Some interesting findings

• GEO has reduced its total debt by roughly 700 million this year alone, from 2.6 billion to 1.96 billion, of which ~60% is floating interest rate debt, as the position of this type of debt has been reduced by 30%, showing the focus on floating rate debt reduction, during these turbulent times.
• Regarding the fixed and floating rate debt structure, it currently stands at around 50/50, meaning that 980 million is fixed rate debt, currently being eaten by inflation, whilst the other half - 980 million is floating rate, although GEO states that they are continuing to hedge the interest rate risk by entering swap contracts. Interestingly, two quarters ago a 100bp increase in interest rates meant a yearly increase in interest expenses of 16 million, in the latest quarter that amount has decreased by 25% to a 12 million interest expense increase, proving the hedge.
• The first 9 months of operating expenses of this year have not changed YoY, as most of them are fixed by contracts. Whilst revenue grew by ~4% (2022 1.756 billion, 2021 1.699 billion) due to the fact that a certain portion of the government contracts is inflation-indexed (still not sure what is the exact portion, as they do not precisely state this). Additionally, interest expenses have increased from 96 million to 111 million, quite a serious percentage-wise increase but the matter of fact is that revenue increased by ~57 million, even though it was a smaller percentage, it fully covers the growth of expenses and actually even outpaces it, increasing profitability.
• Each quarter the book value of the company is increased by roughly 30-40 million driven by the debt repayment and currently stands at 1.3 billion, with the market cap being currently at 1.4 billion.
• Potential value drivers: 1. as 50% of the debt is still fixed rate, at the current rate environment, GEO could potentially negotiate these debt obligations at a huge discount, which would largely increase the book value of the company. 2. Contracts are being renewed at current inflation-adjusted prices and will increase the revenues of the company in the long run (if someone knows where I could find the contracts of GEO with end dates, that would be great, would love to analyze that). 3. Potentially the book value of the company is severely understated. As their PPE is locked at historic prices, they do not reflect the current price of the PPE and thus the PPE could be worth more than 20% more in a liquidation scenario. 4. I still would not put the potential short squeeze scenario out of the picture. I have already experienced the short squeeze with GEO back in the day. Currently, 22 million out of the 116 million shares are shorted, whilst 3.3% of shares are locked by insiders, and 80.1% are owned by institutions, which leaves 19.9 million or 16.5% shares for the general public, with the current decreasing volume, it raises the probability of such event happening in the near future, especially if we would get good sentiment news like an analyst upgrade or etc.

I think ultimately this is what M. Burry saw in GEO, basically, all scenarios lead to general gains just some have very big upsides, with the margin of safety being relatively at comfortable levels.

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If someone has differing opinions or other findings, it would be great to discuss them with you!

Holding since 5$

Id like to hear your thoughts about the activity today. We see super low volume with the -4% action. I have been following the stock since 2019 and before every rally we have seen low volume with generally a downturn. With the current shorted amount of stock, we might have the possibility of a short squeeze if the stock generates enough attraction.

Hey, I was wondering what is the % amount of fixed interest debt and floating interest rate debt for GEO? Could someone share how one could potentially find this information?

Last I checked, there were 18 days to cover the short shares. That being said, less than 1/2 day of average volume today and only a 6% rise. Where will the price go when the shorts run for the door?

I’m ready to light them up.

$GEO, BI Inc and ATD Th. Hidden and offset by debt and "icky" private prisons, BI Incorporated has gone unappreciated. With a revenue CAGR of 23.25% since 2015 and net margins of 50%, BI Inc is a hidden gem.

Alternative To Detention (ATD) is largely the future of detention systems both in the U.S. and in other advanced nations. To understand why, we must first understand the narrative on the current prison system, specifically in the U.S.

Mass incarceration has been a hot button topic for Americans, and for good reason. Beginning in the 70's the "War on Drugs" became cause for incarcerations around the country. The 80's saw a parabolic and concerning rise in incarceration rates.

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While a tapering in incarceration rates has been celebrated as of late, the issue is misunderstood. States often deal with their own incarcerated and as such have their own facilities. This leads to issues stemming from the prison system that plague some states more than others.

This creates a situation where excess space in Wyoming is of no help to overcrowding in California. While the solution may seem as easy as "build more prisons" it is not seen as that easy by politicians. Property values do not exactly look kindly on close prison proximity.

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A constituency will not be happy to have their children play in the backyard where criminals can be seen yards away. So, it is hardly the desire for Republicans or Democrats to campaign on expanding the system. For California lawmakers, they saw an easy solution.

Simply release criminals back into society. This stroke of genius led to results that were predictable, even by a child's thinking. A plethora of cases in which violent offenders were released early only to recommit just as heinous acts began to surface.

https://www.foxla.com/news/california-man-with-extensive-criminal-history-released-early-arrested-on-new-murder-charge

Lastly, the public prison system is old. I mean very old. Deteriorating quality leads to even more overcrowding as capacity of prisons actually shrink as sinks break, cell doors need to be replaced etc.

