CoreCivic, Inc. Q4 FY2021 Earnings Call

Good morning. My name is Anita, and I will be your conference operator. As a reminder, this call is being recorded. I would like to welcome you to CoreCivic's Fourth Quarter 2021 Earnings Conference Call. All lines have been muted to avoid background noise. After the speakers' remarks, there will be a question-and-answer session. 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.

Thanks, Anita. 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 fourth quarter, our 2022 full-year financial guidance, 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 fourth quarter 2021 earnings release, issued after market yesterday, and in our Securities and Exchange Commission 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 supplemental financial data 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.

Thank you, Cameron. Good morning, everyone, and thank you for joining us today for our fourth quarter 2021 earnings conference call. Going to our agenda for the call, we will provide you with a breakdown of our fourth quarter financial performance, recent developments in our ongoing response to COVID-19, 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 I will discuss our full-year 2022 financial guidance, issued in our press release yesterday. I will then turn the call over to our CFO, Dave Garfinkle, who will review our financial results and our 2022 guidance in greater detail, and we'll update you on our ongoing efforts to enhance our capital structure. In the fourth quarter of 2021, we generated revenue of $472.1 million, which was consistent with the prior-year quarter, despite the sale of 47 noncore real estate assets within our Property segment in multiple transactions between December of 2020 and June of 2021, and our decision to exit 2 managed-only contracts with local governments in the state of Tennessee during the fourth quarter of 2020. Collectively, the assets we sold and managed-only contracts we exited accounted for revenue of more than $15 million in the prior-year quarter. For the full year of 2021, we generated normalized funds from operations, or FFO, of $225.5 million, or $1.85 per share, which was a decline from the $2.25 per share we generated in 2020. Now the year-over-year decline was driven by our election to become a taxable C-corp, effective January 1, 2021. For illustrative purposes, we have presented the calculation of normalized FFO for each quarter of 2020, pro forma to reflect the estimated taxes had we been a C-corp in 2020 in our quarterly supplemental financial information package on our website. 2020 pro forma normalized FFO was $228.8 million, or $1.89 per share, so our financial performance in 2021 was very consistent with the prior year despite executing several transactions that strengthened our balance sheet but negatively impacted earnings, as Dave will review in further detail. In early January of this year, we were awarded a new contract with the State of Arizona to care for up to 2,706 adult male residents at our La Palma Correctional Center for the Arizona Department of Corrections, Rehabilitation and Reentry. We were deeply honored to be selected by the state following a public competitive procurement process. The new contract has an initial term of 5 years and includes an option to extend the term for an additional 5 years. This new contract represents the largest contract awarded to the private sector by any state corrections agency in over a decade, which is expected to generate approximately $75 million to $85 million in annualized revenue upon reaching full utilization while the La Palma facility currently supports the mission of Immigration and Customs Enforcement, or ICE, our largest federal customer, by caring for approximately 1,800 detainees. As a result, we are currently working with both the Arizona Department of Corrections, Rehabilitation and Reentry, and ICE on a plan for transitioning resident populations from ICE detainees to residents from the state of Arizona. While the plans are not yet finalized, we currently expect the transition to begin late in the first quarter or early in the second quarter of 2022 and completion of the transition taking place in the fourth quarter of 2022. We are working closely with ICE to facilitate a smooth transition of their detainee populations to other facilities, including facilities where we have available capacity within the region. We are pleased to be in a position to once again provide you with forward-looking financial guidance for 2022. Our full-year 2022 financial guidance forecast normalized FFO per share in the range of $1.55 to $1.70 and adjusted funds from operations, or AFFO, per share in the range of $1.48 to $1.63. Our guidance reflects a continuation of utilization restrictions placed on our facilities by many of our government partners because of the ongoing COVID-19 pandemic. We would expect to generate positive earnings growth when COVID-19 restrictions are relieved and capacity utilization is allowed to return to pre-pandemic levels, but we currently cannot forecast the timing of these changes. We are also forecasting higher operating expenses due to above-average wage inflation we are experiencing across the country. In 2021, we invested the largest wage increases