December 28, 1999|By BLOOMBERG NEWS
NASHVILLE, Tenn. -- Prison Realty Trust Inc. shares tumbled to their lowest level ever yesterday after the largest private prison owner said it would slash dividend payments and oust its chief executive officer.
Prison Realty shares fell 9 percent to close down 50 cents at $5.25 -- after rebounding from $4.50 -- because the company said it would end its status as a real estate investment trust, cutting the 44 percent dividend yield that attracted investors. To avoid taxes, REITs must pay out at least 95 percent of net income to shareholders.
"Because it's no longer an income-paying stock, investors who held it just for the dividend will be selling," said Robert Norfleet, an analyst at Davenport & Co. who rates the company a "hold."
The move to conserve cash came as new investors -- the Blackstone Group, Fortress Investment Group and a unit of Bank of America -- agreed to a $350 million infusion. Credit Suisse First Boston and Lehman Brothers Holdings Inc. also arranged a new $1.2 billion credit line.
Proceeds will be used to replace an existing $1 billion loan and finance operations for the company, which is to be renamed Corrections Corporation of America.
As a condition of the new investments, Prison Realty's chairman and chief executive officer, Doctor R. Crants, who co-founded the Nashville-based company in 1983, gave up the chairmanship immediately and will relinquish the CEO post when the transaction is completed, probably in the second quarter of next year. He will become vice chairman.
Former Chairman Thomas W. Beasley, who was Crants' roommate at West Point and one of three founders of the company, became interim chairman and will be interim chief executive when Crants steps down.
Son also resigns
Crants' son, Robert Crants III, who was president of Prison Realty, also resigned. His interim replacement is J. Michael Quinlan, president and chief operating officer of Corrections Corp.
The restructuring is a turnabout for the company, which Crants, who grew up on a Seneca Indian reservation in upstate New York and served two tours of duty in Vietnam, turned into a REIT in April 1998.
Shareholders protested that plan, which took the company from a high-growth prison operator, whose shares had jumped about 90 percent a year between 1993 and 1997, to a slow-growth but high dividend-paying real estate company.
Crants defended the move, saying that with the economy so strong that state governments had little incentive to hand over the management of prisons to private operators. Instead, the future was in building and owning prisons for states.
Then in the summer of 1998, six prisoners escaped from its facility in Youngstown, Ohio, garnering national attention and bringing renewed criticism of the private prison industry.
Another blow came in May, when the company said it would increase the fees it pays to the affiliated prison-management company owned by Crants to keep that company afloat. Analysts estimated that could cost the company another $90 million a year.
In the cash infusion deal, the investors' group agreed to buy $315 million in securities from the company.
The group will buy an additional $35 million in securities in a newly configured company which will be created through the merger of Prison Realty and the companies collectively operating under the name Corrections Corp. of America. Corrections Corp. managed prisons it leased from Prison Realty.
`Renewed confidence'
The new credit line "has more favorable terms," than the one it replaces, "reflecting the lending community's renewed confidence" in the company, according to Beasley.
The existing loan was split into a $400 million revolving credit, due Jan. 1, 2002, as well as a $250 million term loan and a $350 million term loan due Dec. 31, 2002.
Pricing on the revolving credit and $350 million term loan was 375 basis points more than Libor, or the London interbank offered rate. Pricing on the $250 million term loan was 400 basis points over Libor.
Formerly known as Corrections Corp. of America, Prison Realty owns 51 prisons in 18 states, the District of Columbia and Britain.
Fortress is a New York-based real estate investment company formed in April 1998. The group, headed by Wesley Edens, manages about $760 million, primarily invested in real estate both here and abroad.
Blackstone is investing both through its real estate and private equity groups. Together, these units manage funds worth about $9.3 billion.
