CoreCivic, Inc. Q3 FY2021 Earnings Call

Good morning. My name is Eli and I will be your conference operator. As a reminder, this call is being recorded. At this time, I'd like to welcome you to the CoreCivic's Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Cameron Hopewell, CoreCivic's Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thank you, Eli. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. The call today will focus on our financial results for the third quarter and provide you with other general business updates. During today's call, our remarks including our answers to your questions will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors including those identified in our third quarter 2021 earnings release issued after market yesterday and in our SEC filings, including Forms 10-K, 10-Q and 8-K reports. You are also cautioned that any forward-looking statements reflect management's current views only and that the company undertakes no obligation to revise or update such statements in the future. On this call, we will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the quarterly supplemental financial data report posted on the Investors page of our website corecivic.com. With that, it’s my pleasure to turn the call over to our President and CEO, Damon Hininger. Damon?

Thank you, Cameron. Good morning, everyone and thank you for joining us today for our third quarter 2021 earnings conference call. Going to our agenda for the call, we will provide you with a breakdown of our third quarter financial performance; discuss business development opportunities and the latest developments with our government partners. We will also provide you with an update on our capital allocation strategy and our continued response to the COVID-19 pandemic. Following my remarks, I will turn the call over to our CFO, David Garfinkle, who will review our financial results in greater detail. Our third quarter revenue of $471.2 million represented a 1% increase over the prior year quarter despite the sale of 47 non-core real estate assets within our property segment in multiple transactions between December 2020 and June 2021 and our decision to exit two managed-only contracts with local governments in the State of Tennessee during the fourth quarter of 2020. In the five quarters since we announced the change in our capital allocation strategy, we have substantially improved our credit profile, reducing our net debt balance by approximately $730 million during a time of unprecedented challenges. We remain committed to reaching and maintaining a total leverage ratio, or net debt to adjusted EBITDA of 2.25 times to 2.75 times. Using the trailing 12 months ended September 30, 2021, our total leverage ratio was 2.7 times. Just one year ago, our total leverage ratio was at 4.0 times, so we have made significant progress. The last time our total leverage ratio was below three times was in 2012, nine years ago. While we have touched the high end of our targeted leverage range, we remain committed to continuing to reduce debt to ensure we remain comfortably within the range. Our EBITDA has proven to be durable since the beginning of the pandemic. But there are many other factors that can cause our net leverage ratio to fluctuate quarter-to-quarter such as changes in our net cash balance due to semi-annual interest payments on our debt, capital expenditures, or changes in working capital. We continue to believe our capital allocation strategy is the most prudent approach to position the company to generate long-term value through a stable capital structure and continue to cost-effectively meet the needs of our government customers with less reliance on outside partners. I believe this is evidenced by our recent $225 million unsecured bond issuance which priced nearly 100 basis points lower than the bonds we issued back in April of this year. However, within the next few quarters, we could also be in a position to shift our capital allocation strategy to one that once again returns a portion of our cash flows to our shareholders and less aggressively de-levers. We believe the valuation of our equity remains well below its fair value, and we feel strongly that once we achieve our debt reduction goals, we could create substantial value for our shareholders by repurchasing shares. In 2009, one of my first acts as CEO was to seek authorization from our Board of Directors for an equity repurchase program. So I have a full appreciation of the potential value creation that the current stock presents. Fully appreciating the potential opportunity we have further progress to make with our current debt reduction strategy. We continue to see criminal justice-related populations meaningfully below their pre-pandemic levels. The declines have mostly been due to reduction in new intakes, rather than early releases. Governments have acted faster to transfer certain residents assigned to our reentry facilities to non-residential statuses such as furloughs, home confinement, or early leases to create additional space for enhanced social distancing within our facilities. However, during the third quarter, we did see many of our state customers increase their utilization of our facilities which contributed to modest increases in our occupancy compared with the prior year quarter. Our safety segment's occupancy was 73.2% in the quarter, an increase of 110 basis points compared with the prior year quarter. Our community segment's occupancy was 56.4%, up 180 basis points. As courtroom operations gradually reopened and operations normalized, we anticipate this trend in utilization to continue. With that, we are leaning forward on increasing our staffing levels in anticipation of higher utilization rates from our partners. This, of course, will likely have a material impact on margins as we go into 2022. Normalized Funds from Operations or FFO for the third quarter was $0.48 per share, a decline of 8% compared with the third quarter of 2020. However, this decline was primarily driven by our decision to convert to a taxable C Corporation, effective January 1st, 2021, from a REIT. We have added disclosures in our third quarter supplemental financial information document, available now on our website, which provides our pro-forma results for 2020, reflecting income tax expense by applying our estimated tax rate to pre-tax income in the prior year. When compared to pro forma results for the third quarter of 2020, our adjusted earnings per share, normalized FFO per share, and AFFO per share increased 33%, 9%, and 15% respectively. Our adjusted EBITDA of $100.9 million increased 7% compared to the third quarter of 2020 and again, this is after the sale of 47 non-core assets since the end of the third quarter of 2020. Dave will provide greater details about our third quarter financial results, including reconciling between our GAAP and normalized results following the remainder of my