the company has given to CoreCivic team in over a decade, and we are forecasting additional meaningful investments in 2022. Our guidance also reflects the transition of resident populations at our 3,060-bed La Palma Correctional Center as a result of the new contract with the State of Arizona, which I discussed earlier. The transition is expected to take place over the majority of 2022, beginning late in the first quarter or early in the second quarter. So, for much of the year, we will have disruptions of earnings and cash flows until utilization of the facility by the State of Arizona reaches stabilization. The La Palma facility is the second-largest property in our portfolio, so these transition-related expenses in 2022 are a meaningful headwind compared to 2021. Dave will provide greater details about our fourth quarter financial results, as well as some of the more significant assumptions included in our full-year 2022 financial guidance, following the remainder of my comments. We will start our operational and business development discussion with a brief update on the impact of COVID-19 pandemic and our ongoing response. We continue to see criminal justice-related populations meaningfully below their pre-pandemic levels. The declines have mostly been due to a reduction in new intakes, rather than early releases. Governments have acted faster to transfer certain residents assigned to reentry facilities to nonresidential statuses, such as furloughs, home confinement, or early releases, to create additional space for enhanced social distancing within facilities. The trends have not yet begun to meaningfully reverse. However, during the fourth quarter, we did see the continuation of a recent trend of many of our state customers increasing their utilization of our safety facilities, which contributed to a modest increase in utilization compared to the prior-year quarter. Our safety statements facility utilization was 73.8% in the quarter, an increase of 110 basis points compared with the prior-year quarter. Our Community segment was relatively consistent with the prior-year period. As courtroom operations gradually reopen and operations normalize, we anticipate increased need and utilization to continue in both segments. This trend has also motivated us to raise staffing levels in anticipation of possible higher capacity utilization requirements needed by our partners later this year going into 2023. Pertaining directly to COVID-19, the rate of positive cases around the nation rose dramatically during the fourth quarter due to the emergence of the more transmissible Omicron variants. We experienced an increase in the number of positive cases among staff and residents across many of our facilities during the fourth quarter, but the impact has been less significant to our operations than in the first year of the pandemic. We believe the rate of vaccinations of our facility staff and resident populations and the well-established safety protocols we put in place have certainly helped mitigate the impact of the Omicron variants. However, positive cases around the country remain high, and therefore, the time line for normalization of facility operations to remove various protocols that were enacted in response to the pandemic continue to be extended. Leading health experts have indicated the widespread, rapid transmission of the Omicron variant could lead to an end of the pandemic. But until that occurs, we remain vigilant in our efforts to mitigate the transmission of COVID-19 across our facility operations. I should say, though, the significant decline in new cases nationally over the past few weeks is very encouraging to us. Finally, the most substantial challenge in today's environment continues to be attracting and retaining qualified employees. The nation has experienced a meaningful reduction in workforce over the last 2 years, and it remains unclear how quickly workforce participation will improve once the pandemic reaches its end. However, we have been nimble in our response to the staffing challenges. We have responded to the challenge by aggressively developing new and creative hiring and retention strategies. And as a national employer in the private sector, we have a lot of tools we are deploying in this environment. These include increasing wages, providing housing solutions, sign-on and retention bonuses, and multiple other incentives and programs that we can increase engagement, a sense of shared mission, and overall job satisfaction. We have worked with many states to increase starting wages for our correctional officers by well over double-digit percentages. It is important to note that 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. In 2021, our average per diem increased by approximately 6.1%, more than double our historical averages, as a direct response to the wage inflation we are experiencing. The support of our government partners allowed us as a company to provide the largest wage increases in over a decade, and we are committed to utilizing all necessary resources to address this challenge. We expect wage inflation to remain elevated in 2022, and we are working closely with our government partners to be able to continue to invest in our employees and facility operations as high inflation persists.

