CCA (CXW) Board Approves REIT Conversion, Updates Guidance
Tweet Send to a FriendGet Alerts CVW Hot Sheet
Trade CVW Now!
CCA (NYSE: CXW) announced today that its Board of Directors (the Board) has unanimously authorized the Company to elect to qualify as a Real Estate Investment Trust (REIT) for the taxable year commencing January 1, 2013 (the REIT Conversion). This decision follows the receipt of a favorable Private Letter Ruling (PLR) from the IRS, and completion of the internal reorganization previously announced. CCA has also received an opinion from Latham & Watkins LLP, which advised CCA on its REIT conversion that CCA qualifies as a REIT.
John Ferguson, Chairman of the Board, stated, "Based on a thorough analysis, our Board and management team believe that electing REIT status will maximize value for our shareholders through increases in free cash flow and dividends while continuing to provide significant earnings growth capacity."
Damon Hininger, President and CEO, stated, "The REIT structure will create additional opportunities for shareholder value creation. Additionally, our customers will experience no change in the people, procedures or high quality of service they have come to expect from CCA, nor will the conversion affect our employees."
hareholder Vote
Shareholder approval of the REIT conversion is not required. However, to ensure we meet REIT shareholder ownership restrictions, CCA plans to present to shareholders a proposal at our Annual Meeting of Stockholders in May 2013 to approve the addition of certain ownership limitations in CCA's charter.
Internal Reorganization
As previously announced, the Company completed an internal reorganization of its business operations at the end of last year which will allow it to elect to qualify as a REIT for the taxable year commencing January 1, 2013. Under our new REIT structure, we will deliver certain services and hold and operate certain assets through one or more taxable REIT subsidiaries (TRS). A TRS is a subsidiary of a REIT that is subject to applicable corporate income tax. Our use of TRSs enables us to continue to engage in certain businesses while complying with REIT qualification requirements. The non-REIT qualified businesses that we hold through the TRSs include our managed-only business and TransCor (our inmate transportation business). In addition, certain other services will be provided by the TRS for the benefit of the REIT. The vast majority of the income tax expense we expect to incur will be related to earnings generated by the TRSs.
To maintain REIT status the Company will need and expects to meet a number of ongoing REIT qualification requirements. One such requirement generally mandates annual dividends to shareholders equal to at least 90% of annual tax basis net income (the Minimum Annual Dividend). A REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income, and therefore, taxes are paid by shareholders on the dividends received. The Company intends to make quarterly dividend payments that in the aggregate will be equal to or greater than the Minimum Annual Dividend required. The Company is considering changing its quarterly dividend payment schedule to April, July, October and January beginning in 2013.
E&P Dividend and Other Conversion Items
In order to comply with REIT rules, CCA's Board plans to declare a special one-time dividend to distribute earnings and profits accumulated prior to our REIT election of approximately $650 million to $700 million during 2013 (the E&P Dividend). The Company intends to pay the E&P Dividend with a combination of approximately 20% cash and 80% common stock. CCA will publicly announce a record date and payable date once determined by the Board.
Note this E&P Dividend will be taxable in 2013 and the amount of cash each shareholder receives may not be sufficient to cover the full amount of federal and state taxes owed on this distribution. Shareholders are encouraged to consult with their tax professional to determine the personal tax consequence of this distribution.
We estimate we will incur approximately $25 million in one-time conversion expenses (REIT Conversion Costs), excluding any costs associated with issuing new debt, refinancing existing debt or modifying existing debt agreements. We also expect to record a one-time income tax benefit of $115 million to $135 million in 2013 as a result of the reversal of certain net deferred tax liabilities. We believe there will be no reclassification of assets from personal property to real property in connection with the REIT Conversion, thereby preventing any tax liabilities associated with the recapture of depreciation expenses.
Debt Capital Markets Transactions
As discussed above, the Company intends to pay the E&P Dividend with a combination of cash and common stock and to pay quarterly cash dividends to meet the Minimum Annual Dividend requirement. The Company expects to execute several debt capital markets transactions during 2013 in order to obtain the covenant flexibility to make these dividend payments and to raise additional capital to fund various aspects of the REIT Conversion. The Company plans to refinance all of its $465 million 7.75% Senior Notes due 2017 (7.75% Senior Notes) and may also seek an amendment to its $785 million Revolving Credit Facility to obtain greater operating flexibility under the REIT structure. The Company also plans to raise additional debt capital to fund the payment of up to 20% of the E&P Dividend in cash, debt refinancing and issuance costs and the REIT Conversion Costs. The specific timing of these transactions has not yet been determined. Management is highly confident in CCA's ability to execute these transactions in 2013 given the Company's modest leverage, strong balance sheet and strong historical support from the credit markets.
