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The 2020 financial sell-off due to the coronavirus is still in the early innings. Although the markets have stormed back since hitting fresh lows in mid-March, we still face an extraordinary task for the economy.
The shutdown across the United States could drive unemployment above 20%, and GDP may dry up by as much as 30% in the coming months. That said, we have already seen large levels of recovery in various areas of the real estate market that remain largely immune from the crisis.
Data center REITs, healthcare REITs, and cell tower REITs have all made for solid investments in the long term and provide a mix of appreciation upside and strong dividends.
Today, I want to talk about another classification of REIT that will do very well thanks to the backing of state governments and the federal government in the years ahead. Their contracts are effectively guaranteed, making two companies - with dividends of 14.2% and 12.5% - an absolute steal at today's levels.
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I will say these investments are not for everyone. However, this is one of the most rock-solid opportunities to make money in real estate, and no amount of political pressure appears capable of drying up its returns.
This Class of REITs Offers Long-Term Upside
If you've followed the 2020 primary season, you've likely heard a lot about "for profit" prisons.
These are private operators of domestic incarceration centers both for state prisons or immigration facilities along the U.S. border. State and federal governments outsource part of their prison populations to these facilities and compensate these companies. Based on the rhetoric against the private prison system, one would think that millions of prisoners are locked up in this sliver of the penal system.
The private prison population held 21,718 people in 2017. That represented about 8.2% of the total state and federal prison population. (In the United States, roughly 2.3 million people are in the prison system).
At the heart of the debate is a question of whether or not a private model is ethical. The capitalist idea says that prison budgets can be run more efficiently with fewer resources. The counterargument suggests that it would be better left to the state and federal government.
That said, in a nation where political reform is historically slow, private prison companies will continue to be a part of state and federal inmate management for the foreseeable future.
2 REITs to Buy in This Lucrative Space
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There has been a significant effort at the institutional level among students and activist investors to divest from private prison real estate investment trusts (REITs) over the last decade.
Those outflows from large fund managers combined with the recent financial downturn have made the two largest prison REITs extremely inexpensive.
Core Civic Inc. (NYSE: CXW) is for-profit operator of jails and detention facilities across the United States and along the nation's borders. CXW stands as a potential proxy of U.S. President Donald Trump's campaign. As Democrats move to shut down Immigration & Customs Enforcement and border detentions, CoreCivic has moved to obtain new contracts with states and the federal government. With state-run prisons facing overcrowding, firms like CXW provide the government with a cheaper alternative to building new holding facilities.
CXW benefits from government-backed contracts that extend multiple years. The company's cash flow has grown steadily quarter-over-quarter over the last few years. The stock is trading at a ridiculously low free-cash-flow level, meaning that the stock is underpriced and provides significant value.
CXW has a dividend of 14.2% and a price target of $20 over the next 12 months. That target represents a potential upside of 61% from today's current price.
The other major prison REIT is Geo Group Inc. (NYSE: GEO), which operates immigration detention centers, mental-health and resident treatment facilities, and prisons across the United States, Australia, and parts of Europe. The firm has 95,000 prison beds and offers community supervision services to more than 200,000 offenders and pre-trial defendants.
About half of the company's revenue comes from the U.S. government, money that isn't going away anytime soon. In fact, the firm just won a five-year contract with the U.S. Immigration and Customs Enforcement for the Fed's Intensive Supervision and Appearance Program. The contract will cover the services of roughly 100,000 daily participants.
Finally, one of the most important indicators of a REIT's future success is the actions of its executives. We are always looking to see what leaders at the roughly 225 real estate investment trusts in the United States are doing with their money. In mid-March, executives at GEO Group (GEO) engaged in three insider transactions, including both the CEO and CFO, that totaled about $10 million.
Geo Group currently pays a dividend of 12.5% and trades at roughly $15.40 per share. We see upside in the next 12 months of nearly $25 per share. The combination of a 12.5% dividend and upside of 62.3% is one of the best values you can find in the market today.
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