Thank you, Damon, and good morning, everyone. In the fourth quarter of 2021, we reported net income of $0.23 per share, or $0.27 of adjusted earnings per share; $0.48 of normalized FFO per share; and AFFO per share of $0.41. Adjusted and normalized per-share amounts exclude $4.1 million of noncash expenses for the write-off of costs associated with the pay-down of our term loan B and an impairment charge of $2 million to write down an asset held for sale to its fair value less cost to sell. Financial results in 2021 reflect a higher income tax provision under our new corporate tax structure compared with 2020, when we operated 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 fourth quarter of 2021 of $0.27 compares to $0.30 on a pro forma basis, applying this estimated effective tax rate for the fourth quarter of 2020, while normalized FFO per share of $0.48 compares to $0.53 on a pro forma basis for the prior-year quarter and AFFO per share of $0.41 compared to $0.48 on a pro forma basis for the prior-year quarter. The decline in adjusted per-share amount was primarily the result of property sales and refinancing transactions, both of which strengthened our balance sheet, and an increase in G&A expenses. Facility-level EBITDA increased $6.1 million to $139.2 million in the fourth quarter of 2021 from $133.1 million in the fourth quarter of 2020, excluding $2.8 million of COVID-19 expenses. The growth in facility EBITDA was achieved despite the sale of 47 noncore assets since the end of the third quarter of 2020. The 47 properties that we sold accounted for $7.4 million of facility EBITDA in the prior-year quarter. Therefore, excluding these sales, facility EBITDA increased $13.5 million, or 11% from the prior-year quarter, demonstrating strong core operating results. A decrease in consolidated adjusted EBITDA to $103.2 million in the fourth quarter of 2021 from $108.7 million in the prior-year quarter was impacted by an increase in G&A expenses. The increase in G&A expenses was mostly attributable to lower incentive compensation in 2020 due to the onset of COVID-19, after metrics had been established under our incentive compensation plan, while financial performance in 2021 exceeded targets. As mentioned, our per-share results in the fourth quarter of 2021 were also negatively affected by the property sales and numerous refinancing transactions that were dilutive 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 interest rates higher than the debt we repaid. The property sales and refinancing transactions strengthened the balance sheet by lowering our overall debt levels and extending our weighted average debt maturities, but resulted in a reduction in per-share results by approximately $0.07 from the prior-year quarter. Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, but increased to 72.5% in the fourth quarter of 2021 from 71.6% in the prior-year quarter, and increased from 72.1% in the third quarter of 2021. The impact of COVID-19 began in the second quarter of 2020, 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, in an effort to prevent the spread of COVID-19. This policy, known as Title 42, has continued through today, and ICE detainee populations, therefore, remain well below historical levels. Pre-pandemic, our occupancy was 81.9%, translating into a decrease in our average daily population by about 7,000 residents. COVID-19 has placed restrictions on our bed utilization that is expected to result in enhanced earnings power when relieved. Operating margins were 28.4% in the fourth quarter of 2021, compared with 25.7% in the prior-year quarter and 27.2% in the third quarter of 2021. The increase in our operating margin percentages primarily reflects the continuation of lower cost trends impacted by the pandemic-related capacity and operating restrictions. Further, staffing in this challenging labor market has been increasingly difficult, and we have provided annual, as well as additional off-cycle, wage increases and special incentives to help address depressed staffing levels. Our government partners are experiencing the same staffing challenges, which has contributed to some of the per diem increases we have been able to achieve. Turning to the balance sheet, as of December 31, we had $300 million of cash on hand, which was after the repayment during the fourth quarter of 2021 of $90 million of the outstanding balance on our term loan B, which matures in 2024, reducing its outstanding balance to $128.8 million as of December 31. Including the repayments of the mortgage notes associated with the aforementioned sale of noncore assets, during 2021, we reduced our total net debt balance by $444 million and our net recourse debt balance by $276 million. Although leverage was up slightly from the third quarter of 2021, as expected for changes in working capital that we discussed on our previous earnings call, as of December 31, leverage measured by net debt to EBITDA was 2.9x, down from 3.7x at the end of last year. During 2022, we expect to be sustainably within our targeted leverage range of 2.25x to 2.75x, positioning us to return capital to shareholders. Returning capital to shareholders has been in our capital allocation plan following our priority of reducing debt since we made our announcement in August 2020 to revoke our REIT election. In fact, it was part of the rationale for revoking our REIT election. Since that announcement, we have made great strides in enhancing our capital structure by revoking our REIT election, selling noncore assets, thereby accelerating our debt reduction, accessing