Cellblock kings

Real estate investment trusts own and operate income producing properties, but not all of them house willing guests.

Roughly 10 percent of state and federal correctional facilities are now operated by companies; their role can also include building design and construction.

The two largest operators are Corrections Corp. of America and Geo Group. Both companies converted this year into REITs, a move that makes them particularly compelling buys right now, says Macquarie Capital financial analyst Kevin McVeigh. REITs receive special tax considerations and are required to return at least 90 percent of their taxable income to investors.

McVeigh has an “Outperform” rating on both REITs, even though they’ve risen sharply over the last 12 months. At more than 5 percent, they both offer attractive dividend yields relative to their peers.

Corrections Corp. has posted a total return of 56 percent this past year, while GEO Group has more than doubled, rising 125 percent. Both stocks have a five-year annualized return of 12 percent, well ahead of the 5 percent return of the Standard & Poor’s 500 index.

Although budgets remain tight, government finances have strengthened some since the recession. That means prison management companies could see more demand for their services as states like California address the need to handle overcrowded prisons.