The opinion of Latham & Watkins LLP was based on various assumptions relating to CCA's organization and operation, and was conditioned upon fact-based representations made by CCA's management regarding CCA's organization, assets, income, and the present and future conduct of CCA's business operations.
2012 and 2013 Financial Guidance
Fourth Quarter and Full-year 2012 Guidance
The Company is raising its 2012 financial guidance as follows:
Fourth Quarter Adjusted Diluted EPS: $0.43 to $0.44
Full-year Adjusted Diluted EPS: $1.56 to $1.57
Full-year Funds From Operations (FFO) Per Diluted Share (adjusted to NAREIT definition): $2.34 to $2.35
Full-year Adjusted Funds From Operations (AFFO) Per Diluted Share (adjusted to NAREIT definition): $2.32 to $2.34
Both FFO and AFFO for 2012 have been adjusted to conform more closely to NAREIT definitions and to be consistent with the calculations of 2013 guidance amounts below. The 2012 guidance excludes income statement impacts associated with the REIT Conversion Costs and debt refinancing expenses.
Full-year 2013 Guidance
The Company is providing full-year 2013 financial guidance as follows:
Adjusted Diluted EPS: $2.05 to $2.15
FFO per diluted share: $2.80 to $2.90
AFFO per diluted share: $2.72 to $2.87
Expected Annual Dividend per share: $2.04 to $2.16 -- subject to declaration by Board of Directors
Consolidated GAAP income tax rate: 8.5% to 9.0%
Our guidance includes an estimate of the impact from the additional borrowings discussed above as well as the impact from ongoing annual REIT compliance costs of $2 to $4 million. Our guidance excludes charges associated with the one-time REIT Conversion Costs, debt refinancing expenses (e.g. tender/call fees, write-off of deferred debt issuance costs), reversal of certain deferred tax items resulting from the REIT Conversion and shares of common stock issued as part of the E&P Dividend.
During 2013, we expect to invest approximately $85 million to $100 million in capital expenditures, consisting of $40 million to $45 million in on-going prison construction and expenditures related to potential land acquisition, $20 million to $25 million in maintenance capital expenditures on real estate assets, and $25 million to $30 million on capital expenditures on other assets and information technology.
Join StreetInsider.com FREE and get immediately alerted when news breaks on your stocks and other market items - JOIN NOW
*NEW - Download StreetInsider's FREE iPhone and iPad App - Click Here
John Ferguson, Chairman of the Board, stated, "Based on a thorough analysis, our Board and management team believe that electing REIT status will maximize value for our shareholders through increases in free cash flow and dividends while continuing to provide significant earnings growth capacity."
Damon Hininger, President and CEO, stated, "The REIT structure will create additional opportunities for shareholder value creation. Additionally, our customers will experience no change in the people, procedures or high quality of service they have come to expect from CCA, nor will the conversion affect our employees."
hareholder Vote
Shareholder approval of the REIT conversion is not required. However, to ensure we meet REIT shareholder ownership restrictions, CCA plans to present to shareholders a proposal at our Annual Meeting of Stockholders in May 2013 to approve the addition of certain ownership limitations in CCA's charter.
Internal Reorganization
As previously announced, the Company completed an internal reorganization of its business operations at the end of last year which will allow it to elect to qualify as a REIT for the taxable year commencing January 1, 2013. Under our new REIT structure, we will deliver certain services and hold and operate certain assets through one or more taxable REIT subsidiaries (TRS). A TRS is a subsidiary of a REIT that is subject to applicable corporate income tax. Our use of TRSs enables us to continue to engage in certain businesses while complying with REIT qualification requirements. The non-REIT qualified businesses that we hold through the TRSs include our managed-only business and TransCor (our inmate transportation business). In addition, certain other services will be provided by the TRS for the benefit of the REIT. The vast majority of the income tax expense we expect to incur will be related to earnings generated by the TRSs.
To maintain REIT status the Company will need and expects to meet a number of ongoing REIT qualification requirements. One such requirement generally mandates annual dividends to shareholders equal to at least 90% of annual tax basis net income (the Minimum Annual Dividend). A REIT is permitted to deduct dividends paid to its shareholders from its corporate taxable income, and therefore, taxes are paid by shareholders on the dividends received. The Company intends to make quarterly dividend payments that in the aggregate will be equal to or greater than the Minimum Annual Dividend required. The Company is considering changing its quarterly dividend payment schedule to April, July, October and January beginning in 2013.
E&P Dividend and Other Conversion Items
In order to comply with REIT rules, CCA's Board plans to declare a special one-time dividend to distribute earnings and profits accumulated prior to our REIT election of approximately $650 million to $700 million during 2013 (the E&P Dividend). The Company intends to pay the E&P Dividend with a combination of approximately 20% cash and 80% common stock. CCA will publicly announce a record date and payable date once determined by the Board.