the debt capital markets, extending debt maturities, and positioning the balance sheet to enable us to take advantage of growth opportunities and return capital to shareholders. These steps have also enabled us to reduce our reliance on our revolving credit facility, which has a borrowing capacity of $800 million. We fully repaid the $112 million outstanding balance on our revolving credit facility during the third quarter, which has remained undrawn since. The credit facility matures in April 2023, and we currently expect to obtain a new facility in the near term, reducing the capacity and extending the maturity, enabling us to continue operating with flexibility and cost efficiency. Moving lastly to a discussion of our 2022 financial guidance, for the full year 2022, we expect to generate EPS of $0.72 to $0.86 per share, FFO per share of $1.55 to $1.70, and AFFO per share of $1.48 to $1.63. These ranges are a bit wider than we have historically provided because of the uncertain environment in which all businesses continue to operate, such as the tight labor market and higher inflation, as well as uncertainties that are unique to CoreCivic such as the transition of populations at our second largest facility, immigration policies, and government funding priorities. As mentioned, we continue to operate under COVID-related restrictions on bed utilization implemented by many of our government partners, which will eventually be relieved. However, the timing of when these restrictions are lifted is uncertain, and we are not only retaining staff levels at certain facilities in anticipation of these restrictions being lifted, but expect to increase staffing levels at other facilities in order to prepare for an increase in demand for our bed capacity. Likewise, it is also difficult to predict when Title 42 will be lifted. The Biden administration just extended Title 42, and it continues to be evaluated every 60 days. We expect the demand for detention housing to increase whenever Title 42 is lifted. Our guidance contemplates a persistent challenging labor market, where we expect to continue to provide wage increases and various types of incentives to attract and retain staffing levels, which were depressed during 2021 because of the occupancy restrictions and labor shortages in many of our markets. Our government partners have been supportive of per diem increases above historic averages in response to the wage inflation we are experiencing, and we will continue to work closely with our government partners to provide ongoing support to our employees and facility operations in this inflationary environment. But when combined with the aforementioned higher staffing levels, we expect operating margin percentages to trend toward those we experienced pre-pandemic. As Damon mentioned, we were extremely pleased to have been awarded a new contract from the State of Arizona to care for up to 2,706 inmates at our 3,060-bed La Palma Correctional Center in Eloy, Arizona, the second largest facility in our portfolio. We are currently working with Arizona on a ramp plan that is expected to begin late in the first quarter or early in the second quarter of 2022. We currently care for 1,800 ICE detainees at this facility and are simultaneously working with ICE to coordinate the transition of their populations to other facilities, including at facilities where we have available capacity within the region. This transition is a significant undertaking and is expected to result in the disruption of earnings and cash flows for most of the year, until the occupancy of inmates from the State of Arizona reaches stabilization, not currently expected to occur until the end of the year. The range of our financial guidance reflects a number of assumptions with respect to this transition. Our guidance does not contemplate any new management contracts other than the new Arizona award from Arizona or significant changes in occupancy, which could provide some upside to our guidance if we are awarded any other new contracts, such as those Damon described, or if an increase in demand occurs sooner than we are forecasting. Any new federal contracts would likely require longer-term funding levels for the federal government approved by Congress, which is difficult to predict if and when that might happen. Our guidance also reflects the termination of contracts at the Leavenworth and West Tennessee facilities, as well as at the managed-only Marin County Jail. For modeling our quarterly results, as a reminder, compared to the fourth quarter, Q1 is seasonally weaker because of 1 fewer day in the quarter and because we incur approximately 75% of our unemployment taxes during the first quarter, resulting in a collective $0.03-per-share decline from Q4 to Q1. The EBITDA guidance in our press release enables you to calculate our estimated annual effective income tax rate of 26% to 30% and provides you with our estimate of total depreciation and interest expense. We expect 2022 G&A expenses to be comparable to 2021. During 2022, we expect to incur $63.8 million to $66.3 million of maintenance capital expenditures, in line with 2021. We also expect to incur $12 million to $13 million for facility renovations, including $3.1 million at La Palma for the new Arizona contract, down from $19.1 million in 2021. With depressed occupancy levels, we are in a position to significantly grow earnings whenever the impact of COVID-19 subsides, without the need to construct new capacity. I will now turn the call back to the operator, Anita, to open up the lines for questions.