comments. We will start our operational and business development discussion with a brief update on the impact of the COVID-19 pandemic and our ongoing response. While the rate of positive cases around the nation was significantly increasing due to the delta variant during the third quarter, we only experienced a small temporary increase in positive cases at some of our facilities. The most substantial impact of the emergence of the delta variant was that it temporarily slowed the timeline for normalizing facility operations to remove various protocols that were enacted in response to the pandemic. As we moved towards normalization of operations, the most substantial challenge in today's environment is attracting and retaining qualified employees. No different from our government partners' own correctional systems, the current employment market has caused staffing challenges for us at many locations across the country. We have responded to the challenge by aggressively developing new and creative hiring and retention strategies. Being in the private sector and a multi-state national employer, we have a lot of tools we can deploy in this environment. These include increasing wages, sign-on and retention bonuses, and multiple other programs that can increase engagement, a sense of shared mission, and overall job satisfaction. Our government partners have been very collaborative in this effort by supporting our request for per diem increases that reflect above-average wage inflation in the current market. Across the company this year, we have provided the largest wage increases in my 12 years as CEO. We are also following closely the recent vaccination mandates issued by various states and the federal government, including the September 9, 2021 executive order on ensuring adequate COVID safety protocols for federal contractors. We are working diligently evaluating the new guidance being received from our government partners and ensure we are positioned to fully comply. For our inmate, detainee, and resident populations, we do not have the ability to mandate vaccinations. Just as we've seen in our communities, there has been some hesitancy for many to accept the vaccine. So it should come as no surprise that the rate of vaccination acceptance is similar to that of the general public. We continue to provide educational resources to all our residents in order to encourage more to get vaccinated. I will move next to discuss some recent federal and state-level business development updates. We are continuing to evaluate the impact of the executive order signed by President Biden issued in January that directed the Attorney General to not renew Department of Justice contracts with privately operated criminal detention facilities. Two agencies of the Department of Justice utilized our services, the Federal Bureau of Prisons or BoP; and the United States Marshal Service or USMS. As a reminder, the BoP takes custody of inmates who have been convicted of federal crimes and the USMS is responsible for prisoners who are awaiting trial in Federal Court. The BoP has experienced a significant decline in inmate population since 2013 and simply does not have as much of a need for prison capacity from the private sector. The decline in BoP populations has intensified by COVID-19. We currently have one prison contract with the BoP, accounting for approximately 2% of our total revenue. Marshal Service populations have remained relatively consistent in recent years, so their capacity needs remained unchanged. In fact, nationwide Marshal population has increased over the past year. We continue to believe that the Marshals do not have sufficient detention capacity to satisfy their current needs without much of the capacity we provide. We began the year with four contracts with the Marshals that expire in 2021. In the first half of the year, we were able to enter into new contractual arrangements for our Northeast Ohio Correctional Center and Crossroads Correctional Center in Montana to remain operational and serve various government partners where both facilities previously had direct contracts with the Marshals. At the end of September 2021, our contract with the Marshals at our 600-bed West Tennessee detention facility expired and the federal detainee populations were transferred to alternative locations, including approximately 200 to our Tallahatchie County Correctional Facility in Mississippi. We have elected to retain our staff from the West Tennessee Detention Facility as we pursued an active procurement for the facility with an existing government partner. The only remaining Marshals contract I have yet to discuss is that our 1,033-bed Leavenworth Detention Center expiring in December of 2021. Of note, we are currently in discussions with other potential government partners to utilize the Leavenworth facility in the event that we are unable to reach a solution that enables the Marshal Service to fulfill its mission at this facility. Our third federal partner is Immigration and Customs Enforcement, or ICE, which is not impacted by the previously mentioned executive order. They continue to be the government partner with the most significant impact from COVID-19 on their capacity utilization. However, recent activity along the Southwest border has caused significant volatility in their utilization levels. Nationwide, ICE detainee populations doubled during the first half of 2021, and we have experienced a similar utilization increase at our facilities under contract with ICE. During the third quarter of 2021, ICE detainee populations remained relatively flat. As a result, our facility utilization levels continue to remain materially below historical averages. The largest driver of their lower utilization levels has been the enactment of Title 42 since March of 2020, which prevents nearly all asylum claims at the country's borders and ports of entry in order to prevent the spread of COVID-19. Instead, Title 42 allows individuals apprehended at the Southwest border to immediately be expelled to Mexico or their country of origin. Administrative changes and court decisions have occurred since the enactment of Title 42, which have enabled unaccompanied minors and some family units to enter and remain in the United States while their immigration cases are adjudicated. These changes have essentially no impact on the demand for our services by ICE because we do not house unaccompanied minors in any of our facilities. Our one facility with a family mission is provided to ICE on a fixed-price basis. We primarily provide ICE with detention capacity for adult populations. It is unclear when Title 42 will no longer be applied to adults. Certain factors, such as criminal histories or previous deportations, may compel the government to keep individuals in custody instead of applying Title 42. These situations appear to be the primary driver of the increase in ICE utilization we have