Looking for the impossible, like a growth investment with income that has great benefits for society? Then consider privately managed prisons. Yes, it’s a thought noir, I know. And there is more than a little risk, which I will explain later. But if you feel left out of the dot-com boom or worry about a world built on massive capital gains but no actual revenue, then bear with me. Our prisons are overcrowded. The courts are working to provide a virtual waiting list of new tenants. Absolutely no one, anywhere in America, is worried that we are about to suffer from a glut of prison cells. More important, recent legislative and judicial changes have worked to make certain that each prisoner stays in his room a bit longer than in the past. Private prisons, which now house a veritable sliver of the prison population, are generally less expensive to build and operate, so they offer potential savings to states that are hard-pressed to keep up with the construction, financing and operation of prisons. As a result, building and operating prisons may be one of the real growth opportunities in America. (Sorry, I wish this weren’t true as much as you do, but we’ve got to face facts.) Enter, Prison Realty Trust (PZN). It became one of the largest real estate investment trusts in the country when it merged last January with Corrections Corp. of America. Yes, you read that right: It is one of the largest real estate investment trusts in the country. Indeed, even at a recent depressed price, the market capitalization of the trust was $1.3 billion, ranking 26th among a list of 209 REITs in the Morningstar stock database. To put that in some perspective, Prison Realty Trust was worth slightly more than the entire Four Seasons Hotel chain, the luxury hotels that my wife and I would happily check into for life if our Visa card would allow it. Obviously, prison cells are important real estate. Prison Realty Trust shares, which have been as high as $26.75 and as low as $9 in the last 52 weeks, have been going for less than $10 this month. Meanwhile, the trust was paying a dividend of $2.20 a year. That figures to a yield of 22.5 percent. And that’s where the risk comes in. Earnings for the 12 months ending in June were 59 cents per share. Earnings in the first two quarters of 1999 netted to 27 cents a share, with estimates for the third and fourth quarter of 55 cents and 57 cents a share. In other words, the company might earn $1.39 a share for 1999, if the estimates come in, but is paying out $2.20 a share in dividends. For the year 2000, estimates by analysts range from $2.21 to $2.51 a share, with a consensus estimate of $2.35 a share. Estimates, however, are just that: estimates. They are not done deals. So there is a risk that the dividend will be cut. Which brings us to the social good done by creating and filling more cells. According to a report from the National Center for Policy Analysis in Dallas, the cost of keeping a prisoner can range as high as $25,000 a year. The same study found, however, that “incarcerating one additional prisoner reduces the number of crimes by approximately 15 per year, the majority of them property crimes, and yields a social benefit of at least $53,900 annually.” That makes prisons a nearly irresistible investment. Q & A My mother is a widow, 68 years old. Her Social Security and pension checks total about $20,000 a year, and she needs another $10,000 a year from her investments. She has $300,000 in savings, of which $100,000 is in an IRA. Currently, she has no investments in equities. She buys individual CDs and Treasuries, and holds them to maturity. She has about 30 different CDs/notes at this time and spends the interest. She has no debt, lives in her own home, and is in reasonably good health. We have come to the conclusion that we need some portion of her estate put away for growth. This smoney would not be needed for at least five years. The question is, how much? I would like to see $70,000 in a good domestic equity fund, putting it in over the next two years. Is this a reasonable allocation? M.H., by e-mail If she is interested in a higher return and the potential for leaving a larger estate, there is a way to approach the problem of providing diversification, income security for her lifetime, and potential growth of her estate. One solution would be to buy an immediate annuity that guarantees her $10,000 a year for the rest of her life. While this wouldn’t cope with inflation, it would solve the bulk of the income problem and give her greater income stability. While you would need to get figures for specific contracts, most would be in the area of $7 per month per $1,000 committed. This means your mother could have $10,000 a year for life (in a 10-years-certain contract) for about $119,000. She could commit her IRA funds and some of her taxable investments. This leaves $180,000 to fund two distinct needs: a contingency fund to cover emergencies and a deep reserve fund for estate growth. It would be entirely reasonable to keep a $50,000 contingency fund (it will earn $3,000 a year at 6 percent) and commit the remaining $130,000 to an equity fund. If that fund earned 10 percent a year, it would grow to about $1 million in 21 years. I am 45 and plan to semi-retire within 10 years. I have been an active investor in mutual funds for more than 20 years and have a portfolio (not including 401(k), IRA, etc.) that is just at seven figures. While I feel I have done a decent job of building and managing my portfolio, I believe it may be time to have professional help. During a recent meeting with a prospective financial adviser, he recommended that I begin to consolidate my fund holdings into a tax-efficient institutional money management account. Specifically, he recommends SEI’s ATM 80 (active tax management, 80 percent stocks, 20 percent bonds). I am not familiar with this type of investment. Can you explain it? K.M., by e-mail Avoiding the drag of taxes can have a profound effect on the growth of your money. As a consequence, increasing (however reluctant) attention is being paid by the mutual fund industry to the impact of taxes on investment returns. In a tax-managed account, the portfolio manager tries to keep a low turnover rate so that the portfolio generates very little in tax liabilities. When a taxable capital gain is generated, the portfolio manager examines the portfolio and tries to find stocks that he can sell at a loss. With luck, he can find losses that will offset the gain, eliminating the tax liability. With a portfolio just breaking seven figures you should also examine another alternative: an individually managed portfolio. By directly owning a portfolio of securities you can have more control over taxable events. Syndicated columnist Scott Burns can be reached by fax at (214) 977-8776 or by e-mail at [email protected].