We will take our first question from Joe Gomes with Noble Capital.

So I wanted to start maybe here with Arizona, trying to get just a little more color here. First, on the ICE populations that you're moving, you keep saying they're moving to other facilities, including ones where you have excess space right now. Do you anticipate all of the ICE population to move into your facilities? Or is there an option for ICE to move some of those into other non-CoreCivic facilities? And two, you talked about the disruption of earnings and cash flow as you transfer the ICE out and Arizona in, and I know it's in your guidance. Can you get any type of quantification of what that disruption of earnings and cash flow is going to be?

Joe, thank you for that. I'll address the first part of your question, and then Dave can handle the second part. For the first part, we began discussions with ICE well before the proposal deadline for Arizona. As you know, we have a longstanding 40-year relationship with ICE, and we regularly communicate about their evolving needs in various regions. Before we submitted our proposal, we had a conversation with ICE about the possibility of being awarded the La Palma contract. We indicated that, if awarded, we could offer alternative capacity within our system, especially in Arizona. While we can't confirm specifics right now since it's still a work in progress, we do have capacity in Eloy, as the Eloy Detention Center is located nearby La Palma, and there's also additional capacity in Florence, Arizona. Additionally, ICE has a processing center in Florence, which could factor into their decision-making regarding capacity as they plan the ramp-down of La Palma's population. So, this is something we'll need to keep monitoring. We are actively discussing these matters with ICE and have been transparent and collaborative, aiming to support their mission along the Southwest border, particularly in Arizona. Now, Dave, I'll let you address the second part.

It's really challenging to provide a specific amount because that's one of the key reasons our guidance range is so broad. As you know, it's wider than our earlier guidance, which had a narrower range. The two primary factors are La Palma and, likely more significantly, wage increases along with our ability to secure per diem adjustments that can offset those wage increases. I would prefer not to give you a number since the situation is quite fluid, especially without a ramp plan in place. Additionally, at the La Palma facility, we are dealing with very short-term, transient detainees. This means it's less about transferring populations from one facility to another and more about adjusting the flow of intakes and releases throughout the immigration process across multiple facilities. As mentioned, we have capacity at our Eloy facility nearby, which we anticipate will start to see an increase in intakes. There is no need for a contract modification; we can simply shift the processing of detainees currently at La Palma to Eloy, as well as in Central Arizona, where we also have additional capacity. Therefore, considering all these factors, it's too difficult to quantify the impact of the entire La Palma, Arizona ICE transition.

Okay. I have a follow-up regarding the higher wages. You mentioned your government partners and noted a 6% increase in the per diem to help cover some of the higher wages you're facing. How much of the overall wage increase will those increases cover? Is it full coverage, or perhaps 50% or 75%? How delayed will this be? Are we certain that the higher wages will eventually be covered, even if it takes time? Could you explain how this process works?

Absolutely. Let me take a moment to remind everyone that our business is split evenly between federal and state partners. For our federal partners, our contracts require us to adhere to wage determinations set by the Bureau of Labor Statistics, meaning that any wage inflation will necessitate salary adjustments on our part, with a contractual feature that allows us to get reimbursed dollar for dollar. On the state side, we have seen considerable success, largely attributable to the strong relationships we maintain with our various state partners across the country. Our state partners, who own and operate their own facilities, face similar labor challenges, allowing us to work closely with the leadership of the Department of Corrections in these jurisdictions to request additional funding for salary increases. We've effectively made our case for salary adjustments in collaboration with the Department of Corrections, and we've managed to get reimbursed fairly quickly, though it’s not always perfect. The timeline for when we want to make changes aligns closely with when we receive clarity on reimbursement. Having been with this company for 30 years and having worked with state partners for the last 20, I can say that our partnerships have never been stronger, particularly given the current challenging labor market and the need to invest more in our employees, especially over the past 24 months amid the pandemic. Would you like to add anything to that, Dave?

There have been more frequent communications, and some states have even offered temporary stipends that we receive reimbursement for to provide to our correctional officers. While only a few states have done this and not across all areas, we are making numerous unusual adjustments to salaries and their corresponding per diem. Some of these changes are temporary to help us through the fiscal year ending June 30, after which we expect to incorporate some of these into both long-term wages and per diem adjustments. The adjustments we are making have been significant, and our partners are also offering extraordinary support to help us manage our staff and operations.

Okay. And on ICE, if you look, and you guys kind of touched on a little bit, if you look at their monthly ADP, they kind of went up from the pandemic lows of the mid- to low teens to the mid-20s. It kind of backed off here lately to the low 20s. How have you guys' ICE populations been holding up across your system?

Yes. I think relatively stable.

Yes, they were very stable, especially if you're comparing Q4 to Q3, they were about flat, almost to the detainee. I think that was somewhat impacted by the Omicron variant because we started to see an increase in some detainee populations earlier in the year and then continue into Q3, but they kind of leveled off and remained flat in Q4. So, with the data getting better on the number of people infected by the Omicron variant of COVID, hopefully, those populations would trend similarly.

