UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2005
or


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Transition Period From _______________ to _______________

Commission File Number: 1- 14031

CORRECTIONAL PROPERTIES TRUST

(Exact name of Registrant as specified in its declaration of trust)


Maryland		65-0823232
(State or other jurisdiction		(I.R.S. Employer
of incorporation or organization)		Identification No.)

3300 PGA Blvd., Suite 750, Palm Beach Gardens, Florida 33410
(Address and zip code of principal executive offices)

(561) 630-6336
(Registrant’s telephone number, including area code)

Not Applicable
(Former name, former address and former fiscal
year if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x

There were 10,997,250 common shares, $0.001 par value per share, of the registrant outstanding as of November 7, 2005.

CORRECTIONAL PROPERTIES TRUST
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2005

INDEX


			Page
PART I -		FINANCIAL INFORMATION
	Item 1.	Financial Statements
	a.	Consolidated Balance Sheets as of September 30, 2005 and December 31, 2004		3
	b.	Consolidated Statements of Income for the three months ended September 30, 2005 and 2004		4
	c.	Consolidated Statements of Income for the nine months ended September 30, 2005 and 2004		5
	d.	Consolidated Statements of Cash Flows for the nine months ended September 30, 2005 and 2004		6
	e.	Notes to Consolidated Financial Statements		7
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		12
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk		23
	Item 4.	Controls and Procedures		23
PART II -		OTHER INFORMATION
	Item 1.	Legal Proceedings		24
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		24
	Item 3.	Defaults upon Senior Securities		24
	Item 4.	Submission of Matters to a Vote of Security Holders		24
	Item 5.	Other Information		24
	Item 6.	Exhibits		24
SIGNATURE				25
Section 302 CEO Certification
Section 302 CFO Certification
Section 906 CEO Certification
Section 906 CFO Certification

PART I — FINANCIAL INFORMATION

Item I — Financial Statements.

CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED BALANCE SHEETS
As of September 30, 2005 and December 31, 2004
(Amounts in thousands, except per share amounts)


	September 30,			December 31,
	2005			2004
	(Unaudited)
Assets
Real estate properties, at cost:
Correctional and detention facilities	$	252,142		$	243,747
Less—accumulated depreciation		(38,603	)		(34,221	)

Net real estate properties		213,539			209,526
Cash and cash equivalents		4,043			5,004
Deferred financing costs, net		814			1,345
Other assets		2,513			2,441

Total assets	$	220,909		$	218,316


Liabilities and shareholders’ equity
Liabilities
Accounts payable and accrued expenses	$	4,966		$	3,243
Deferred revenue		2,147			—

Total liabilities		7,113			3,243


Commitments and contingencies

Shareholders’ equity
Preferred shares, $.001 par value; 50,000,000 shares authorized; none outstanding		—			—
Common shares, $.001 par value; 150,000,000 shares authorized; 10,997,250 and 10,992,750 shares issued and outstanding, respectively		11			11
Capital in excess of par value		220,835			220,709
Distributions in excess of accumulated earnings		(6,951	)		(5,625	)
Unearned compensation		(99	)		(22	)

Total shareholders’ equity		213,796			215,073

Total liabilities and shareholders’ equity	$	220,909		$	218,316

The accompanying notes to consolidated financial statements are an integral part of these statements.

CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
For the Three Months Ended September 30, 2005 and 2004
(Amounts in thousands, except per share amounts)
(Unaudited)


	September 30,		September 30,
	2005		2004
Revenue
Rental	$	7,050	$	6,799
Interest		30		5

		7,080		6,804


Expenses
Depreciation		1,474		1,449
General and administrative		766		593
Interest		279		278

		2,519		2,320

Income from continuing operations		4,561		4,484
Discontinued operations
Income from operations of discontinued facilities		—		566

Net income	$	4,561	$	5,050


Basic net income per common share:
Continuing operations	$	.42	$	.41
Discontinued operations		—		.05

Total	$	.42	$	.46


Diluted net income per common share:
Continuing operations	$	.41	$	.41
Discontinued operations		—		.05

Total	$	.41	$	.46


Weighted average number of common shares and common share equivalents outstanding:
Basic		10,992		10,983
Diluted		11,105		11,078

Distributions declared per common share outstanding (Note 7)	$	.45	$	.45

The accompanying notes to consolidated financial statements are an integral part of these statements.

CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF INCOME
For the Nine Months Ended September 30, 2005 and 2004
(Amounts in thousands, except per share amounts)
(Unaudited)


	September 30,		September 30,
	2005		2004
Revenue
Rental	$	20,878	$	20,261
Interest		101		7

		20,979		20,268


Expenses
Depreciation		4,382		4,346
General and administrative		2,236		1,869
Interest		832		852

		7,450		7,067

Income from continuing operations		13,529		13,201
Discontinued operations
Income from operations of discontinued facilities		—		945

Net income	$	13,529	$	14,146


Basic net income per common share:
Continuing operations	$	1.23	$	1.20
Discontinued operations		—		.09

Total	$	1.23	$	1.29


Diluted net income per common share:
Continuing operations	$	1.22	$	1.19
Discontinued operations		—		.09

Total	$	1.22	$	1.28


Weighted average number of common shares and common share equivalents outstanding:
Basic		10,991		10,978
Diluted		11,091		11,083

Distributions declared per common share outstanding (Note 7)	$	1.35	$	1.35

The accompanying notes to consolidated financial statements are an integral part of these statements.

CORRECTIONAL PROPERTIES TRUST
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 2005 and 2004
(Amounts in thousands, except per share amounts)
(Unaudited)


	September 30,			September 30,
	2005			2004
Cash flows from operating activities
Income from continuing operations	$	13,529		$	13,201
Adjustments to reconcile income from continuing operations to net cash provided by operating activities of continuing operations:
Depreciation of real estate properties		4,382			4,346
Amortization of deferred financing costs		531			532
Stock based compensation		49			27
Changes in operating assets and liabilities net of effect of discontinued operations:
Other assets		(72	)		(157	)
Accounts payable and accrued expenses		12			(135	)
Deferred revenue		2,147			2,056

Net cash provided by operating activities of continuing operations		20,578			19,870

Income from discontinued operations		—			945
Adjustments to reconcile income from discontinued operations to net cash provided by discontinued operations:
Depreciation of real estate properties		—			964
Changes in net assets of discontinued operations		—			(94	)
Changes in liabilities associated with assets of discontinued operations		—			(6	)

Net cash provided by operating activities of discontinued operations		—			1,809

Net cash provided by operating activities		20,578			21,679

Net cash used in investing activities

Acquisition of real estate properties		(4,704	)		—

Cash flows from financing activities
Distributions to shareholders		(16,835	)		(14,835	)
Proceeds from exercise of stock options		—			224
Net repayments under revolving line of credit		—			(3,800	)
Repayments on bonds		—			(870	)
Restricted cash		—			(30	)
Deferred financing costs		—			(9	)

Net cash used in financing activities		(16,835	)		(19,320	)

Net (decrease) increase in cash and cash equivalents		(961	)		2,359
Cash and cash equivalents, beginning of year		5,004			668

Cash and cash equivalents, end of quarter	$	4,043		$	3,027

Supplemental Disclosure:
Cash paid for interest	$	168		$	3,291

The accompanying notes to consolidated financial statements are an integral part of these statements.