experienced this year. Whenever Title 42 is rescinded, we believe there will be a significant surge in the need for detention capacity. Our facilities support ICE by providing safe, appropriate housing and care for individuals as the agency works through the various processes associated with an individual's immigration case, deportation order, or initial processing. While we have no involvement or influence on anyone's immigration-related case, we know these matters are often quite complex and typically take days or weeks to be adjudicated. This results in a need for various solutions and a diverse portfolio of real estate across the country to provide housing and care for individuals while they are in ICE custody. Our facilities serve as a critical component of the real estate infrastructure needed by ICE to help them carry out their mission. Finally, we know there has been a great deal of coverage of a minimum wage ICE detainee lawsuit faced by our largest competitor in Washington State. We don't have a facility in Washington, and so we are not subject to litigation related to the Washington minimum wage statute. We do have a pair of similar lawsuits in California, but those are both stayed while one of them is on appeal in the 9th Circuit. We don't have trial dates scheduled for those and the timing of any future litigation activity is uncertain. We don't generally comment on litigation, and this will be my only remark on this subject during this call. But, as our competitor has pointed out, very similar litigation has been dismissed and that dismissal has been upheld on appeal by the 4th Circuit Court of Appeals. We also have other litigation around the U.S. related to the ICE Voluntary Work Program, or VWP, but those lawsuits don't raise minimum wage claims. The VWP is an ICE contract requirement, and as the VWP's name suggests, it's voluntary. Detainees aren't forced or coerced to participate in the VWP. The VWP offers the opportunity to avoid idleness, improve morale, learn new skills, and earn money at or above the ICE prescribed minimum daily rate. Moving now to state-level developments and opportunities. I will first mention our new lease agreement with the State of New Mexico for our 596-bed Northwest New Mexico Correctional Center that we announced in September. The new lease has an initial term of three years but includes automatic extension options that could extend the lease term through 2041. The new lease commenced on November 1st, and we successfully transitioned operations of the facility to the state. So, you will see that property reclassified from our safety segment to the property segment during the fourth quarter. We continue to pursue an opportunity with the State of Arizona which has an active procurement for up to 2,700 beds for medium and close security inmates. The state intends to close its oldest prison facility in Florence due to its outdated condition and operational and maintenance cost concerns. Instead of deploying taxpayer funds to build new capacity, the outstanding request for proposal will allow the state to evaluate alternative capacity available from the private sector. We have responded to the procurement and believe the State Department of Corrections Rehabilitation and Reentry is poised to move quickly on the procurement. The only other opportunity I will mention is in Hawaii. The state continues to determine the best approach to replace the Oahu Community Correctional Center, the largest jail facility in the state. The existing facility has exceeded its useful life, and the state is in need of a new modern facility to meet its current and future needs. We remain actively engaged with the state regarding various solutions we could deliver, and we anticipate a competitive procurement in 2022 to replace the current facility. Two final comments before I turn the call over to Dave. First, Newsweek recently released their list of America's Most Responsible Companies for 2021. We were very honored to learn of our placement on this list. At the beginning of their report, they note, and I quote: 'As this difficult year comes to an end, it's good to remember that we're all part of a community; neighbors, family, friends, first responders, we depend on, appreciate, and hope to be helpful to each other. Many corporations also step up. They care about being good citizens and give back to the communities they operate in.' Their ranking goes through a rigorous four-step process starting with a review of the top 2000 public companies based on revenue. Then afterwards, a detailed review of company ESG reports and the relevant KPIs along with a reputational survey of 7,500 U.S. residents. This list is a who's who of companies I have long observed, admired, and have inspired to emulate. I am deeply grateful and proud of every single CoreCivic team member for their tireless passion for our mission that has allowed us to achieve this well-deserved recognition. Finally, we shared last month that CoreCivic Co-Founder and industry visionary T. Don Hutto passed away on October 22nd, 2021. Known as a fierce advocate for correctional professionals and for the safety and well-being of justice-involved individuals, Don was instrumental in the creation and implementation of industry-recognized standards that greatly improved conditions for incarcerated people and those who care for them. He will be missed by everyone who knew him and remembered truly as a hero in the field. Prior to co-founding CoreCivic, then known as Corrections Corporation of America, with businessman Tom Beasley in 1983, Don had a long and prestigious career in the corrections industry including as Commissioner of Corrections for the State of Arkansas and later the Director of Corrections for the Commonwealth of Virginia. Don's rise to industry leader came during a time of uncertainty in America. Not long before he began serving as the Commissioner of Corrections in Arkansas, the landmark Holt v. Sarver decision declared the entire State of Arkansas prison system unconstitutional. At that time, there were over 40 states that had some level of control or oversight by the federal government due to inhumane conditions. This need for higher standards is what sparked the birth of CoreCivic and ushered in improved conditions across the country. Don's experience gave him extensive insight into modernizing the systems to emphasize rehabilitation and education, and he used that experience at CoreCivic. Don was absolutely the right person at the right time to create a better way and lead our profession into the modern era. CoreCivic is very grateful for his leadership for our wonderful company, but I am also personally grateful for his mentoring and friendship with me. I'll now turn the call over to Dave to provide a more detailed look at our financial results in the third quarter of 2021 as well as factors that could affect our business for the remainder of this year.