Okay. Can we switch topics for a moment? I would like to ask one more question about capital allocation. You mentioned that you're looking to finalize the credit line facility soon. Could you provide some timing details and the size you're considering now compared to before? Also, regarding share repurchases, when do you expect to approach the board for authorization? I know it might be early, but I wanted to ask anyway. What size are you envisioning for the share repurchase authorization?

Let me start with the buybacks. We have a board meeting coming up next week, and we've had very positive discussions with the board over the last couple of years regarding important decisions and actions we've taken, including the transition to a C-corp and selling noncore assets, as well as some refinancing activities this past year. The board has been highly supportive throughout this process. We have also engaged with major investors to gather their feedback, and we value their insights and support for our initiatives. As we've mentioned in previous quarters, our next significant objective is the credit facility. Once we complete that milestone, we will continue our discussions with the board next week. They concur, and we're receiving favorable feedback from investors about finalizing the credit facility, both in terms of extension and size. After that, we can focus on the next priority, which is returning capital to shareholders, possibly through a share buyback program. Now, I'll hand it over to Dave to address the first part.

Yes. Thanks, Damon. Yes. So, as we mentioned, the total facility size today is $1 billion. We don't need anywhere near that; probably 1/4 to 1/3 of that size is what I estimate, and I think we'll have that buttoned up within the next few months with the maturity in April '23. It becomes current in April of '22. There is a 0 balance on the revolver today. As I mentioned, we paid that off in the third quarter and have not used the revolver, have not drawn on it since then through today. We have $170 million on the term loan A, and we've got $300 million of cash on the balance sheet. So I think we're in a really, really good position from a debt maturity, being able to address maturities and still return capital to shareholders without needing to draw on a credit facility to any great extent. Nice to have one just for working capital purposes and things like that. So I would estimate, like I said, 1/4 to 1/3 of its size, and we should have that buttoned up over the next few months.

Great. I'll get back in queue, let someone else ask some questions.

We'll take our next question from Kirk Ludtke with Imperial Capital.

As always, very, very helpful. A couple of topics. A follow-up on the guidance, and then maybe I'd like to touch on this monitoring opportunity and the Georgia opportunity, if I have time. With respect to the guidance, I think you mentioned that it does not reflect any new contracts, including contracts at West Tennessee or Leavenworth, if hopefully, I heard that correctly.

Yes, that's correct.

Could you provide an update on the discussions regarding the RFP for at least one of those facilities? I have a few follow-up questions on other topics as well.

Yes, sir. So I think you're referring to West Tennessee. We did have very productive conversations with a couple of different government partners on that facility. And our sense is, and we've had interest from ICE probably most notably in that facility. Our understanding is that they're trying to get some clarity on the rest of the funding for this fiscal year. So, as you may know, the current federal government is funded through February 18. There has been some news reports here in the past week that they're potentially going to do a very short-term extension, maybe to early into March, and then do a full year funding. So our understanding, that is going to be kind of the milestone they'll be looking at on not only what their potential needs are going to be based on the funding they get from the budget, but also, again, as I said earlier, Title 42 and some of the other kind of policy things that they put in place, how that reconciles what kind of their needs this fiscal year going to the next fiscal year. So those are the things we're in looking at closely.

And Kirk, yes, you're correct. Our guidance is conservative with respect to both West Tennessee and Leavenworth and does not include any new contracts in 2022.

Got it. And on that topic, did the marshals enter into contracts to replace the capacity that they had at West Tennessee and Leavenworth, or are they still in place?

They've replaced. So it's our understanding they looked at either other government entities, either at the local level or the Federal Bureau of Prisons. And that's actually been one of the things they've put on the table with the enactment of the executive order, even going back to Ohio and Montana, that they were looking at all alternatives, and then based on all those alternatives kind of prioritize what is the most advantageous for their needs kind of going forward with those respective districts. So it's our understanding they looked at and utilized local capacity, and also capacity within the Federal Bureau of Prisons.

Okay, I understand. You mentioned the new monitoring program. Is it an addition to the existing monitoring contracts that ICE has, or does it replace those contracts?

Good question. It's an addition. We understand that there are individuals who were initially unaccompanied minors under the authority of another jurisdiction, and as they turn 18 or older, there is a need for a solution for that group, specifically 18- to 19-year-old males in various parts of the country. So this will be an addition rather than a replacement.

Okay. Excellent. Is it too early to estimate how large it might be and what the capital requirements would be if you win it?