CORRECTIONAL PROPERTIES TRUST
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. General

The consolidated financial information of Correctional Properties Trust (the “Company”) and its subsidiaries as of September 30, 2005 and for the three and nine months ended September 30, 2005 and 2004 is unaudited, but has been prepared in accordance with accounting principles generally accepted in the United States for interim financial information and in conjunction with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by accounting principles generally accepted in the United States. In the opinion of management, the interim data includes all adjustments consisting solely of normal recurring adjustments that are considered necessary for a fair presentation of the Company’s results for the periods presented. The results of operations for the interim period are not necessarily indicative of the results to be obtained for the full fiscal year. The consolidated balance sheet at December 31, 2004 has been derived from the Company’s audited consolidated financial statements at that date. This financial information should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2004 included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, as filed with the Securities and Exchange Commission.

The accompanying financial statements include the accounts of the Company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

2. Recent Accounting Pronouncements

In March 2005, the Financial Accounting Standards Board (“FASB”) issued Interpretation Number 47, “Accounting for Conditional Asset Retirement Obligations, an interpretation of FASB Statement No. 143” (“FIN 47”). FIN 47 clarifies the term “conditional asset retirement obligation” as used in Statement of Financial Accounting Standards (“SFAS”) No. 143, “Accounting for Asset Retirement Obligations,” and also clarifies when an entity would have sufficient information to reasonably estimate the fair value of an asset retirement. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The Company does not anticipate that the implementation of FIN 47 will have a material impact on its financial position, results of operations or cash flows.

On December 16, 2004, FASB issued FASB Statement No. 123 (revised 2004), Share-Based Payment, which is a revision of FASB Statement No. 123, Accounting for Stock-Based Compensation. Statement 123(R) supersedes APB Opinion No. 25, Accounting for Stock Issued to Employees, and amends FASB Statement No. 95, Statement of Cash Flows. Generally, the approach in Statement 123(R) is similar to the approach described in Statement 123. However, Statement 123(R) requires all share-based payments to employees, including grants of employee stock options, to be recognized in the income statement based on their fair values. Pro forma disclosure is no longer an alternative.

On April 15, 2005, the Securities and Exchange Commission posted Final Rule Number 33-8568, “Amendment to Rule 4-01(a) of Regulation S-X Regarding the Compliance Date for Statement of Financial Accounting Standards No. 123 (Revised 2004), Share-Based Payment,” which is effective as of April 21, 2005. Under the Commission’s amendment, the Company is required to file financial statements that comply with SFAS No. 123R in its Quarterly Report on Form 10-Q for the first quarter of the first fiscal year that begins after June 15, 2005, and the Company is permitted, but is not required, to comply with SFAS No. 123R for periods before the required compliance date. The Company is currently assessing the timing and impact of adopting SFAS No. 123R.

3. Amended Bank Credit Facility

On November 25, 2003, the Company entered into its Amended and Restated Credit Agreement (the “Amended Bank Credit Facility”) initially consisting of a $95 million secured revolving credit facility. The Amended Bank Credit Facility replaces the Company’s original secured line of credit which matured on October 1, 2003 but was extended up until the closing of the Amended Bank Credit Facility. The proceeds of the Amended Bank Credit Facility, which has a term of

thirty-six (36) months, may be used to finance the construction and acquisition of correctional and detention facilities, to expand or improve current facilities and for general working capital purposes. The Amended Bank Credit Facility includes a swingline component and provisions to increase the Amended Bank Credit Facility up to a total of $200 million by increasing the Revolver, and/or by originating a new term loan of up to $100 million, subject to successful syndication and closing.

The Amended Bank Credit Facility is currently secured by all of the Company’s facilities other than the Queens Facility, and permits aggregate borrowings of up to 50% of the total value of the secured facilities (the “Pledge Pool”), which is calculated as the lesser of the aggregate of the historical cost of the secured facilities or the aggregate of the appraised value of such facilities (the “Total Value”). Under the terms of the Amended Bank Credit Facility, the Company is restricted from paying dividends in excess of the lesser of 100% of Cash Available for Distribution (as defined) or 95% of Funds from Operations plus, in either case 100% of the amount of any capital gain from dispositions of facilities. The Amended Bank Credit Facility includes a requirement that the Company enter into certain interest rate swap agreements for a portion of the amounts drawn, which effectively fixes the interest rate on a significant portion of the borrowings. The Company’s ability to borrow under the Amended Bank Credit Facility is subject to the Company’s compliance with a number of restrictive covenants and other requirements.

Borrowings under the Amended Bank Credit Facility bear interest at either the Base Rate or Eurodollar Rate at the option of the Company. The Base Rate is equal to the sum of (a) the higher of (i) the Federal Funds Rate plus 50 basis points and (ii) the Prime Rate plus (b) the Base Rate Applicable Margin, which ranges from 0 to 75 basis points depending upon the ratio of consolidated total liabilities to consolidated total assets. The Eurodollar Rate is equal to LIBOR plus the Eurodollar Rate Applicable Margin, which ranges from 275 to 350 basis points depending upon the ratio of consolidated total liabilities to consolidated total assets. The interest period on Eurodollar Rate Loans may be of one, two, three, six or nine months at the option of the Company. The Applicable Margins for Base Rate Loans and Eurodollar Rate Loans described above in the Amended Bank Credit Facility were 0 and 275 basis points at September 30, 2005, respectively. The Company is required to pay on a quarterly basis an unused fee under the Amended Bank Credit Facility, which ranges from 35 to 50 basis points depending upon the ratio of consolidated total liabilities to consolidated total assets, on the amount by which the available borrowing capacity exceeds the amounts outstanding. The unused fee at September 30, 2005 was 35 basis points. Economic conditions could result in higher interest rates, which could increase debt service requirements on borrowings under the Amended Bank Credit Facility and which could, in turn, reduce the amount of cash available for distribution.

As of September 30, 2005, no amounts were outstanding under the $95 million Amended Bank Credit Facility. As of September 30, 2005, the Company had $95 million of available borrowing capacity under its Amended Bank Credit Facility, including $7.5 million available to be drawn on the swing line component of the Amended Bank Credit Facility for general working capital requirements. All borrowings under the Amended Bank Credit Facility are subject to the Company’s compliance with several restrictive covenants prior to any such amounts being drawn to finance the acquisition of correctional and detention facilities and/or to expand the Facilities and for general working capital requirements.

In order for a facility to be initially included in the Pledge Pool, the lessee of the facility must be in full compliance with the material terms and conditions contained in the operating or management contract with the governmental agency. However, in the event that any facility, after becoming a part of the Pledge Pool, becomes vacant such property shall continue to be included in the Pledge Pool so long as the lease agreement with respect to such property is in full force and effect and the inclusion of such property in the Pledge Pool would not cause the sum of the appraised values of all vacant properties in the Pledge Pool to exceed 20% of the Total Value.

The GEO Group, Inc. (or GEO) does not presently have a correctional facility operating or management contract with a governmental agency for the Jena Facility, and as a result, the facility has been vacant since the termination of the operating agreement in July 2000. GEO had recently allowed the State of Louisiana to use the Jena Facility on a temporary emergency basis to house approximately 500 inmates as a result of the emergency situation created by Hurricane Katrina. However, the State of Louisiana is no longer utilizing the facility, and the Jena Facility is currently vacant. GEO continues to make rental payments to the Company as required under the terms of the non-cancelable lease. The appraised value of this facility is approximately seven percent of the Total Value, and therefore, does not exceed 20% of the Total Value. As a result, the Jena Facility continues to be included in the Pledge Pool.