Note this E&P Dividend will be taxable in 2013 and the amount of cash each shareholder receives may not be sufficient to cover the full amount of federal and state taxes owed on this distribution. Shareholders are encouraged to consult with their tax professional to determine the personal tax consequence of this distribution.
We estimate we will incur approximately $25 million in one-time conversion expenses (REIT Conversion Costs), excluding any costs associated with issuing new debt, refinancing existing debt or modifying existing debt agreements. We also expect to record a one-time income tax benefit of $115 million to $135 million in 2013 as a result of the reversal of certain net deferred tax liabilities. We believe there will be no reclassification of assets from personal property to real property in connection with the REIT Conversion, thereby preventing any tax liabilities associated with the recapture of depreciation expenses.
Debt Capital Markets Transactions
As discussed above, the Company intends to pay the E&P Dividend with a combination of cash and common stock and to pay quarterly cash dividends to meet the Minimum Annual Dividend requirement. The Company expects to execute several debt capital markets transactions during 2013 in order to obtain the covenant flexibility to make these dividend payments and to raise additional capital to fund various aspects of the REIT Conversion. The Company plans to refinance all of its $465 million 7.75% Senior Notes due 2017 (7.75% Senior Notes) and may also seek an amendment to its $785 million Revolving Credit Facility to obtain greater operating flexibility under the REIT structure. The Company also plans to raise additional debt capital to fund the payment of up to 20% of the E&P Dividend in cash, debt refinancing and issuance costs and the REIT Conversion Costs. The specific timing of these transactions has not yet been determined. Management is highly confident in CCA's ability to execute these transactions in 2013 given the Company's modest leverage, strong balance sheet and strong historical support from the credit markets.
The opinion of Latham & Watkins LLP was based on various assumptions relating to CCA's organization and operation, and was conditioned upon fact-based representations made by CCA's management regarding CCA's organization, assets, income, and the present and future conduct of CCA's business operations.
2012 and 2013 Financial Guidance
Fourth Quarter and Full-year 2012 Guidance
The Company is raising its 2012 financial guidance as follows:
Fourth Quarter Adjusted Diluted EPS: $0.43 to $0.44
Full-year Adjusted Diluted EPS: $1.56 to $1.57
Full-year Funds From Operations (FFO) Per Diluted Share (adjusted to NAREIT definition): $2.34 to $2.35
Full-year Adjusted Funds From Operations (AFFO) Per Diluted Share (adjusted to NAREIT definition): $2.32 to $2.34
Both FFO and AFFO for 2012 have been adjusted to conform more closely to NAREIT definitions and to be consistent with the calculations of 2013 guidance amounts below. The 2012 guidance excludes income statement impacts associated with the REIT Conversion Costs and debt refinancing expenses.
Full-year 2013 Guidance
The Company is providing full-year 2013 financial guidance as follows:
Adjusted Diluted EPS: $2.05 to $2.15
FFO per diluted share: $2.80 to $2.90
AFFO per diluted share: $2.72 to $2.87
Expected Annual Dividend per share: $2.04 to $2.16 -- subject to declaration by Board of Directors
Consolidated GAAP income tax rate: 8.5% to 9.0%
Our guidance includes an estimate of the impact from the additional borrowings discussed above as well as the impact from ongoing annual REIT compliance costs of $2 to $4 million. Our guidance excludes charges associated with the one-time REIT Conversion Costs, debt refinancing expenses (e.g. tender/call fees, write-off of deferred debt issuance costs), reversal of certain deferred tax items resulting from the REIT Conversion and shares of common stock issued as part of the E&P Dividend.
During 2013, we expect to invest approximately $85 million to $100 million in capital expenditures, consisting of $40 million to $45 million in on-going prison construction and expenditures related to potential land acquisition, $20 million to $25 million in maintenance capital expenditures on real estate assets, and $25 million to $30 million on capital expenditures on other assets and information technology.
Join StreetInsider.com FREE and get immediately alerted when news breaks on your stocks and other market items - JOIN NOW
*NEW - Download StreetInsider's FREE iPhone and iPad App - Click Here
You May Also Be Interested In
- UPDATE: Applied Materials, Inc. (AMAT) Tops Q2 EPS by 3c, Offers Guidance
- UPDATE: Aruba Networks, Inc. (ARUN) Misses Q3 EPS by 4c, Guidance Light
- Emerson Electric (EMR) Reports 5% Drop in Orders for April
Create E-mail Alert Related Categories
Corporate News, GuidanceRelated Entities
Dividend, Earnings
Login with Facebook
Sign up for StreetInsider Free!
Receive full access to all new and archived articles, unlimited portfolio tracking, e-mail alerts, custom newswires and RSS feeds - and more!
