GEO Group continues to pursue REIT conversion, reports 'adequate' liquidity for Q3

By Lisa Kerner

Charlotte, N.C., Nov. 5 - The GEO Group, Inc. has made "significant" progress in its review of a potential conversion to a real estate investment trust (REIT) with a taxable REIT subsidiary (TRS) structure, said chairman and chief executive officer George C. Zoley during the company's third-quarter earnings call on Monday.

Under the proposed conversion, a small portion of GEO's businesses, which are non-real estate-related, would be part of wholly owned taxable subsidiaries of the REIT. Most of GEO's business segments that are real estate-related and entail company-owned and company-leased facilities would be part of the REIT.

Zoley said GEO will benefit by not having to separate into an independent REIT and an independent operating company.

Additional benefits, according to GEO, include enhancing its ability to return value to shareholders, lowering its cost of capital, drawing a larger base of potential shareholders, providing greater flexibility to pursue growth opportunities and creating a more efficient operating structure.

GEO has retained Skadden Arps as legal advisers and Bank of America Merrill Lynch and Barclays as financial co-advisers to assist the company with its review, said Zoley.

According to Zoley, GEO is striving to meet the earliest conversion date of January 2013. However, due to the short timeline, the conversion could be delayed to the next conversion date of January 2014.

GEO submitted a request to the Internal Revenue Service for a private letter ruling in mid-July. GEO has also been working on a number of administrative steps, including the internal reorganization of the company into separate legal operating business units, according to a company news release.

Adequate liquidity, share repurchases

Chief financial officer Brian Evans said GEO has spent $80 million of its expected $100 million of capital expenditure funds through the end of the third quarter.

The remaining funds will be used for the $27 million purchase of the partnership interests in Municipal Corrections Finance, LP, dividend payments and debt repayment.

GEO will have "adequate" liquidity for growth and to return value to shareholders, Evans said on the call.

Through the end of the third quarter, GEO repurchased about 3.9 million shares of its common stock for $75 million under the company's $100 million stock repurchase program that was approved in July 2011. The program is effective through Dec. 31.

Financial highlights

GEO reported total revenues for third-quarter 2012 of $411.5 million, compared to total revenues of $395.7 million for third-quarter 2011.

Income from continuing operations for the period were down at $16.5 million, or $0.27 per diluted share, compared to $20.7 million, or $0.33 per diluted share, for the third quarter of 2011.

Third-quarter 2012 adjusted EBITDA increased to $86.7 million from $81.1 million in the year-ago period.

For the first nine months of 2012, GEO reported total revenues of $1.23 billion compared to total revenues of $1.17 billion for the first nine months of 2011.

Income from continuing operations for the period was $54.5 million, or $0.89 per diluted share, compared to $56.6 million, or $0.88 per diluted share for the first nine months of 2011.

Adjusted EBITDA for the first nine months of 2012 rose to $246.7 million from $233.1 million in the prior-year period.

Looking ahead, fourth-quarter revenues are expected to be between $413 million and $418 million. Pro forma earnings per share are expected to be in the range of $0.41 to $0.42 per share, excluding some expenses.

GEO expects full-year 2012 revenues to be in the range of $1.64 billion to $1.65 billion, with pro forma earnings per share of between $1.55 and $1.56 per share, excluding certain expenses.

Boca Raton, Fla.-based GEO Group provides correctional, detention and residential treatment services to federal, state and local government agencies.

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