4. Earnings Per Share

Basic earnings per share is computed by dividing income from continuing operations and income from operations of discontinued facilities for the period by the weighted average number of common shares outstanding for the period. Diluted earnings per share is computed by dividing income from continuing operations and income from operations of discontinued facilities for the period by the weighted average number of common shares outstanding for the period after considering additional dilution from outstanding stock options. The following data show the amounts used in computing earnings per share and the effects on income and the weighted average number of shares of potential dilutive common stock (in thousands, except per share data):


	For the Three Months Ended				For the Nine Months Ended
	September 30,				September 30,
	2005		2004		2005		2004
Income from continuing operations	$	4,561	$	4,484	$	13,529	$	13,201
Weighted average shares – basic		10,992		10,983		10,991		10,978
Per share – Basic	$	.42	$	.41	$	1.23	$	1.20
Effect of potential dilutive common stock		113		95		100		105
Weighted average shares – diluted		11,105		11,078		11,091		11,083
Per share – Diluted	$	.41	$	.41	$	1.22	$	1.19

Income from operations of discontinued operations	$	—	$	566	$	—	$	945
Weighted average shares – basic		10,992		10,983		10,991		10,978
Per share – Basic	$	—	$	.05	$	—	$	.09
Effect of potential dilutive common stock		113		95		100		105
Weighted average shares – diluted		11,105		11,078		11,091		11,083
Per share – Diluted	$	—	$	.05	$	—	$	.09

Net income	$	4,561	$	5,050	$	13,529	$	14,146
Weighted average shares – basic		10,992		10,983		10,991		10,978
Per share – Basic	$	.42	$	.46	$	1.23	$	1.29
Effect of potential dilutive common stock		113		95		100		105
Weighted average shares – diluted		11,105		11,078		11,091		11,083
Per share – Diluted	$	.41	$	.46	$	1.22	$	1.28

As of September 30, 2005, and 2004, all outstanding options to purchase shares of the Company’s stock were included in the computation of diluted earnings per share.

5. Discontinued Operations

In November 2004, the Company sold the Pamlico Facility and Mountain View Facility to the State of North Carolina. As a result of the sale, certain amounts in the Company’s prior year’s quarterly consolidated financial statements have been reclassified to reflect the discontinued operation presentation by reporting the results of operations associated with such facilities for prior periods as discontinued operations. The discontinued operations line item in the consolidated statements of income includes rental income and interest income less depreciation expense recorded prior to the classification of the facilities as held for sale, interest expense on the bonds used to finance the facilities and general and administrative expenses directly associated with both the Pamlico Facility and the Mountain View Facility.

The aggregate rental revenues from these facilities for the three and nine months ended September 30, 2004 were approximately $1,663,000 and $4,988,000, respectively.

6. Employee Stock-Based Compensation Plans

The Company accounts for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of APB Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for stock options granted under the Company’s employee stock plans because the exercise prices of the stock options granted equal the market prices of the underlying stock on the dates of grant. Had compensation for the Company’s stock-based compensation plans been determined pursuant to SFAS No. 123, “Accounting for Stock-Based Compensation”, the Company’s net income and earnings per share would have decreased accordingly.

The following table represents the effect on net income and earnings per share if the Company had applied the fair value based method pursuant to SFAS No. 123, to employee stock-based compensation plans. (In thousands except per share amounts)


	For the Three Months Ended						For the Nine Months Ended
	Sept. 30, 2005			Sept. 30, 2004			Sept. 30, 2005			Sept. 30, 2004
Net income, as reported	$	4,561		$	5,050		$	13,529		$	14,146
Add: stock-based compensation expense included in net income as reported		18			9			49			27
Deduct: stock-based compensation expense determined under the fair value based method for all awards		(25	)		(14	)		(73	)		(42	)

Pro forma net income	$	4,554		$	5,045		$	13,505		$	14,131


Net income per share
Basic, as reported	$	0.42		$	0.46		$	1.23		$	1.29
Basic, pro forma	$	0.41		$	0.46		$	1.23		$	1.29
Diluted, as reported	$	0.41		$	0.46		$	1.22		$	1.28
Diluted, pro forma	$	0.41		$	0.46		$	1.22		$	1.28

7. Distributions Declared Per Share

Regular quarterly distributions are generally declared a quarter in arrears. Regular quarterly distributions declared per share during the three months ended September 30, 2005 and September 30, 2004 represent the regular quarterly distribution for the second quarter of 2005 and 2004, respectively. Regular quarterly distributions declared per share during the nine months ended September 30, 2005 represent the regular quarterly distribution for the fourth quarter of 2004 and the first and second quarter of 2005. Regular quarterly distributions declared per share during the nine months ended September 30, 2004 represent the regular quarterly distribution for the fourth quarter of 2003 and the first and second quarter of 2004.

8. Expansion to the Lawton Correctional Facility

On May 27, 2005, the Company amended the terms of its lease agreement with The GEO Group, Inc., dated January 15, 1999, relating to the Lawton Correctional Facility. Pursuant to this First Amendment to Lease Agreement (the “Amended Lease”), the Company completed the acquisition of an existing 300-bed expansion to the Lawton Correctional Facility in Lawton, Oklahoma from GEO. The acquisition was completed using cash on hand, and no debt was incurred. However, the facility is subject to a mortgage under the Company’s existing bank credit facility. The purchase price was $3.5 million. The Amended Lease also provides for the Company to fund up to $23 million for a new 600-bed expansion to be constructed onto the existing medium-security prison.

Upon completion, the Company will own the entire 2,518-bed facility, comprised of the original 1,500 beds, the original 118 administrative beds, the newly acquired 300-bed expansion, and the 600-bed expansion to be constructed. The facility will continue to be leased to GEO to house adult, male inmates for the Oklahoma Department of Corrections.

The Company is not obligated to fund more than $23 million of the costs for the 600-bed expansion. The Company may however, with no obligation to do so, advance more than $23 million if it so elects, with the additional costs reflected accordingly in the Amended Lease. If the Company elects not to fund the costs, if any, in excess of $23 million, GEO shall be responsible for

any such costs. The 600-bed expansion is a build-to-suit project, with GEO providing design and development expertise. The Company has incurred approximately $4,895,000 of construction and related costs in connection with the new 600-bed expansion, and these costs are included in Correctional and Detention Facilities in the accompanying Consolidated Balance Sheet as of September 30, 2005.

GEO is currently paying the Company a lease rate of 11.08 percent on the original 1,500-bed facility, which remains unchanged as a result of this transaction. The acquired 300-bed expansion is leased to GEO at an initial rate of 9.5 percent. This resulted in a blended-lease rate for the 1,918-bed facility (which includes 118 adult segregation beds) of approximately 10.96 percent with annual lease escalators at CPI, not to exceed 4 percent annually. The new 600-bed expansion will also be leased to GEO at an initial rate of 9.5 percent of CPT’s total costs when it is completed. Following the completion of the new 600-bed expansion, the initial blended-lease rate on the entire 2,518-bed facility is expected to be approximately 10.50 percent with annual lease escalators at CPI, not to exceed 4 percent annually.

The lease maturity date on the existing 1,500-bed facility between GEO and the Company has been amended. GEO had approximately four years remaining on its original 10-year lease with the Company. The amended lease provides a maturity date of 10 years on the entire 2,518-bed facility and will commence when the new 600-bed expansion is completed.

Item 2 – Management’s Discussion and Analysis of Financial Condition and Results of Operations.