Thank you, Damon, and good morning everyone. In the third quarter of 2021, we reported net income of $0.25 per share, or $0.28 of adjusted earnings per share, $0.48 of normalized FFO per share, and AFFO per share of $0.47. Adjusted and normalized per share amounts exclude an impairment charge of $5.2 million for pre-development activities associated with the Alabama project that we are no longer pursuing, as disclosed last quarter. Financial results in 2021 reflect a higher income tax provision under our new corporate tax structure compared with the prior year when we elected to qualify as a REIT. For illustration purposes in the supplemental disclosure report posted on our website, we present the calculations of adjusted net income, normalized funds from operations, and AFFO for each quarter and full year of 2020 on a pro forma basis to reflect such metrics applying an estimated effective tax rate of 27.5%. Adjusted net income per share in the third quarter of 2021 of $0.28 compares to $0.21 on a pro forma basis applying this estimated effective tax rate for the third quarter of 2020, while normalized FFO per share of $0.48 compares to $0.44 on a pro forma basis for the prior year quarter, and AFFO per share of $0.47 compares to $0.41 on a pro forma basis for the prior year quarter. Adjusted EBITDA, which is obviously before income taxes, was $100.9 million in the third quarter of 2021 compared with $94.6 million in the prior year quarter. The growth in adjusted EBITDA and the aforementioned per share metrics were achieved despite the sale of 47 properties since the end of the third quarter of 2020 and the execution of numerous refinancing transactions that were collectively diluted for the quarter, as we paid down low-cost, short-term, variable-rate, bank debt with the proceeds from the property sales and issued new unsecured senior notes that have higher interest rates than the debt we repaid. The property sales and refinancing transactions lowered our overall debt levels, extended our weighted average debt maturities and re-positioned the balance sheet for long-term success. The 47 properties that we sold accounted for $7.3 million of EBITDA in the prior year quarter. Therefore, excluding these sales, adjusted EBITDA increased $13.6 million, or 16% from the prior year quarter, demonstrating strong core operating results. Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, but increased to 72.1% in the third quarter of 2021 from 70.9% in the prior year quarter and increased from 71.6% in the second quarter of 2021. The impact of COVID-19 began in the second quarter of last year, as populations primarily ICE declined sequentially throughout 2020, as the Southwest border was effectively closed to asylum seekers and adults attempting to cross the southern border without proper documentation or authority to prevent the spread of COVID-19. As the federal and state court systems have begun to return to normal operations and as the number of undocumented people encountered at the southern border has increased, the utilization of our facilities has increased. Operating margins have trended similarly and were 27.2% in the third quarter of 2021 compared with 23.8% in the prior year quarter and 26.8% in the second quarter of 2021. The increase in our operating margins reflects a continuation of lower cost trends combined with higher occupancies. Many of our facilities continue to operate with pandemic-related capacity and operating restrictions that are modifying the services that we are able to provide impacting margins compared with normal operations. Further, staffing in this challenging labor market has become increasingly difficult, and we have provided annual, as well as additional off-cycle wage increases and special incentives to help address depressed staffing levels. Conversely, our government partners are experiencing the same staffing challenges, which has contributed to some of the per diem increases we were able to achieve as more budget dollars are allocated to help offset the wage increases. Turning to the balance sheet. As of September 30th, we had $456 million of cash on hand and $786 million of availability on our revolving credit facility, which matures in 2023. During the third quarter of 2021, we issued an additional $225 million aggregate principal amount of 8.25% senior unsecured notes due 2026. The issuance constituted a tack on to the original 8.25% senior notes we issued in April 2021, a $450 million aggregate principal amount. The additional 8.25% senior notes were priced at 102.25% of their face value, resulting in an effective yield to maturity of 7.65%. While we believe this effective yield is still high relative to the stability of our cash flows and credit ratings, it compares favorably to the issuance in April when the notes were priced at 99% of face value, resulting in an effective yield to maturity of 8.5%. As a reminder, the net proceeds from the April issuance were used to fully repay $250 million of 5% senior unsecured notes that were scheduled to mature in 2022 and to repurchase in privately negotiated transactions, $176 million of the $350 million outstanding principal balance of our 4.58% senior unsecured notes that are scheduled to mature in 2023. We continue to be steadfast on our debt reduction strategy, paying down $188 million of additional debt during the third quarter alone, net of the change in cash including the $112 million outstanding balance on our revolving credit facility, which remains undrawn today. Subsequent to quarter-end, we repaid $90 million of the outstanding balance on our Term Loan B reducing its outstanding balance to $133.4 million. Including the repayments of the mortgage notes associated with the aforementioned sale of non-core assets during the nine months ended September 30, 2021, we have reduced our total net debt balance by over $500 million and our net recourse debt balance by $334 million. Our leverage measured by net debt-to-EBITDA was 2.7 times using the trailing-12 months down from four times using the