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Disclaimer
The analyses and conclusions of Pershing Square Capital Management, L.P. ("Pershing Square") contained in this presentation are based on publicly available information. Pershing Square recognizes that there may be confidential information in the possession of the companies discussed in the presentation that could lead these companies to disagree with Pershing Squares conclusions. This presentation and the information contained herein is not a recommendation or solicitation to buy or sell any securities. The analyses provided may include certain statements, estimates and projections prepared with respect to, among other things, the historical and anticipated operating performance of the companies, access to capital markets and the values of assets and liabilities. Such statements, estimates, and projections reflect various assumptions by Pershing Square concerning anticipated results that are inherently subject to significant economic, competitive, and other uncertainties and contingencies and have been included solely for illustrative purposes. No representations, express or implied, are made as to the accuracy or completeness of such statements, estimates or projections or with respect to any other materials herein. Actual results may vary materially from the estimates and projected results contained herein. Funds managed by Pershing Square and its affiliates have invested in common stock and total return swaps on Corrections Corporation of America (CXW). Pershing Square manages funds that are in the business of trading buying and selling securities and financial instruments. It is possible that there will be developments in the future that cause Pershing Square to change its position regarding CXW. Pershing Square may buy, sell, cover or otherwise change the form of its investment in CXW for any reason. Pershing Square hereby disclaims any duty to provide any updates or changes to the analyses contained here including, without limitation, the manner or type of any Pershing Square investment.
Largest private prison company Fifth largest prison manager behind California, the Bureau of Prisons, Texas and Florida
Capitalization:
Enterprise value: $4.1 billion Equity market value: $2.9 billion
Overview of CXW
CXW operates its business in two segments: Owned & Managed Facilities and Managed Facilities
Managed Facilities
CXW operates facilities on the governments behalf, but does not own the underlying property 20 managed facilities 25,916 beds ~14% Facility EBITDA margin Subject to higher competition
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Market Leader
CXW is the clear leader in privatized prisons, controlling approximately 46% of the private prison and jail beds in the U.S.
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~12,000
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~7,000
~2,000
NA
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Source: Bureau of Justice Statistic: Prison Inmates at Midyear 2008, CXW investor presentation, Aug. 2009. 7
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Across the state of California, facilities are running at 170% of designed capacity
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________________________________________________ (1)
Source: 2007 Pew Charitable Trusts report Public Safety, Public Spending Forecasting Americas Prison Population 2007 2011. Annual Operating Cost per Inmate for the year 2005. States vary widely; for instance, California had a $34k annual operating cost per inmate in 2005. 10
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Federal Demand Drivers BOP: Shift from 137% to 115% capacity (1) BOP: Undeveloped growth (2) USMS / ICE (3) Incremental Federal Demand CXW inventory (as of 8/1/09) (4) Incr. Federal Demand as % of Inventory Capture Rate Required to Fill Inventory
________________________________________________ (1) (2)
(3) (4)
Based on 172,827 inmates in BOP facilities as of 9/26/09. Source: BOP website. Assumes the shift from 137% to 115% takes place over the next three years. The BOP projects its inmate population will grow by ~19,000 inmates from 2008 to 2011 but has only planned the development of ~12,000 beds. Assumes ~5% growth of USMS / ICE inmate populations over the next three years. Includes 2,572 beds not yet developed. Source: CXW investor presentation, Aug. 2009.
Of the 19 state customers that CCA does business with, we are currently
estimating that those states will have an incremental growth that will be twice as much as their funded plan capacity by 2013. Damon Hininger, CEO, Q1 Earnings Call
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We estimate CXWs owned beds represent >40% of the industrys spare capacity
Incremental CXW Beds (Owned) 1.4 Occupancy (Owned) 90.3% Memo: Pershing Square Forecast Incremental CXW Beds (Owned) Occupancy (Owned) 1.4 90.3%
(1) Source ('04-'07): Bureau of Justice Statistics and Office of Detention Trustee Statistics. Excludes juvenile, jail and ICE population. Source ('08-'12): In 2007, Pew Charitable Trust estimated there will be an incremental 153,000 prisoners by YE 2011. This analysis assumes an incremental 140,000 prisoners by YE 2012. (2) Source ('04-'07): Bureau of Justice Statistics and Office of Detention Trustee Statistics. Excludes juvenile, jail and ICE population. Assumes 35% private capture rate in 2008 and 25% private capture rate going forward.
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Increased crime during times of economic weakness and high U.S. recidivism rates drive post-recessionary inmate population growth
Of 300,000 prisoners released from 15 states in 1994, 67.5% were rearrested for a new offense within three years (1)
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While this contribution margin analysis implies $230mm of incremental EBITDA, we believe the actual number will be somewhere between $100mm and $230mm
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Source: CXW Q209 financial supplement. See page 33 of the CXW investor presentation for details of the assumptions used to derive managements ~$100mm estimate. (1) The vast majority of CXWs fixed expense is labor. Also includes utilities, property taxes, insurance, repairs & maintenance and other similar expenses. (2) Includes legal, medical, food, welfare and other similar expenses. (3) This analysis is illustrative. We note that there will be some amount of incremental fixed expense associated with the ramp-up of CXWs inventory as staffing requirements increase with occupancy. 19 We further note that some of the beds in CXWs inventory have not yet been developed, and therefore do not yet have associated fixed expenses.