Forward Looking Statements

This report contains “forward-looking statements” for purposes of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements are based on current expectations, estimates and projections about our business and the business marketplace in which we operate. This report also includes management’s beliefs and assumptions. Words such as “expects”, “anticipates”, “intends”, “plans”, “believes”, “seeks”, “estimates”, and variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, or Future Risk Factors (described below), which are difficult to predict. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. We caution you not to place undue reliance on these forward-looking statements, which speak only as of the date of this report. We undertake no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise.

Future Risk Factors include, without limitation: increasing competition, including new entrants in the marketplace; the mix of tenants as it relates to other private prison owners and operators and government entities; governmental and public policy changes; reliance on a single tenant for a significant portion of revenue; non-renewal of existing leases; government regulation; annual governmental appropriation risk; interest rate risk; repurchase of properties by tenants under purchase options; continued availability of financing; rental rates sufficient to make acquisitions feasible; limited alternative use and special purpose aspects of our properties; continued ability to pay a dividend; continued ability to qualify as a real estate investment trust; and financial resources in the amounts, at the times and on the terms required to support our future business. These are representative of the Future Risk Factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions and growth rates, general domestic economic conditions including interest rate fluctuations and other Future Risk Factors. We will discuss such risks in our future reports filed with the Securities and Exchange Commission.

The following discussion should be read in conjunction with the Company’s unaudited consolidated financial statements and notes thereto, which are included elsewhere in this report.

Overview

We were formed in February 1998 as a Maryland real estate investment trust to capitalize on the growing trend toward privatization in the corrections industry by acquiring correctional and detention facilities from both private prison operators and government entities and leasing these facilities to experienced correctional and detention facility operators or the government entities under long-term, non-cancelable, triple-net leases (leases where the tenant is required to pay all operating expenses, taxes, insurance, structural and non-structural repairs and other costs). Except where the context otherwise requires, the terms “we,” “us,” “Company” or “our” refer to the business of Correctional Properties Trust and its consolidated subsidiaries.

Our principal business strategy is to finance and/or acquire correctional and detention facilities that meet our investment criteria, from private prison owners and operators, developers and government entities, to expand our existing facilities, and to lease all of these facilities under long-term triple-net leases to qualified third-party operators. Our facilities are privately managed facilities that are leased to and operated by The Geo Group, Inc., or The Geo Group, or Community Educations Center, Inc., or CEC. We lease eleven of our facilities to The Geo Group or its subsidiary and one of our facilities to CEC.

Substantially all of our revenues are derived from: (i) rents received under triple-net leases of correctional and detention facilities; and (ii) interest earned from the temporary investment of funds in short-term investments.

A component of the rental revenue we receive consists of increases resulting from rent escalation provisions which appear in all of our leases:

•

The Geo Group Leases. The base rent for the first year of each facility leased to The Geo Group before January 1, 2000 was equal to 9.5% of the facility purchase price. After the first year, minimum rent escalates by the greater of

			3% or the increase in the Consumer Price Index, or CPI, with a maximum increase of 4% for the first two annual anniversaries of the effective date of each lease and, for each successive annual anniversary for the remaining term of each lease, by an amount equal to increases, if any, in the CPI, subject to a maximum increase of 4.0% per annum throughout the term of the leases. The base rent for the first year of the Jena Juvenile Justice Center in Jena, Louisiana leased to The Geo Group was equal to 11.0% of the facility purchase price with a fixed 4.0% annual escalator. The base rent for the first year of the 300-bed expansion to the Lawton Correctional Facility leased to The GEO Group was equal to 9.5% of the facility price. After the first year, minimum rent escalates by an amount equal to increases, if any, in the CPI, subject to a maximum increase of 4% per annum throughout the term of the lease. The average remaining life on the eleven leases with The Geo Group as of September 30, 2005, is approximately 3 years.

	•		Community Education Centers Lease. On May 29, 2003, we acquired Delaney Hall. The initial base rent was $2,310,000 per annum or 11.0% of the facility purchase price. Following the first year and continuing during the term of the lease, base rent will increase by 3.0% annually on each anniversary.

We incur operating and administrative expenses, including compensation expense for our executive officers and other employees, office rental and related occupancy costs and various expenses incurred in the process of acquiring additional properties. We are self-administered and managed by our executive officers and staff, and do not engage a separate advisor or pay an advisory fee for administrative or investment services, although we do engage legal, accounting, tax and financial advisors from time to time. Our primary non-cash expense is depreciation of our correctional and detention facilities. All facilities owned by us are leased under triple-net leases, which require the lessees to pay substantially all expenses associated with the operation of these facilities. As a result of these arrangements, we do not believe we will be responsible for any major expenses in connection with the facilities during the terms of the leases.

We have previously leveraged and anticipate continuing to leverage our portfolio of real estate equity investments in the future, and expect to continue to incur short-term indebtedness and related interest expense. We may also incur long-term indebtedness to make acquisitions, and/or refinance correctional facilities currently owned.

We intend to make distributions to our shareholders in amounts not less than the amounts required to maintain our status as a real estate investment trust, or REIT, under the Internal Revenue Code.

Our cash flows from operating activities are dependent on the continued leasing of our properties, the rents that we are able to charge to our tenants, the ability of these tenants to make their rental payments, our ability to renew our leases with our existing tenants as they expire and our ability to re-lease our properties with other suitable tenants if our leases are not renewed by our existing tenants. A principal long-term risk to our business is our dependence on the viability of our tenants, The Geo Group and CEC. Any of the following could have a material adverse impact on our cash flows from operating activities and income from operating activities:

	•		We are subject to lease payment collection risks because our lease agreements are for longer terms than those of the facility management services or operating agreements held by and which generate revenue for The Geo Group and CEC. Only a governmental agency that has contracted with The Geo Group and CEC may exercise a renewal option of an existing management services or operating agreement or enter into a new management services or operating agreement. A governmental agency may choose to terminate or not renew an operating agreement or management services agreement. For example, the operating agreement for the Jena Facility has been terminated. The non-renewal of a facility management services or operating agreement and the inability to secure an alternate agreement or source of inmates could materially and adversely affect The Geo Group’s or CEC’s financial condition and their respective ability to make lease payments to us.

	•		The Geo Group and its subsidiary and CEC are currently the only parties with whom we have lease agreements on our facilities. Accordingly, these parties account for 100% of our lease agreement revenue and the failure of either one of them to meet their respective obligations to us may have a material adverse effect upon our operations.

	•		The Geo Group is either the lessee or sub-lessee of 11 of the 12 facilities we own. As of September 30, 2005, approximately 91% of our revenue, and our ability to make distributions to our shareholders, will depend

substantially upon The Geo Group making rent payments and satisfying its obligations to us. Any failure or delay by The Geo Group in making rent payments or otherwise complying with its obligations under these leases may adversely affect our cash flows from operating activities and income from operating activities and our ability to make anticipated distributions. Eight of our leases with The Geo Group expire during April 2008. To the extent these leases are not renewed by The Geo Group or re-leased to other suitable tenants on acceptable terms, our total revenue and ability to make distributions to our shareholders will be adversely affected.

We may finance, purchase or lease properties for long-term investment, expand and improve the facilities presently owned or sell these properties, in whole or in part, when circumstances warrant. We may also participate with other entities in property ownership, through joint ventures or other types of co-ownership. Equity investments may be subject to existing mortgage financing and other indebtedness which have priority over our equity interest. While we emphasize equity real estate investments, we may, in our discretion, invest in mortgages, equity or debt securities of other REITs or partnerships and other real estate interests. Mortgage investments may include participating in convertible mortgages. There are no current limitations on the percentage of our assets that may be invested in any one property, venture or type of security. Our Board of Trustees may establish investment limitations as it deems appropriate from time to time, including investment limitations necessary to maintain our qualification as a REIT. No limitations have been set on the number of properties in which we will seek to invest or on the concentration of investments in any one geographic region.