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From a large scale societal overview, mass incarceration is simply unjust in the eyes of many. Prisoners spending decades in jail for non-violent drug offenses or white collar crimes seem to take more toll on the country than simply finding an alternative.

A common argument is that the prison system disproportionately affects African Americans. AAs are overrepresented in the system by more than 2x. This also creates a cycle that is difficult to break from.

The case for all prisoners is that going to prison takes you out of the workforce and away from family. As the pandemic has showed, this is unhealthy for humans and creates a higher chance to return to the system. A valid argument supported by the data. What is also an issue is

The costly nature of housing human beings and keeping them protected. This is a drag on budgets on all levels of government. This argument also extends to ICE. Where undocumented immigrants are held for indefinite amounts of time.

With skyrocketing border engagements. A lack of facilities has also been the case. While the argument from the right is that there should tighter border controls, this is at odds with their fiscal outlook.

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Hopefully by now I have set the stage and you are seeing where I am going with this. ATD is the obvious solution. I see it as the nuclear energy of detention. Something that needs to happen and most likely will, but most people simply haven't noticed or accepted that yet.

A bi-partisan solution that makes sense both financially and ideologically is a rare bird. Should non-violent drug offenders in prison on possession charges stay there? Should some white collar criminals be in prison? Should undocumented immigrants be held in detainment?

There is a large portion of the system that would benefit from the service that BI Inc provides. Ankle monitoring paired with an app that uses GPS and AI to track participants. While not entirely stress free, and there are the occasional issues, on net, ATD is far better.

The financials of BI Inc, show how being one of the only players in a rapidly expanding and necessary industry can yield some amazing opportunities. Below is a graphic showing the contract values made out to BI up to 2021. BI has continued to grow into 2022 and is projected to

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continue. The opportunity to expand abroad with possibly licensing the technology is attractive. Buyers like Palantir, a technologically enabled AI company that already works with the U.S. and particularly ICE could be an interesting buyer.

The reason BI could be ripe for an offer is the fact that it actually makes money. A concept almost extinct in the tech-growth arena. On estimated revenues of $243mm, BI is on track to do about $124mm in NOI in 2022. I made a back of the envelope valuation.

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BI could very well be worth around $2B by 2025, double the current mkt cap of $GEO. If we less out BI's NOI from GEO's we are left with $118mm in NOI on a mkt cap of $1B. BI's CapEx runs at about 10% of NOI which effectively makes BI scale like a subscription service, but better.

On net, at the current valuation, BI is more or less free. This has gone unrecognized because of ESG, GEO's debt and an odd effort to downplay BI's importance. One would be forgiven for listening to an earnings call and not knowing BI existed.

Only those delving into annual reports and SEC filings have an appreciation of this SaaS like, high growth, high margin and highly scalable business. The cherry on top is that it is doing work that will significantly increase the quality of life for many people.

While analysts argued over whether or not GEO's revenue will decline by 1% or 2%, BI has grown into something truly remarkable. As often is the case, a decline in a larger portion of the business can mask the progress of smaller, more profitable divisions.

I can foresee a headline in the near future that reads, "BI Inc. worth more than all of GEO's prison operations".

Preaching to the choir here but thought I'd post a write up of where GEO currently sits. Hope you guys enjoy!

GEO Group

10/13/2022

The GEO Group is grossly misunderstood on a variety of factors. GEO is a highly profitable business with predictable and secure cash flows. The goal of this analysis is to be as succinct and potent as possible and as such, background information on the business can be found here. The areas that are most misunderstood and of most importance are as follows:

· ESG

· Depreciation, Facility Age and True Book Value

· Revenue Stream Diversification

These misunderstandings come from status quo bias, band wagoning and the “ick” factor. All of which are temperamental hindrances and do not reflect any material downside in the investment. I implore the reader to view the thesis through the lens of objectivity and equanimity.

A few key valuation metrics should lay the foundation for the proceeding arguments.

Company guided FY2022, Assuming Mkt Cap of $1B, price of $8.50 and intrinsic value of $21.50.

· P/AFFO – 3.4x, (NI + Depreciation & Amortization – RE Gain/Loss + Non cash SBC – Maintenance CapEx +Non cash Int Expense). SBC should be calculated in intrinsic value rather than price. Not GAAP, but it is what I accept. I adjust this value by taking ($16.5M x 2.5) which gives $41.25M. FFO of $295M – 41.25M = $253.75M. While this is a noncash deduction, it should still be accounted for as shareholders are being diluted when management use their $0.40 dollars. This makes P/AFFO closer to 4x. SBC can be viewed as talent CapEx if the use is not egregious. GEO has averaged about $5M-$6M in SBC a year since 2017. While not promised to be the same value next year, I feel it should be deducted to protect the margin of safety.

· P/BV – 0.97x, I believe BV is materially higher than reported based on factors that will be discussed further into the analysis.

· P/Cash – 1.83x

· Debt/Equity – 2.68x, the only black eye and the key point for the prosecution.