trailing-12 months at the end of the third quarter of 2020 when we announced our revised capital allocation strategy and decision to revoke our REIT election. As Damon mentioned, the last time our leverage was below three times was in 2012, which was the last year we operated as a taxable C Corporation prior to our conversion to a REIT in 2013. Notably 2012 followed an aggressive stock repurchase program in 2009 through 2011 when we repurchased over $0.5 billion of stock or equal to half our market capitalization today. As a REIT from 2013 through 2020, we could not implement a meaningful share repurchase program. It is possible we could slip slightly above our targeted leverage ratio of 2.25 times to 2.75 times in the fourth quarter when we are scheduled to make almost $40 million of semiannual interest payments on our unsecured notes, about $15 million in social security payments that were deferred under the CARES Act, and capital expenditures consistent with our previous guidance. But we expect to be sustainably within the range on a quarterly basis thereafter. We have made great strides in enhancing our capital structure by accessing the debt capital markets, addressing near-term maturities, selling non-core assets, reducing debt, and positioning the balance sheet to enable us to take advantage of growth opportunities and return capital to shareholders. These steps have enabled us to reduce our reliance on bank capital. We intend to address the 2023 maturity of our bank credit facility next in order to provide us with the clarity needed around our future liquidity and to ensure the implementation of our capital strategy remains on track. Our intention is to reduce the size of our bank credit facility and extend the maturity yet enabling us to continue operating with optimal flexibility and cost efficiency. We continue to get increasing clarity around many of the uncertainties that existed when we suspended our financial guidance and currently anticipate providing full year 2022 guidance in February when we report our financial results for the fourth quarter and full year 2021. I've already highlighted some of the factors experienced in the third quarter that could have an impact on our financial results for the fourth quarter. These include the anticipation of modestly higher occupancy levels as the country continues to emerge from the pandemic. Higher demand for our detention facilities could also result from lifting title 42, the health care policy causing the southern border to remain effectively closed in an effort to prevent the spread of COVID-19. However, the timing of when the federal government ends Title 42, which is evaluated every 60 days, is difficult to predict and therefore likely won't have a material impact in the fourth quarter. We also anticipate higher staffing levels as we return our correctional detention and reentry facilities to normalized pre-pandemic operations. Longer term, as we look toward 2022, we will endeavor to hire in anticipation of increases in occupancy, which could have a negative impact on our margins at least until we experience further increases in occupancy. We continue to anticipate a challenging labor market which could require us to provide further wage increases and other incentives in certain markets necessary to attract and retain qualified staffing levels. Recall however, that at our federal facilities, we are entitled to equitable adjustments to per diem rates to compensate us for any increases in wage rates mandated by the Department of Labor providing a potential hedge against increasing wage rates at such facilities. By signing a new contract with Mahoning County at our Northeast Ohio Correctional Center and expanding the contract with Montana at our Crossroads Correctional Center, we have successfully resolved two of the four 2021 contract expirations with the US Marshal service. The contract with the US Marshals Service at our 600-bed West Tennessee Detention Facility expired September 30th and was not renewed. As we previously disclosed, we responded to a request for proposal to utilize the West Tennessee facility and we remain optimistic in signing a new contract. We have temporarily redeployed most of the staff at this facility to other facilities we operate while we negotiate the contract in order to provide minimal disruption in ramping back up operations. But depending on the outcome and timing of a decision as well as the pace of utilization, we could experience a reduction in earnings in the fourth quarter of up to $0.02 per share compared with the third quarter. Our last contract with US Marshals expiring in 2021 is at our 1033-bed Leavenworth Detention Center in Kansas which expires in December. We are in discussions with other potential partners to utilize the Leavenworth facility in the event we are unable to reach a solution that enables the US Marshals to fulfill its mission at this facility. Since the contract doesn't end until the end of the fourth quarter, however, we don't expect a material impact in the fourth quarter, even if the contract is not renewed. During the third quarter, we responded to a request for proposal from the State of Arizona to care for up to 2,700 inmates the state plans to transfer from a facility owned and operated by the Arizona Department of Corrections Rehabilitation and Reentry. We are optimistic in a contract award near the end of the year, which would obviously be more impactful in 2022. Compared with the third quarter, we expect higher interest expense as a result of the additional issuance at the end of September of $225 million of our 8.25% senior notes, somewhat offset by the $90 million repayment in October of our Term Loan B which has a total effective rate of 7%. We currently estimate our income tax expense to reflect a normalized effective tax rate of 27% to 28%, although we estimate our cash taxes to be approximately 20% for the year because of net deductions for special items. I will now turn the call back to the operator, Eli, to open up the lines for questions.