Critical Accounting Policies and Estimates

The preparation of our consolidated financial statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions in certain circumstances that affect amounts reported in our consolidated financial statements and related notes. In preparing our consolidated financial statements, we have made our best estimates and assumptions that affect the reported assets and liabilities. We believe our most critical accounting policies include revenue recognition, depreciation of real estate, impairment of long-lived assets, and the accounting for interest rate swaps and stock options. Application of these assumptions requires the exercise of judgment as to future uncertainties and, as a result, future results could differ from these estimates. For additional information, please see Note 2 (Basis of Presentation and Summary of Significant Accounting Policies) to our audited consolidated financial statements included in Item 8 of our Annual Report on Form 10-K for the year ended December 31, 2004.

Revenue Recognition

Lease revenue is recognized on a straight-line basis over the lease term including the impact of scheduled rent increases which are determinable in amount at the inception of the lease. Any increases in lease revenue due to scheduled rent increases which were not determinable at the inception of the lease will be recognized when determinable. Scheduled rent increases which are not determinable at lease inception are dependent upon increases in the CPI.

Depreciation of Real Estate

Real estate properties are recorded at cost. Acquisition costs and transaction fees directly related to each property are capitalized as a cost of the respective property. The purchase price of properties is allocated to tangible and intangible assets and liabilities based on their respective values in accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations”. The tangible cost of real estate properties acquired is allocated between land, buildings and improvements, and machinery and equipment based upon the relative fair value of each component at the time of acquisition. Depreciation is provided for on a straight-line basis over an estimated useful life ranging from 27-40 years for buildings and improvements. The intangible costs of real estate properties are allocated to above or below market in-place leases and other lease origination costs. These intangible costs are amortized over the remaining term of the corresponding leases. We are required to make subjective evaluations of the estimated useful lives of our properties, which directly impact our net income.

Impairment of Long-lived Assets

We review the recorded value of our real estate for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset in question may not be recoverable. We have reviewed our long-lived assets and

have determined that there are no events requiring impairment loss recognition. The method used to determine impairment would be based on estimates of undiscounted operating cash flows expected to be generated from the related long-lived assets. We would measure impairment as the difference between fair value and the net book value of the related asset.

Interest Rate Swaps

In accordance with our amended bank credit facility, we utilize interest rate swap derivative instruments to manage changes in market conditions related to interest rate payments on certain of our variable rate bank debt obligations. These interest rate swaps exchange floating interest rate LIBOR payments on specified established notional amounts for fixed rate interest payments on the same notional amounts. We recognize our interest rate swap derivatives on the balance sheet at fair value as either an asset or a liability. Changes in the fair value of interest rate swaps, which are determined to be effective cash flow hedges, are recorded in accumulated other comprehensive income or loss, which is a component of shareholders’ equity.

Stock Options

We account for stock-based compensation utilizing the intrinsic value method in accordance with the provisions of Accounting Principles Board Opinion No. 25 and related interpretations. Accordingly, no compensation cost has been recognized for stock options granted under the Company’s employee stock plans because the exercise prices of the stock options equal the market prices of the underlying stock on the dates of grant. Had compensation for our stock-based compensation plans been determined pursuant to Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation”, our net income and earnings per share would have decreased accordingly. For additional information, please see Note 2 (Recent Accounting Pronouncements) and Note 6 (Employee Stock-Based Compensation Plans) to our unaudited consolidated financial statements included elsewhere in this report.

FINANCIAL CONDITION

Results of Operations

In November 2004, the Company sold the Pamlico Facility and Mountain View Facility to the State of North Carolina. As a result of the sale, certain amounts in our prior year’s quarterly consolidated financial statements have been reclassified to reflect the discontinued operation presentation including reporting the results of operations associated with such facilities for prior periods as discontinued operations. The discontinued operations line item in the consolidated statements of income includes rental income and interest income less depreciation expense recorded prior to the classification of the facilities as held for sale, interest expense on the bonds used to finance the facilities and general and administrative expenses directly associated with both the Pamlico Facility and the Mountain View Facility.

Three Months ended September 30, 2005 vs. Three Months ended September 30, 2004

For the three months ended September 30, 2005, rental revenues increased to $7,050,000 from $6,799,000 for the three months ended September 30, 2004. The 4% increase in rental revenues is primarily due to rent escalations, based on the consumer price index (CPI), on certain of the facilities and the acquisition of the 300 beds at the Lawton Facility in May 2005.

General and administrative expenses for the three months ended September 30, 2005 increased 29% to $766,000 from $593,000 for the three months ended September 30, 2004. The increase in general and administrative expenses was primarily due to an increase in salaries and benefits of $37,000, an increase in Board of Trustee fees of $19,000, an increase in business development related travel expenses of $10,000, an increase in costs related to evaluating acquisition prospects of $12,000, and an increase in professional fees of $66,000 primarily due to an increase in audit fees.

Interest expense increased to $279,000 for the three months ended September 30, 2005 from $278,000 for the three months ended September 30, 2004. Interest expense for the three months ended September 30, 2005 and 2004 primarily consists of amortization of deferred financing costs and the unused fee on the amended bank credit facility.

Income from discontinued operations for the three months ended September 30, 2005 was $0 compared to $566,000 for the three months ended September 30, 2004. The decrease is due to the sale of the Mountain View Facility and Pamlico Facility in November 2004.

Nine Months ended September 30, 2005 vs. Nine Months ended September 30, 2004

For the nine months ended September 30, 2005, rental revenues increased to $20,878,000 from $20,261,000 for the nine months ended September 30, 2004. The 3% increase in rental revenues is primarily due to rent escalations, based on the consumer price index (CPI), on certain of the facilities and the acquisition of the 300 beds at the Lawton Facility in May 2005.

General and administrative expenses for the nine months ended September 30, 2005 increased 20% to $2,236,000 from $1,869,000 for the nine months ended September 30, 2004. The increase in general and administrative expenses was primarily due to an increase in salaries and benefits of $105,000, an increase in Board of Trustee fees of $58,000, an increase in business development related travel expenses of $45,000, an increase in costs related to evaluating acquisition prospects of $57,000, and an increase in professional fees of $28,000 primarily due to an increase in audit fees.

Interest expense decreased to $832,000 for the nine months ended September 30, 2005 from $852,000 for the nine months ended September 30, 2004. Interest expense for the nine months ended September 30, 2005 and 2004 primarily consists of amortization of deferred financing costs and the unused fee on the amended bank credit facility.

Income from discontinued operations for the nine months ended September 30, 2005 was $0 compared to $945,000 for the nine months ended September 30, 2004. The decrease is due to the sale of the Mountain View Facility and Pamlico Facility in November 2004.

Liquidity and Capital Resources

Our short-term liquidity requirements normally consist primarily of funds necessary to pay for general and administrative expenses (including payroll and costs of legal, accounting and other professionals), interest expense and scheduled principal payments on our outstanding debt, capital expenditures incurred to facilitate the leasing of space, the expansion of existing facilities and quarterly dividends and other distributions paid to our common shareholders. As a REIT, we are required to distribute at least 90% of our taxable income to holders of our common shares on an annual basis. Therefore, as a general matter, it is unlikely that we will retain any substantial cash balances that could be used to meet our liquidity needs. Instead, we expect to meet our short-term liquidity requirements generally through our working capital and net cash provided by operating activities. We believe that our net cash provided by operating activities will be sufficient to allow us to make distributions necessary to enable us to continue to qualify as a REIT. All facilities owned by us are leased under triple-net leases, which require the lessees to pay substantially all expenses associated with the operation of these facilities. As a result of these arrangements, we do not believe we will be responsible for any major expenses in connection with the facilities during the terms of the leases.