Yes, it's too early to say. It just came out in the last 14 days, so we are still assessing the need, opportunity, and size. At this moment, we don't expect a significant capital requirement. We are still evaluating that, but that is our current perspective.

Okay. Great. And then lastly, if I can squeeze this in, on Georgia, you mentioned the governor's budget includes some facility closures. And I know the lead time on these types of things can be long. But do you have a sense for timing and how many individuals are detained at those facilities that are potentially closing?

Yes. The first part seems to be straightforward. The governor recently released a budget, and I believe it was within the last couple of weeks. History suggests that the budget is typically enacted around late April or early May. Each state has its own timeline, so this will go through the legislature, which will likely have strong opinions on the matter. If multiple facilities are to be closed in various districts, that may be particularly sensitive for both legislative members and the Senate. We'll gain more clarity once the budget is finalized, which should be around late April or early May. I believe we have heard discussions about potentially a couple of thousand beds, possibly up to 3,000 beds, that could be affected by the anticipated facility closures.

Yes, I think it was 3 to 5 facilities. I think they named a couple of them. But it's interesting that it sounds an awful lot like the same situation that Arizona was in where they had an outdated correctional facility that was obsolete and it needed to be shut down, so transferring the populations to the private sector. So we've talked about in the past that opportunity, either through the development opportunity and where we'd just be the landlord and managing the real estate, or an opportunity like Arizona, where we also manage the population. So we continue to believe that that's an opportunity going forward with a lot of states throughout the country with outdated criminal justice infrastructure that could result in a growth in our business without an increase in overall inmate populations. They're just transferring from older, outdated facilities to newer facilities.

Interesting. Do you have capacity in Georgia for that?

Yes. I mean, we mentioned the facility that currently has a BOP contract that expires in November. So, if that one is not renewed, that would certainly become available.

We'll take our next question from Ben Briggs with StoneX Financial.

So I think you addressed most of my questions on the higher general and administrative costs that we saw this quarter. So, if I heard you correctly, those were due entirely to increased incentive comp, correct?

Yes, when comparing Q4 '21 to Q4 '20, a significant part of the increase was due to higher incentive compensation. As I mentioned, the compensation committee had set the compensation level targets before the onset of COVID-19 in 2020. This year, there were some unusual expenses in Q4 that could be considered nonrecurring when compared to Q3. However, as I pointed out in my remarks, our guidance for 2022 reflects a general and administrative expense level that is very similar to the total G&A expense in 2021.

Right. Okay. So that increased G&A expense is going to kind of be offset a lower G&A expense later in the year, is kind of what it sounds like you're alluding to.

Yes. Correct; that's a fair statement, yes.

Got it. Got it. That's very helpful. And then next thing for me, so obviously, inflation is on the top of everybody's minds, and you guys addressed inflation, specifically wage inflation. Are you seeing any cost inflation impacting any purchased goods either in OpEx or CapEx? I know obviously, there's not a ton of purchased goods in your business, but you have food. And then obviously, for CapEx, it could impact some of that. So I'm curious to hear about what impact you're seeing from inflation.

Yes, for the most part, salaries and wages account for two-thirds of our cost structure. We are observing inflation in other expense areas, but those do not significantly affect us as much as salaries and wages do. We are aware that construction costs are increasing, but we currently don't have any construction projects at our facilities. Our maintenance capital expenditures in 2022 are similar to those in 2021. While some costs in the construction sector are higher, we have included that in our guidance. Therefore, unlike many other companies across the nation, inflation is not having a major impact on us.

Okay. All right. That's very helpful. I appreciate the time.

We'll now take our next question from Marla Marin with Zacks.

I'm curious, it seems we are in a position where some excellent opportunities might arise due to the condition of certain federally or state-owned facilities. However, considering the challenges with hiring, what are your thoughts? Are there specific geographic regions where you think opportunities are more likely to arise? Given the current trends in wage inflation and the difficulties in hiring, what do you anticipate the timing would be if a new opportunity presented itself?