Thank you. We'll take our first question from Joe Gomes from NOBLE Capital. Joe, please go ahead.

Can you hear me?

Yes, we can now, Joe. Thank you.

Oh, okay. I previously said good morning.

Oh, good morning, Joe. Sorry, we did not hear you. Good morning, Joe.

Good morning, thanks for taking the question. So really nice job on achieving the target leverage ratio early in my opinion. It would seem to speak not only to your focus on deleveraging, but also the stability of the business overall. You did mention you wanted to see further progress to make on the debt reduction before you started implementing some of the other capital allocation programs such as share repurchases. I was wondering, if you might give us a little more color as to how much progress you're looking at what's your thought and what you want to see before you might implement something like a share repurchase program?

Yes, great question, Joe. This is Damon, and I appreciate it. We are currently just slightly below our target range based on the numbers we shared last night. Dave provided a good overview of the factors we expect to see in the fourth quarter and into early next year. It seems we're probably a couple of quarters away from comfortably being within that range. To put it another way, at the start of the fourth quarter, we might be looking at achieving that by the second or third quarter next year. Again, we're very pleased with the progress we've made, and the management team is aligned on various initiatives that positively impact our numbers. Notably, the transaction we completed earlier this year involving the divestment of non-core assets contributed to this. Dave, do you have anything to add?

Yes. And the credit facility as I mentioned in my script matures in 2023. We'd really like to amend and extend that credit facility and get that behind us. That will give us the clarity on liquidity and capital resources going forward. I think we've done a really, really good job of positioning the balance sheet to return capital to shareholders. We've addressed the short-term maturities for several years out now, so that risk has really been limited from the balance sheet completely. So getting through the credit facility would, in my mind, give us a lot more clarity to move forward and that would fall in line with the timing that Damon mentioned.

Okay. Thanks for that insight. And on the vaccine mandate, I don't know how deep you can go into or what percent of the CoreCivic employees are vaccinated especially at the facilities, is there any concerns on your part that the contract could get terminated if you can't get everyone to be fully vaccinated? And I know that there's a lot of confusion out there over who some of these mandates apply to or don't apply to. But simply does the mandate also apply to the BOP that all of their staffing also has to be vaccinated?

Yes. So, several questions there, Joe. This is Damon again. So, a couple of observations. We have had vaccination acceptance rates a little behind what you see kind of generally in the public, but probably no surprise here in the last 30 to 60 days with some of the mandates that have been required. Notably all the attention has really been at the federal level. But we have had some local jurisdictions that are required too. So, I gave a pretty good indication of now how to approach it. We’d be thoughtful on how we communicate to employees to give them various options not only for the vaccine, but maybe other employment opportunities. We had a pretty good playbook before the executive order was signed at the federal level. We’ve got work to do. We're clearly working really hard to make sure we again educate our employees, advising appropriately and also leadership as they go through the process if they've got either a physical or health combination that needs to be considered or religious combination. Again, those are policies that are well-established just because we're a public employer. So, we're working through that progress. I would tell you I think we are making good progress on that side. As I just said earlier, we're starting to see a pretty meaningful uptick in vaccination rates within the organization. Again, it's focused primarily on our federal contracts with ICE Marshals. And as you know we just have that one BOP contract on the safety side with McRae. I think again, we're making good progress. I don't know anything you'd add to that, Dave?

No, I don't think that covers it.

I'm assuming it would, but there seem to be a lot of exceptions. Does this mandate also apply to the BOP staff people who work there?

Yes, my understanding is that it applies to federal employees and federal contractors as well. I don’t have details on how they are implementing it or their specific levels, but my expectation includes them.

Okay. And you talked some detail here on the staffing environment and you've got lots of different levers that you can pull to try and help with that. But I mean, what are we talking about here in terms of increased wages or bonuses, sign-on bonus, whatever other types of things that you're offering to get people. I mean in this type of environment? Again, it's not just you guys. Almost every company I talk to these days has the issues with staffing and in some way shape or form. But the corrections, is a little more difficult just in normal time. So maybe you can give us a sense of what are you having to do out there in order to attract the staff that you needed?

Great question. Like others across the country, we are facing labor challenges whether in public or private sectors. Over the past year, I’ve spoken with many peers in the national business community and gathered useful insights to enhance our approach to labor opportunities. Everyone I’ve connected with locally, especially in healthcare, faces similar issues. Our strategy involves standard employer practices such as adjusting base salaries and wages, enhancing benefits, and offering a range of incentives like referral and retention bonuses. We are exploring any incentive that has been effective elsewhere, regardless of the industry, to see how it can help us. Additionally, we have implemented a few unique initiatives this summer that have shown promising results. Being a private employer with operations in multiple states, we have the flexibility to try creative solutions that can aid our labor efforts. I encourage our HR and operations teams to share any ideas they have or trends they observe in the broader market, not just within our industry. We assess the risks and rewards of these ideas to make informed decisions. I recently updated our Board of Directors on the approximately 35 to 40 specific measures we've undertaken to address labor challenges in various facilities—significantly more than the typical five actions we would have taken before COVID. We are making prompt decisions after analyses to ensure our field leadership has all the necessary tools for success. As I mentioned earlier, we expect increased utilization from our partners to approach pre-COVID levels. Anything you would like to add, Dave?

Yeah. The number of incentives, the list goes on and on. Our HR Department is doing a phenomenal job coming up with some creative solutions. Overtime premium you're paying for experienced employees, housing, it's just a long laundry list of things that we pull out which, as Damon mentioned, these things are much more easily done in the private sector than what our public sector counterparts are able to do, because they have to get appropriations for budget purposes and special appropriation. So, things like that. We think it could actually generate new businesses. Some of the state partners are having the same challenges on staffing and may end up sending some inmates to our facilities as they're not able to staff their facilities adequately. So yeah, it's all of the above.

