Investment houses continue to beat down Prison Realty Trust Inc. (NYSE: PZN), which recently hired an outside advisor to evaluate its liquidity and financing needs.

The company, which turned in funds from operations of 56 cents per share for the third quarter, is facing difficulty in fulfilling its obligation to pay out 95 percent of taxable income for the year, as required by Prison Realty's real estate investment trust status.

Prison Realty also must come up with the cash to pay out dividends on accumulated earnings from Corrections Corporation of America, which merged with the REIT in January.

This week, Standard & Poor's placed the company's double B corporate credit and bank loan ratings, as well as its single B-plus senior unsecured debt rating, on CreditWatch with "developing" implications. In other words, things are up in the air, and investors had better watch out. The total rated debt involved tops $1 billion.

So why the liquidity problems? It's hard to tell how the company is faring versus its pre-merger performance. In its last earnings release, Prison Realty gave pro-forma year-to-date and quarterly returns, but did not provide comparables from last year.

Some other financial indicators, however, reveal why the company is bullish on prison real estate prospects. During the third quarter, affiliate Corrections Corporation of America brought 4,056 new beds online, an increase of almost 10 percent.

In addition, occupancies at Prison Realty-owned, CCA-managed facilities increased to 88.8 percent, up from 87.3 percent last quarter.

Nevertheless, the taxman cometh, and that has investors running scared. With a 52-week high of $24 3/8, the company's stock now hovers around $10 per share.

Stephens Inc. has cut its price target from $21 to $11 and lowered its rating from a buy to a neutral. The firm was quick to say that the situation will change if Prison Realty solves its liquidity challenges. But, short of a financing miracle, the company may be facing a REIT status change or an even more serious devaluation in stock, which now is at a respectable 28.86 price-to-earnings ratio.

Has quick growth brought an end to this innovative REIT? Or will Prison Realty rob a bank to please its merry band of shareholders?

The company does not have a good reputation on Wall Street. That situation was not helped by a recent scheme to refinance its credit facilities via issuance of junk bonds, nor by taking on new debt while making property acquisitions.

Stay tuned - there may be a shootout at the end of this one.

Published: November 24, 1999

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