Q208a 126.5
Q308a 126.5
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$1.73 $1.40 $1.06 $0.84 $0.59 $0.64 $0.53 $0.40 $0.61 $0.86 $1.20 $1.07
Diluted EPS
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Normalized FCFPS
21
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22
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Title Director Chairman Director Director Director Director Director Director Director Director Director Director Director Chief Executive Officer Chief Financial Officer General Counsel Chief Corrections Officer Chief of Human Resources
Total Beneficial Ownership (1) 525,523 1,711,455 50,916 1,282,934 83,124 5,500 100,166 97,700 72,998 47,284 87,232 352,410 1,377,920 20,489 134,072 159,295 144,742 91,984 6,453,308 5.4%
Source: CXW March 31, 2009 proxy and Bloomberg. (1) Includes shares that could be purchased upon exercise of stock options at March 1, 2009 or within 60 days thereafter. (2) William Rusak was succeeded by Brian Collins on September 14, 2009. (3) Based on 117,681,012 shares outstanding as of March 1, 2009. Deems shares that could be purchased upon exercise of stock options as shares outstanding. 24
Valuation
Summary Financials
2008a Avg Occupied Beds (owned only) Avg Total Beds (owned only) Occupancy (owned only) Revenue
Growth
431
27.0%
445
27.0%
467
27.1%
514
28.1%
571
29.6%
Cap Rate Analysis TEV Less: Mgmt Business (1) PropCo TEV 2009e NOI (owned only) (2) Cap Rate $4,057 (400) $3,657 445 12.2%
EBITDA
Margin
395
24.7%
402
24.3%
419
24.3%
462
25.3%
518
26.8%
359
22.5%
362
22.0%
372
21.6%
414
22.7%
470
24.3%
$1.73
23.6%
$1.84
6.4%
$1.95
5.9%
$2.34
19.9%
$2.90
23.8%
Trading Multiples
2008a TEV / EBITDA TEV / EBITDA - Maint Capex Implied Cap Rate P / Normalized FCFPS 10.3x 11.3x 11.8% 14.2x 2009e 10.1x 11.2x 12.2% 13.3x 2010e 9.7x 10.9x 12.7% 12.6x 2011e 8.8x 9.8x 14.0% 10.5x 2012e 7.8x 8.6x 15.6% 8.5x
Applies an 8.0x multiple to Facility EBITDA from the management business. NOI is defined as Facility EBITDA from CXWs Owned & Managed segment (owned only). Assumes a 38% cash tax rate. Assumes CXW uses future free cash flow to repurchase shares at a premium to market.
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$24.50
$25 $20 $15 $10 $5 $0 $85,000 $75,000 $65,000 $55,000 $45,000 $35,000
Jan-07
Jul-07
Feb-08
Stock Price
Sep-08
TEV / Bed
Mar-09
Oct-09
46,681
48,933
50,909
53,464
59,184
61,054
125.3
125.6
126.1
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126.5
120.6
115.7
14x
11x
9.8x
8x
5x
Jan-07 Jul-07 Feb-08 Sep-08 Mar-09 Oct-09
85.9%
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87.1%
88.9%
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89.8%
89.6%
90.1%
Principal Asset Primary Tenant Growth Opportunity Maint Capex as % of Revenue Tenant Allowances Return on New Development Competition for Existing Units Competition for New Construction Cyclicality
Real Estate Government Secular ~2% None High Local Monopoly Oligopoly Low
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CXW has creditworthy tenants, requires limited maintenance capex, and enjoys excellent competitive dynamics all features of a high quality real estate business
(1)
Government ~2%
Supply / demand imbalance provides secular tailwind
Government ~3.5%
Aging baby boomers provide secular tailwind
>12%
~7%
Source: Green Street research and Pershing Square estimates. 30 (1) We define typical health care REITs to include senior housing, skilled nursing, MOBs, hospitals and life sciences. (2) Maintenance capex is low for health care REITs due to the triple-net leases associated with senior housing, skilled nursing and hospitals.
By December-97, CCA Prison Realty Trusts stock had moved up to the $40s, trading at a ~5% cap rate and a ~4% dividend yield
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May-05
Jun-07
Jul-09
It had too much leverage It had an overly aggressive development plan Its tenant, OpCo, was also over-leveraged (1)
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The rates on the Operating Company leases were set with the intention that the public stockholders of New Prison Realty would receive as much of the benefit as possible from owning and operating the correctional and detention facilities. In fact, the Operating Company lease rates were set so that Operating Company was projected to lose money for the first several years of its existence. Source: CXW 2002 10-K.
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NOLs
CXW has not been a large taxpayer for the last eight years because of substantial NOLs that are now exhausted
Total: $149mm Total: $165mm
$90 $80 $70 $60 $50 $40 $30 $20 $10 $0 2001a 2002a 2003a 2004a 2005a 2006a 2007a 2008a 2009e 2010e
9.4%
2.4%
3.4%
20.4%
8.2%
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24.1%
22.5%
37.6%
38.0%
30%
25.7% 26.0%
25%
19.7% 19.9% 18.4%
20%
15%
10%
9.3%
5%
2006a
2007a
2008a
2009e
2010e
Management Gets It
The other thing I would point out is before we'd even sell stock, that there's a lot of value in these assets. I hear people talking to me about regional malls selling at six cap rates or parking garages selling at five cap rates or 20 times cash flow and you think about -- or highways selling at 50 times cash flow, you think about prisons as infrastructure or some type of real estate asset, I think these could be even sold and harvested in some fashion to avoid selling stock in the future. So there are a number of things that we could do to finance our growth, but just with respect to cash flow and leverage, we could go quite a ways. Irving Lingo, Former-CFO of Corrections Corp, Q206 Earnings Call
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Conclusions
Market Leader / Competitive Advantage Secular Growth Opportunity Several Near-Term Catalysts Stable Free Cash Flow in Excess of EPS Strong Management Strong Balance Sheet Attractive ROC / Low Cost of Capital
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