Okay, great. And one more question, if I may. You mentioned the West Tennessee facility and that there's an RFP out there in Leavenworth. You're also in discussions with other parties. I believe you have five other facilities that are currently idle. If Title 42 expires and ICE shows a need for facilities, considering the staffing challenges you've just mentioned, how quickly could some of these idle facilities be operational again if needed? Or do you believe that your existing facilities and their occupancy levels would mean you wouldn't need to worry about reopening any idle facilities?

Yes, that's a great question, Joe. This is Damon again. Let me provide you with a couple of answers. One of them is regarding West Tennessee and Leavenworth; even though Leavenworth is further down the schedule, we haven't made any employment changes for the staff at those facilities. Specifically for West Tennessee, where the contract expires in September, we've retained the staff to engage in various activities at the facility, including training in anticipation of future partners who may utilize the facility, while also supporting other operations in West Tennessee. We might consider a similar approach for Leavenworth. As for your question about other currently vacant facilities beyond West Tennessee, we are facing some global labor market challenges. However, the advantage of being a large multi-state operator and employer means that we actually have some markets where we are experiencing favorable conditions for hiring. We've instructed all facilities to actively recruit staff, even if that results in exceeding their budgeted full-time employee count, with the expectation that this staff could also be allocated to other facilities during transitions or when additional staffing is required. Overall, being a multi-state operator gives us several options, including programs, incentives, and competitive salaries. Additionally, we have a few markets where we can afford to hire more staff and reassign them within the organization. Anything you would like to add to that, Dave?

No. I think that covers it.

Thanks, guys for taking the questions. I'll pass it along and let someone else ask some. Thanks again.

Yes sir. Thank you, Joe.

Thank you, Joe.

And we'll go ahead and move on to our next question from Brian Violino from Wedbush Securities. Please go ahead.

Yes. Thanks for taking my question. Just one quick one for me. Appreciate the color on the 2021 US Marshals contracts. I was hoping you could just remind us about the contracts coming up in 2022 and 2023 and even beyond and I guess, how you're thinking about those? And any sort of commentary around that? Thanks.

Yes, sir. Thank you for that question. This is Damon again. After West Tennessee and Leavenworth, which we have talked extensively about on this call. The only other two after that are one in Arizona, which is in 2023. The final one would be in Nevada in 2025. So several years out and say a different way we have nothing next year after Leavenworth so 2023 would be the next one. Those being so far off. Really the focus for us and I'd say on behalf of the Marshals service has really been focused on the ones in this current calendar year. I suspect as we go into 2022, then we'll start having conversations about the one in 2023 and one in 2025.

Great. Thank you.

And we'll go ahead and take our next question from Kirk Ludtke from Imperial Capital. Please go ahead.

Good morning, guys.

Good morning.

I just follow-ups on a couple of topics. New Mexico, Leavenworth, and then staffing. So three topics. On New Mexico, you've expressed some interest in the leasing model in the past. This deal seems to be a step in that direction. I know you don't comment on profitability by facility, but maybe directionally, can you give us a sense for the economics of the new deal and maybe even more importantly, are other states considering this option of bringing operations in-house so to speak?

Yes, sir. Thank you. This is Damon again. For the first part, I would say, I'm going through in my mind all of the facilities that we've converted from safety to properties like the one you just mentioned with New Mexico. Generally, that return and earnings performance has been consistent with what it's previously safety, if not maybe improved. We've got a couple of situations coming to mind where you maybe had one year or two or maybe the earnings was a little stronger on the safety side versus what we did on the lease agreement on the property side, but there may be some times where it was well below. One nice thing about these agreements, and it's probably an obvious point, is that it creates a lot of stability and durability and consistency from a returns perspective. That’s a big part of the allure when we're in discussions with these jurisdictions about potentially moving a facility from the safety segment over to the property segment. To your last question, I'd say yes. We actually just did a review of a proposal for another existing safety operation that we're going to propose to a state for a lease. So yes, there's really good conversation and interest by jurisdictions for existing properties in the safety segment. It may be a case where we're flipping one from a federal to state or federal to a federal. The conversations are good and pretty robust at the moment. Anything you'd add to that, Dave?

Yes. The economics on Northwest, New Mexico, during the initial three-year base term, the average annual rent is $3.2 million. So it's not a large facility. Although it's $4.2 million in the second and third years of that lease, and then there's annual inflators thereafter. This facility, I think we disclosed, was operating at a loss year-to-date just due to COVID-related population. So it will actually flip that from an operating loss to a profitable agreement. It will depend facility-by-facility just different dynamics in each location, but it's stable cash flow. As you can imagine, the value you described with that cash flow is higher than it would be under the own and operated model where revenues are subject to ebbs and flows based on inmate populations versus a fixed multi-payment and a lease arrangement.