We currently have an amended bank credit facility consisting of a $95 million secured revolving credit facility. The proceeds of the amended bank credit facility may be used to finance the construction and the acquisition of correctional and detention facilities, to expand or improve current facilities and for general working capital purposes. The amended bank credit facility includes a swing line component and provisions to increase the amended bank credit facility up to a total of $200 million by increasing the revolver, and/or by originating a new term loan of up to $100 million, subject to successful syndication and other specified closing conditions.

The amended bank credit facility is secured by our facilities, other than the Queens Facility, and permits aggregate borrowings of up to 50% of the total value of the facilities, known as the Pledge Pool, which is calculated as the lesser of the aggregate of the historical cost of our facilities or the aggregate of the appraised value of those facilities. Under the terms of the amended bank credit facility, we are restricted from paying dividends in excess of (a) the lesser of 100% of cash available for distribution or 95% of funds from operations plus, in either case (b) 100% of the amount of any capital gain from dispositions of facilities. The amended bank credit facility includes a requirement that we enter into specified interest rate swap agreements for a portion of the amounts drawn, which effectively fixes the interest rate on a significant portion of the borrowings. As of

September 30, 2005, the Company has no amounts drawn, and no interest rate swap agreements in effect. Our ability to borrow under the amended bank credit facility is subject to our compliance with a number of customary affirmative and negative restrictive covenants and other requirements including certain financial covenants with respect to our consolidated net worth and interest coverage ratio and limits on capital expenditures and borrowings in addition to other restrictions. We were in compliance with these covenants at September 30, 2005.

Borrowings under the amended bank credit facility bear interest at either a base rate or Eurodollar rate at our option. The base rate is equal to the sum of (a) the higher of (i) the Federal Funds Rate plus 50 basis points and (ii) the Prime Rate plus (b) the base rate applicable margin, which ranges from 0 to 75 basis points depending upon our ratio of consolidated total liabilities to consolidated total assets. The Eurodollar rate is equal to LIBOR plus the Eurodollar rate applicable margin, which ranges from 275 to 350 basis points depending upon our ratio of consolidated total liabilities to consolidated total assets. The interest period on Eurodollar rate loans may be one, two, three, six or nine months at our option. The applicable margins for base rate loans and Eurodollar rate loans described above were 0 and 275 basis points at September 30, 2005, respectively. The Company is required to pay on a quarterly basis an unused fee under the amended bank credit facility, which ranges from 35 to 50 basis points depending upon the ratio of consolidated total liabilities to consolidated total assets, on the amount by which the available borrowing capacity exceeds the amounts outstanding. The unused fee at September 30, 2005 was 35 basis points. Economic conditions could result in higher interest rates, which could increase debt service requirements on borrowings under the amended bank credit facility and which could, in turn, reduce the amount of cash available for distribution. As of September 30, 2005, no amounts were outstanding under the $95 million amended bank credit facility. As of September 30, 2005, we had $95 million of available borrowing capacity, including $7.5 million available to be drawn on the swing line component for general working capital requirements.

In order for a facility to be initially included in the Pledge Pool, the lessee of the facility must be in full compliance with the material terms and conditions contained in the operating or management contract with the governmental agency. However, in the event that any facility, after becoming a part of the Pledge Pool, becomes vacant that property shall continue to be included in the Pledge Pool so long as the lease agreement with respect to such property is in full force and effect and the inclusion of that property in the Pledge Pool would not cause the sum of the appraised values of all vacant properties in the Pledge Pool to exceed 20% of the total value of the Pledge Pool as calculated above.

Each of our facilities are leased under triple-net leases in which the tenant is required to pay all the operating expenses, taxes, insurance, and structural and non-structural repairs and other costs. As a result, we have no commitments with respect to other capital expenditures on our existing facilities. We have an agreement under which we may acquire, at a price of up to 105% of cost, and lease back to The Geo Group, any correctional or detention facility acquired or developed and owned by The Geo Group, subject to specified limited exceptions, and subject to time constraints on each specific property. Currently there are no properties of The Geo Group eligible for purchase pursuant to this agreement.

Our long-term liquidity requirements customarily consist primarily of funds necessary to pay for the principal amount of our long-term debt as it matures and significant non-recurring capital expenditures that may need to be made periodically at our properties if the properties are not subject to a lease agreement, and the costs associated with acquisitions of properties as well as the expansion of existing facilities. Historically, we have satisfied these long-term liquidity requirements through what we believe to be the most advantageous source of capital available at the time, which has included borrowing under our amended bank credit facility and by issuing equity or debt securities in public or private transactions. We believe that these sources of capital will continue to be available in the future to fund our long-term capital needs. We anticipate that we will be able to obtain financing for our long-term capital needs. However, we cannot assure you that this additional financing or capital will be available on terms acceptable to us. We may, under some circumstances, borrow

additional amounts in connection with the renovation or expansion of facilities, the acquisition of additional properties, or as necessary, to meet certain distribution requirements imposed on REITs under the Internal Revenue Code. Our ability to incur additional debt may be affected by a number of factors, including the terms and conditions of our facility leases, the underlying operating and management services agreement between the government entities and our lessees, our degree of leverage, the appraised value of our properties, the credit quality of lessees, the value of our unencumbered assets, and borrowing restrictions imposed by lenders.

On June 12, 2002, we filed a “universal shelf” registration statement on Form S-3 with the Securities and Exchange Commission, under Rule 415 under the Securities Act of 1933, as amended. Subject to the effectiveness of this registration statement at the time of the offering, we may, from time to time, offer our common shares, preferred shares, debt securities, which may be senior or subordinated, depositary shares and warrants to acquire any of the foregoing. These securities may only be offered in amounts, at prices and on terms to be set forth in the prospectus contained in the effective registration statement, and in one or more supplements to the prospectus. The registration statement is intended to provide us flexibility to raise up to $250 million from the offering of these securities, subject to market conditions and capital needs. We currently have approximately $167 million available for issuance under the shelf registration statement subject to its effectiveness at the time of the offering. Net proceeds from the offering may be used by us to acquire correctional properties, repay outstanding debt, and for general working capital purposes.

On March 31, 2005, we signed a purchase and sale agreement to acquire an office condominium located in Palm Beach Gardens, Florida to be utilized as our corporate office. On October 14, 2005, we closed on the purchase of the office condominium and expect to move into our corporate office in the fourth quarter of 2005 following the completion of the interior improvements. The total estimated costs of the corporate office are approximately $1,400,000. As owners of the office condominium, we are responsible for paying all direct expenses associated with the building ownership, including real estate taxes, insurance and maintenance costs. Our lease for our current corporate office space expired on July 31, 2005, which we have extended on a month-to-month basis until the completion of the office condominium.

On May 27, 2005, we amended the terms of our lease agreement with The GEO Group, Inc., dated January 15, 1999, relating to the Lawton Correctional Facility. Pursuant to the amended lease, we completed the acquisition of an existing 300-bed expansion to the Lawton Correctional Facility in Lawton, Oklahoma from GEO. The acquisition was completed using cash on hand, and no debt was incurred. However, the facility is subject to a mortgage under our existing bank credit facility. The purchase price was $3.5 million. The amended lease also provides for us to fund up to $23 million for a new 600-bed expansion to be constructed onto the existing medium-security prison.

