What Research Investors Want, Part 2: Prison REITs

Who says crime doesn’t pay? Prison REITs are on a winning streak.


Second in a Series

Institutional Investor asked participants in the All-America Research Team survey to identify the industry sectors and macroeconomic disciplines in which they would like to see more sell-side research. We received more than 950 suggestions on topics ranging from additive manufacturing — better known as 3-D printing — to yieldcos, fairly new mechanisms that hold the cash-generating infrastructure assets of renewable energy outfits. This installment looks at prison real estate investment trusts.

More than 300 REITs are registered with the Securities and Exchange Commission, according to the National Association of Real Estate Investment Trusts, and they encompass everything from residential and commercial properties to hospitals and self-storage facilities. Two of them — Nashville, Tennessee–based Corrections Corp. of America and GEO Group of Boca Raton, Florida — are prison REITs.

“Most clients are shocked that this category of REIT exists,” acknowledges Brian Ruttenbur, an analyst with CRT Capital Group in Stamford, Connecticut. “But as they dig down and look into them, they get comfortable.”

There’s no question that these investment vehicles are often overlooked. Leaders of the three highest-ranked REITs squads on the 2014 All-America Research Team — ISI Group’s Stephen Sakwa, Michael Bilerman of Citi and Jeffrey Spector of Bank of America Merrill Lynch, respectively — say they don’t report on them. But a few analysts do.

Ruttenbur launched coverage on the two names in January, after joining CRT from Morgan Keegan & Co. He dubbed CCA reasonably priced and GEO a bargain. The following month he upgraded the former to buy, on the belief that expansion of current facilities in Arizona, California, Tennessee and Texas would boost profitability. By the end of September, CCA’s shares had jumped 10.6 percent, from $31.08 to $34.36, and bested the broad market by 3.3 percentage points.


GEO’s did even better, gaining 19.4 percent (from $32.01 to $38.22) and beating the S&P 500 by more than 11 percentage points since Ruttenbur’s recommendation.

He cites several reasons why the outperformance of both will continue. “Governments have not funded a new prison in five years — it’s all private funding for new prison construction” even as demand surges, he explains. “Immigration issues are driving detention beds to way over capacity.”

Ruttenbur knows whereof he speaks, having worked in security police — guarding the nation’s nuclear weapons — while on active duty in the Air Force. “I understand security and prisons,” he says. “It’s either keeping the bad guys out or keeping the bad guys in — very similar tactics for each.”

After earning a master’s degree in administrative science at the University of Montana in Missoula, Ruttenbur left the service and went to work in the investment banking division of SunTrust Equitable Securities. “I became the prison king,” he affirms. “We did tons of banking deals for the prisons. We held specific prison conferences and toured prisons with money managers. In the 1990s prisons were red hot.”