That's very helpful. Thank you. It's encouraging. Regarding Leavenworth, I understand that sometimes it comes down to alternatives. What other facilities are nearby that the Marshals might consider using? If I'm interpreting this correctly, the occupancy at Leavenworth was 80% in the third quarter, which appears to be a positive indication. Do you have information or would you be able to share the occupancy rates at the competing facilities or what facilities are effectively competing with Leavenworth for the next contract?

Yes, sir. I would say, let me say, I know that they're pretty darn well. It's more in Leavenworth so I know that referral. They are looking at, I'd say, alternatives in two buckets. One, the local bucket, primarily counties. No one again kind of Eastern Kansas, Western Missouri like I do. I don't think there's a facility even if it's completely vacant that would be equal to the size of our facility. So I think on the county side, they are really looking closely at various counties potentially providing capacity, but there clearly is not one. Even if you put five together, I don't know if they would be equal in vacant capacity with what we've got at Leavenworth. Having said that, though, I know they're still looking at that very, very closely and looking at those alternatives, because some of those jurisdictions that you're looking at maybe existing partners with them. For the other bucket, I would say, the United States Century there Leavenworth that's been there for about a century again that facility I know very well. It's about I think 2,000 beds total capacity. I think that's changed a little bit over the years based on maybe some reconfiguration of the capacity. I don't know to your question though what its actual population is today. My suspicion has been impacted probably like us with COVID. I also suspect with the BOP down almost 70,000 in May since 2013, they probably have some flexibility and moved to populations out of that facility to other BOP facilities to make capacity available to the Marshal Service. Those would be the two buckets looking at counties and/or the BOP. That BOP facility is within probably 10 minutes of our facility. So it's in very close proximity. Again, I don't know the actual population but again, I suspect that BOP has got some flexibility on that point. Anything you'd add to that, Dave?

Just so we have had a couple of conversations with some other government partners that could back-fill it if Marshals decides to leave the facility. So, there are some things some balls in the air so to speak.

That's a good point. And actually, I'd say, at a couple of different levels. So that's an opportunity we'll continue to look at very closely.

Great. Thank you. Lastly, a follow-up on the staffing question. Is there a way you can just give us a ballpark how many people you may need to add? And what the average wage rate is?

That would be a good question, and I understand your interest in it. It might be best to wait for our guidance in February, but we are leaning towards an increase in staff. Dave, do you have anything to add?

I don't think so. The opportunities with some government partners could lead to an increase in populations, and those will be the facilities where we focus on adding staff to avoid losing business due to insufficient personnel. Primarily, we will be increasing staffing in federal facilities, but there are also state opportunities where we would like to raise staffing levels. However, I can't provide a specific number regarding the amount of staff or the associated costs.

Got it. Yeah. A lot of moving pieces, I understand, and I appreciate it. Thank you very much.

Thank you, Kirk. I appreciate your questions.

And we'll go ahead and take our next question from Ben Briggs from StoneX Financial. Please go ahead.

Hey guys. Thanks for taking my questions. And great job on the quarter. Kind of a follow-up I had to the previous question about facility level margins as you transfer from an own operate model to more of an own and lease model. Are there any cost savings you guys can realize at the corporate level that are related to that just kind of with fewer operational things to manage as you transfer it to more of a landlord model?

That's a great question. We've only experienced one or two instances in the last couple of years where there's been a shift from safety to property. I think as we move forward, there may not be anything next year, but in the upcoming couple of years, if the trend of safety migrating to properties continues, there could be some opportunity. I wouldn't categorize it as largely significant, but there may be a few chances there. Dave, is there anything you would like to add?

If we fully transitioned our portfolio from owning and operating to just being landlords, we would see a reduction in our real estate staff, but this would be more than compensated for by a decrease in the operational staff. However, I don't expect this to happen, certainly not in the next year or two. As Damon mentioned, there would need to be a significant shift from the safety segment to the property segment before we could change the staffing levels in the corporate office. Currently, we are not having discussions at that scale.

Okay. Great. That's very helpful. I appreciate that.

And we'll go ahead and take our last question from M. Marin from Zacks. Please go ahead.

Okay. Thank you. So, are there any services that you had offered pre-COVID that you're not currently offering? And would like to resume but are being hindered because of the staffing challenges you spoke about?

Keep me honest, here Dave. I'd say no. We had early days of the pandemic and this situation mirrored what we saw with our public sector counterparts, where we had to reduce services in our safety facilities, particularly in programs like academic vocational, among others. However, those services have been ramping back up, and we will continue to increase them based on occupancy in those facilities, aside from that.

No. I agree. In the 2020 time period in consultation with our government partners, unfortunately had to shut down some of those programs which is an unfortunate byproduct for the residents in our care, because obviously they need the skills training that you want to provide them so that when they get released, they've got the tools to get a job and sustain living outside of a correctional facility. But most of those have been reinstated now. And so outside of those types of programs, industry trade certificates that we had temporarily shut down, most of which are back operational today. I can't think of any other services that we're not performing today that we were pre-pandemic.

Okay. Thank you.

Okay. Thanks, Red.

Thanks for the question.

That does conclude our Q&A session. Thank you for participating. You may now disconnect.