Upon completion, we will own the entire 2,518-bed facility, comprised of the original 1,500 beds, the original 118 administrative beds, the newly acquired 300-bed expansion, and the 600-bed expansion to be constructed. The facility will continue to be leased to GEO to house adult, male inmates for the Oklahoma Department of Corrections.

We are not obligated to fund more than $23 million of the costs for the 600-bed expansion. We may however, with no obligation to do so, advance more than $23 million if we so elect, with the additional costs reflected accordingly in the amended lease. If we elect not to fund the costs, if any, in excess of $23 million, GEO shall be responsible for any such costs. The 600-bed expansion is a build-to-suit project, with GEO providing design and development expertise. We have incurred approximately $4,895,000 of construction and related costs in connection with the new 600-bed expansion and approximately $3,361,000 of these costs have been accrued and included in Accounts Payable and Accrued Expenses in the Consolidated Balance Sheet as of September 30, 2005. We expect to finance the new 600-bed expansion through net cash provided by operating activities and/or debt financings.

Inflation Considerations

Most of our leases contain provisions designed to partially mitigate the adverse impact of inflation and are indexed in some manner to the CPI. Our leases require the tenant to pay all operating expenses, including maintenance, real estate taxes and insurance, thereby reducing our exposure to increases in costs and operating expenses resulting from inflation.

Funds from Operations

We believe Funds from Operations, or FFO, is helpful to investors as a measure of the performance of an equity REIT. FFO should not be considered as an alternative to net income (determined in accordance with generally accepted accounting principles) as an indication of our financial performance or to cash flows from operating activities (determined in accordance with generally accepted accounting principles) as a measure of our liquidity, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions.

We compute FFO in accordance with the current standards established by the White Paper on Funds from Operations approved by the Board of Governors of the National Association of Real Estate Investment Trusts, or NAREIT, which may differ from the methodology for calculating FFO utilized by other equity REITs, and accordingly, may not be comparable to such other REITs. The White Paper defines FFO as net income (loss), computed in accordance with generally accepted accounting principles, excluding gains (or losses) from sales of property, plus real estate related depreciation and amortization and after adjustments for unconsolidated partnerships and joint ventures. Further, FFO does not represent amounts available for management’s discretionary use because of needed capital replacement or expansion, debt service obligations, or other commitments and uncertainties.

We believe that in order to facilitate a clear understanding of our consolidated operating results, FFO should be examined in conjunction with net income as presented in the unaudited consolidated financial statements included elsewhere in this report.

The following table presents a reconciliation of net income to FFO for the three and nine months ended September 30, 2005 and 2004 (in thousands):


	For the Three Months Ended				For the Nine Months Ended
	Sept. 30, 2005		Sept. 30, 2004		Sept. 30, 2005		Sept. 30, 2004
Net income	$	4,561	$	5,050	$	13,529	$	14,146
Plus real estate depreciation		1,474		1,449		4,382		4,346
Plus real estate depreciation included in discontinued operations		—		71		—		964

Funds from Operations	$	6,035	$	6,570	$	17,911	$	19,456

The Owned Facilities

The twelve facilities owned by us at September 30, 2005 were purchased for an aggregate cash purchase price of approximately $247 million. We lease eleven of these facilities to The Geo Group or its subsidiary and one of these facilities to CEC. These twelve facilities are located in nine states and have an aggregate design capacity of 7,156 beds. The following table sets forth certain information with respect to these facilities as of September 30, 2005.

Date

Design

Expiration

Facility

Capacity

Operating

was Acquired

and

Facility

Underlying

Agreement

Facility and

by the

Lease

Type of

Contracting

Security

Occupancy

Opening

Operating

Renewal

Location

Company

Expiration

Facility

Entity

Level (1)

Rate (2)

Date

Agreement (3)

Options

THE GEO GROUP
FACILITIES:

Aurora
Processing Center,
or the Aurora
Facility,
Aurora, CO

April 1998

April 2008

BICE
Detention
Facility

BICE(4)

Minimum/
Medium

300/87%

May
1987

March 2006

—

McFarland Community
Correctional
Facility,
or the McFarland
Center Facility,
McFarland, CA

April 1998

April 2008

Pre-Release

CDOC (6)

Minimum/
Medium

224/97%

February 1988

December 2005(7)

—

Queens Private
Correctional
Facility,
or the Queens
Facility,
New York, NY

April 1998

April 2008

USMS
Detention
Facility

USMS(5)

Minimum/
Medium

200/79%(8)

March
1997

June 2006(5)

One One- Year

Central Valley
Community
Correctional
Facility,
or the Central
Valley Facility,
McFarland, CA

April 1998

April 2008

Adult
Correctional
Facility

CDOC

Minimum/
Medium

550/98%

December
1997

December 2007

—

Golden State
Community
Correctional
Facility,
or the Golden State
Facility,
McFarland, CA

April 1998

April 2008

Adult
Correctional
Facility

CDOC

Minimum/
Medium

550/98%

December
1997

December 2007

—

Desert View
Community
Correctional
Facility,
or the Desert View
Facility,
Adelanto, CA

April 1998

April 2008

Adult
Correctional
Facility

CDOC

Minimum/
Medium

550/98%

December
1997

December 2007

—

Broward County
Work Release Center,
or the Broward
County Facility,
Broward County, FL

April 1998

April 2008

BICE Detention Facility and Work Release Center

Broward County and BSO(9) and BICE

Non-
Secured

300/62%(10)

February
1998

September 2006 (10)

(10

)

Karnes County
Correctional Center,
or the Karnes
Facility,
Karnes City, TX

April 1998

April 2008

Adult
Correctional
Facility

Karnes County

Multi-
Security

480/107%

January
1996

2026

—

Lawton Correctional
Facility,
or the Lawton
Facility,
Lawton, OK

January 1999

January 2009

Adult
Correctional
Facility

ODOC(11)

Medium

1,800/98%

December 1998

June 2006

Two One- Year

Date

Design

Expiration

Facility

Capacity

Operating

was Acquired

and

Facility

Underlying

Agreement

Facility and

by the

Lease

Type of

Contracting

Security

Occupancy

Opening

Operating

Renewal

Location

Company

Expiration

Facility

Entity

Level (1)

Rate (2)

Date

Agreement (3)

Options

Lea County
Correctional
Facility,
or the Hobbs
Facility,
Hobbs, NM

October 1998 (12)

January 2009

Adult
Correctional
Facility

Lea County

Multi-
Security

1,200/103%

May
1998

June 2006

Annual

Jena Juvenile
Justice Center,
or the Jena
Facility,
Jena, LA

January 2000

January 2010

Juvenile
Correctional
Facility

None

Multi-
Security

276/0%(13)

June
1999

None (13)

None

FACILITY LEASED
TO CEC:

Delaney Hall
Newark, NJ

May 2003

May 2013

Adult
Correctional
Facility

(14

)

Minimum

726/ 99%

March
2000

(14

)

(14

)

Total Facilities

7,156/93%

(1)

Each facility is identified according to the level of security maintained as follows: non-secured facilities are facilities which are access controlled residential facilities; minimum security facilities are facilities having open-housing within an appropriate designated and patrolled institutional perimeter; medium security facilities are facilities having either cells, rooms or dormitories, a secure perimeter, and some form of external patrol; maximum security facilities are facilities having single occupancy cells, a secure perimeter and external patrol or devices; and multi-security facilities are facilities with various components of the previously described security levels.