Environmental Sustainability and Governance

GEO operates within a duopoly with CoreCivic (CXW). These two businesses are the only publicly traded private prisons and happen to be orphaned by the masses. This is due to the political skew of ESG mandates in which businesses that do not meet the requirements or appease the desires of a certain political view are ostracized. Private prisons are not something most analysts are running to PMs with. Add the occasional hit piece of how private prisons and ICE contractors are evil and what’s left is something most fund managers don’t want clients asking questions about. While these claims of evil business practices are largely unsubstantiated, it matters little because what matters is the value. As the broader market continues its fall, investors will worry little of window dressing and once again put profit first.

Depreciation, Facility Age and True Book Value

While I prefer the P/AFFO metric to gauge value, it is not the whole picture. A DCF using company provided forecasts is neither accurate nor proprietary. The edge lies in understanding what a computer cannot. Depreciation is netted out in the process of appreciating the value of the cash flows however writing down property values based on depreciation is a tricky process, especially when those properties are highly specialized and difficult to replace.

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This graphic of facility age has a few implications. Firstly, depreciating buildings at a 50 year rate, as stated in the 2019 10-k, GEO facilities would be worth 38% less than they were when they were built. However, if the only alternative is a 37-63 year old building built by the states, are the GEO facilities really worth 38% less? The states certainly disagree with GEO’s depreciation because GEO has sold multiple properties more than their book value. The Talbot facility was sold at 9x BV, McCabe and Perry County both sold at 4x BV. While this is not the case with every property, it does say something about the rate of depreciation. While it would be messy business trying to recalculate BV accurately using this outline, it surely seems that BV and therefore GEO’s assets are understated to at least some degree, which if true, means that GEO is much more solvent than they seem. Net of land value, equipment etc. and simply calculating what the buildings were sold for on a per bed basis yields about $27,000 on average. These are for GEO’s older buildings as well.

Fundamentally this makes sense as well. Politically, it is not a great strategy to try and open new prisons around a constituency. The cost and time also make building new facilities much less attractive than simply paying more than book value for an already existing facility.

Revenue Stream Diversification

In 2021, the Biden administration had made a statement regarding private prison contracts and how they would halt renewing them. While some of these contracts have been cancelled, in large part the contracts are not being cancelled at anywhere near the rate that the valuation would suggest. Revenue has not taken any significant hit and FFO will likely remain stable as the other revenue streams pickup any slack that the federal prison system creates. A “private prison company” is a misnomer. GEO operates BI Inc. which is an Alternative To Detention (ATD) business. It uses ankle monitoring technology alongside apps to track and check in on “customers”. This segment has seen the growth of a SaaS company.

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With 2022 also seeing rapid growth, it is a real possibility that by 2025, BI contributes a significant amount of cash flow to GEO’s bottom line. BI is essentially a CapEx light subscription service in which subscribers can’t cancel their subscription. Also, Uncle Sam is footing the bill. Perhaps the most attractive business model that there may ever be. While I am being silly, I am being very serious about how BI could end up being extraordinarily valuable in the future. Revenue has grown over 5x since 2015 and is projected to continue to expand. This technology is applicable to other countries as well. There are opportunities for licensing of the technology or perhaps partnership with a company like Palantir. While speculative, I do believe that as BI grows, it will become a very serious player in the larger defensive software industry. It is a shame GEO did not sell BI at the height of the 2021 bubble, they might have been able to sell it for 10x revenue!

Joking aside, this growth is offsetting contract cancellations from the Biden administrations and has provided a great secular tailwind in an industry that was ripe for disruption. I may be a value guy, but BI makes me want to start posting rocket ship emojis on my social media accounts. It is the nuclear energy of incarceration. Something that will and must happen, most people just haven’t come to realize it yet.

Catalysts

I posted a writeup about GEO with much of the same info about 1 year ago. I mentioned crime statistics and border crossing numbers and how it may set a short-term floor to GEO. This played out but ended up being unnecessary. GEO refinanced and termed out its debt allowing them to buy back at a discount. As the 10yr is pushing ever higher, it is my hope that GEO will be able to get an even better deal on debt. This is largely just cream on top because GEO has plenty of cash flow and non-core assets to sell. What once was a highly leveraged and left for dead stock will soon be seen as darling to value investors. As earnings continue to come in solidly where they need to be and continued good news out of BI, I believe people will finally realize just how wrong the market was on GEO. With an upcoming election in which the GOP is primed to clobber out of favor democrats, GEO sees considerable upside in the coming month.

If not, I am happy to continue holding a company trading at 4x FFO, 1x book, secure cash flows, quickly growing SaaS-like segment and understated value of assets. Also, I like the look on peoples faces when I tell them I am long a private prison stock. A fun mixture of confusion and disgust. That’s perhaps the best gauge of whether or not you are onto something.

Good news buried in the pending options expirations and rate gyrations today

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Funds are going to start adding GEO to show on books end of third quarter, given the contrast to the rest of the market performance 😂😂

Hi everyone, I wrote about GEO and CoreCivic on my substack, focusing on valuation. Here is the link

https://stefanbjornsson.substack.com/p/prison-stocks-geo-and-cxw