(2)

Design capacity measures the number of beds, and, accordingly, the number of inmates each facility is designed to accommodate. Occupancy rate measures the percentage of the number of beds which a facility is designed to accommodate which are occupied at any given time or for which payment has been guaranteed by the contracting governmental entity. The facility operating agreement with respect to any facility may provide for occupancy less than the facility design capacity. While the design capacity of each of the Central Valley Community Correctional Facility, the Golden State Community Correctional Facility and the Desert View Community Correctional Facility is 550, the facility operating agreement for each such facility provides for the use and occupancy of only 500 beds per facility. The occupancy rates presented are as of September 30, 2005. We believe design capacity and occupancy rate are appropriate measures for evaluating prison operations because the revenues generated by each facility are generally based on a per diem or monthly rate per inmate housed at the facility paid by the corresponding contracting government entities. The ability of The Geo Group, CEC or another private prison operator to satisfy its financial obligations under its leases with us is based in part on the revenues generated by their operation of these facilities, which in turn depends on the design capacity and occupancy rate of each facility.

(3)

We are not a party to the underlying operating agreement on each facility. The Geo Group and CEC or their affiliates are the parties to the operating agreements with the contracting government entities on The Geo Group and CEC facilities, respectively. The expiration or termination of any operating agreement between a governmental entity and The Geo Group or CEC does not terminate or cause the expiration of the lease agreement.

(4)

The Homeland Security Act of 2002 moved the functions of the Immigration and Naturalization Service, or INS, to the Department of Homeland Security, or DHS. The Bureau of Immigration and Customs Enforcement, or BICE, or ICE, is a division of the DHS.

(5)

On June 30, 2005, The GEO Group’s operating agreement with BICE on the Queens Facility was transferred to the Office of the Federal Detention Trustee (“OFDT”) effective June 30, 2005. GEO is managing and operating the Queens Facility on behalf of the United States Marshall Service (“USMS”) under a contract option period which began on July 1, 2005 and ends on June 30, 2006.

(6)

State of California Department of Corrections.

(7)		In January 2005, The Geo Group entered into a one year operating contract with the California Department of Corrections, or the CDOC, on the 224 bed McFarland Community Correctional Facility, or the McFarland Facility, which expires on December 31, 2005. The Geo Group’s previous contract with the CDOC on the McFarland Facility had expired on December 31, 2003 and the facility was vacant until the signing of the new contract in 2005.

(8)		The facility operating agreement for the Queens Private Correctional Facility includes a minimum guarantee of 150 beds (75% occupancy).

(9)		The Broward County Sheriff’s Office, or the BSO.

(10)		Under the operating agreement between the BSO and The Geo Group, which expires on September 30, 2006, the BSO will utilize between 50-100 beds. BICE has executed an operating agreement with The Geo Group under which BICE will utilize 200 beds in the Broward Facility, with an option to expand by an additional 50 beds at the request of BICE. The agreement has two remaining one-year renewal options.

(11)		State of Oklahoma Department of Corrections.

(12)		In October 1998, we acquired the 600-bed Hobbs Facility. Subsequently, we acquired the 600-bed expansion of the Hobbs Facility in January 1999, and an industries building in July 1999.

(13)		The Jena Facility was operated by The Geo Group under an operating agreement with the State of Louisiana, which was terminated in July 2000. The Geo Group does not presently have an operating contract with a client for the Jena Facility, and as a result, the facility has been vacant since the termination of the operating agreement in July 2000. GEO had recently allowed the State of Louisiana to use the Jena Facility on a temporary emergency basis to house approximately 500 inmates as a result of the emergency situation created by Hurricane Katrina. However, the State of Louisiana is no longer utilizing the facility, and the Jena Facility is currently vacant. The Geo Group is obligated under the terms of the lease to continue to make rental payments to us regardless of the occupancy status of the Jena Facility.

(14)		CEC operates Delaney Hall under three separate operating agreements with: (1) the New Jersey Department of Corrections, which expires on June 30, 2006; (2) Union County, New Jersey, which expires on December 31, 2006; and (3) Essex County, New Jersey, which expires on December 31, 2005.

Item 3. Quantitative and Qualitative Disclosures about Market Risk.

We are exposed to market risks inherent in our financial instruments. These instruments arise from transactions entered into in the normal course of business and relate to our acquisitions and financing of correctional and detention facilities. We are subject to interest rate risk on our existing amended bank credit facility and any future financing requirements. We do not use financial instruments for trading or speculative purposes and all financial instruments are entered into in accordance with the amended bank credit facility agreement and Board approved policies.

Our interest rate risk is related primarily to the variable rates of our amended bank credit facility, which we seek to reduce by entering into the interest rate swaps. We are also exposed to market risk from (i) the interest rate risk on short-term borrowings, (ii) the possibility of non-performance by the counter parties to the interest rate swaps, (iii) our ability to refinance our amended bank credit facility at maturity and (iv) the impact of interest rate movements on our ability to obtain and maintain adequate financing to fund our existing properties and future acquisitions. While we cannot predict or manage our ability to refinance debt or the impact interest rate movements will have on our debt, we continue to evaluate our financial position on an ongoing basis and may in the future seek to minimize interest rate exposure. Our interest rate risk management objective is to limit the impact of interest rate changes on earnings and cash flows. To achieve this objective, we may from time to time enter into interest rate swaps and seek long term financing. As of September 30, 2005, no funds were drawn on the amended bank credit facility and, as such, we had no interest rate swaps in effect.

Item 4. Controls and Procedures.

Disclosure Controls and Procedures. As of September 30, 2005, our principal executive officer and principal financial officer have conducted an evaluation of our “disclosure controls and procedures” (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934). These officers have concluded that, based on their evaluation, the design and operation of these disclosure controls and procedures were effective as of September 30, 2005.

Changes in Internal Controls. There was no change in our internal control over financial reporting identified in connection with the evaluation required by paragraph (d) of Rules 13a-15 or 15d-15 under the Securities Exchange Act that occurred during the three and nine months ended September 30, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II — OTHER INFORMATION

Item 1. Legal Proceedings

The nature of our business may result in claims or litigation against us for damages arising from the conduct of our lessees, employees or others.

Except for any routine litigation incidental to our business, there are no pending material legal proceedings to which we or any of our subsidiaries is a party or to which any of our property is subject. Subject to specified exceptions appearing in the applicable leases, each of The Geo Group and CEC has agreed to indemnify us for incidents that arise from operation of facilities leased to them. To the extent any claim is not covered by our lessees’ insurance, or ours, or exceeds the amount of the coverage, we may be liable which could have a material adverse effect on our operations, financial position or our future business operations.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

None.

Item 5. Other Information

None.

Item 6. Exhibit

(a) Exhibits


Number		Description of Exhibits
	31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1).

	31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002(1).

	32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1).

	32.2	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002(1).

(1)

Filed herewith this Quarterly Report on Form 10-Q for the fiscal quarter ended September 30, 2005.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

CORRECTIONAL PROPERTIES TRUST
(Registrant)

/s/ Charles R. Jones
Charles R. Jones
Chief Executive Officer and President
(Principal Executive Officer)

/s/ David J. Obernesser
David J. Obernesser
Chief Financial Officer and Senior Vice President
(Principal Financial and Accounting Officer)

Date: November 9, 2005

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CORRECTIONAL PROPERTIES TRUST 10-Q