Yes, that's a great question. This is Damon. Regarding the first part, it's essentially nationwide. In recent years, we have seen developments in property solutions in states like Kansas and New Mexico. We've also discussed Arizona, where we're replacing a 110 or 120-year-old prison with our La Palma facility. We mentioned Georgia and Hawaii earlier as well. There are numerous jurisdictions involved across the country. To be honest, the urgency for improvement has become more pronounced in the last 24 months, primarily because the outdated infrastructure has proven challenging during the COVID-19 pandemic. It has been difficult to manage quarantines and limit transmission without modern HVAC systems. Facilities have realized the need for upgrades, especially due to the serious consequences they've experienced because of COVID-19. On the staffing side, we've implemented increases and are seeing positive responses across the country. I'm encouraged to see some improvement in labor workforce participation in certain regions. With these wage increases, our partners have been extremely supportive of the necessary investments, which has led to per diem adjustments that benefit us. This year, our approach is not only focused on meeting labor market demands, but also on preparing for a potential easing of pandemic restrictions. We are anticipating a return to pre-pandemic capacity levels, so we're taking steps to increase our staff accordingly. Do you have anything to add to that, Dave?

Not directly to your question, but I put registry nursing in the same category as staffing. I mean, the national shortage of nursing, our health services department has done a fantastic job in identifying and coming up with resources to fill the shortage of nursing that we see across the country, but nothing else to add to the rest of your answer there, Damon.

We'll now take our next question from Jordan Sherman with Ranger Global.

Did you quantify the amount of additional labor expense you expect to incur in 2022 compared to 2021? And how much of that do you believe can be directly offset by increased per diem?

Yes, that's a challenging question to answer. Last year, it was approximately a $30 million figure for total aggregate wage increases, and I believe we have at least that amount in the 2022 guidance. However, it's a moving target due to the dynamic nature of the labor market. Additionally, per diem adjustments play a role, and our government partners have been quite supportive of those adjustments since we are part of their system. They don't want us to take their staff, and we don't want to take theirs either. The market is what it is, and they understand the challenges we face because they experience similar situations. Therefore, it's difficult to pinpoint the bottom line impact of both wage increases and per diem adjustments in our 2022 guidance. Both elements are included, which is why we have a wide range.

Yes, understood. That makes sense. What would be your approximate disruption of revenue due to the La Palma transition? Are there any additional costs related to that as well?

We will be spending about $3 million on renovations at the La Palma facility. We anticipate that the annual revenue for Arizona will fall between $75 million and $85 million once stabilization is achieved, which we don't expect to occur until the end of the year. It is challenging to predict the revenue reduction during this transition, especially if we consider the possibility of redistributing that revenue from La Palma to other facilities in the area. So, while it's difficult to answer precisely, the anticipated annual revenue for Arizona remains between $75 million and $85 million, which would be illustrative of the 2023 figures.

Okay. And I guess the question, what was the government's run rate in '21 for that facility?

We don't disclose that level of detail on revenue for our individual facilities.

Okay. So is the per diem increasing or decreasing? I have two questions: what is the change in per diem and what is the change in expected utilization, meaning full utilization, when everything is finalized?

The economics between the two contracts are quite similar. Depending on our ability to transfer operations to other facilities, if we look at 2023 and assume all ICE detainees were to be removed—which I want to clarify is not guaranteed since we do have capacity in the region—the economics in 2023 would resemble those in 2021 under the Arizona contract.

A portion of the uncertainty in your guidance arises from not knowing exactly how this transition will unfold. You are aware of when the ICE personnel are departing the facility, but the timeline for how quickly Arizona will ramp up remains unclear.

You got it. We're going to see 2,700 Arizona inmates compared to 1,800 today, and that population fluctuates with ICE. It's a longer-term sentenced population in Arizona. We have specific programs and services to offer that group, which are not required for an ICE population. Therefore, increasing our staffing in anticipation of receiving the additional Arizona inmates is also part of that disruption.

Yes. And just to reinforce, I mean, it's our second-largest facility. So it's 3,000 beds. It's a very large facility, probably one of the largest in the country. So again, just imagine the ramp-down of the population from ICE, the ramp-up of Arizona population. Those were going to overlap, and then obviously, along the way, you've got to do all the appropriate training to make sure our employees meet all the training requirements. So a lot of moving parts that obviously, again, be very disruptive to earnings this year. The only thing I would just say is that Dave indicated that the earnings performance of '23 will be similar to the earnings performance of ICE in '21. But one thing I would just say is probably the earnings kind of ups and downs a little bit are probably a tad more stable with Arizona, just because that is going to be a longer-term population, which you indicated that it will be there for programs and other services. So you may not see as much volatility in earnings from, let's say, a year-over-year or quarter-over-quarter versus a state contract.

Once the government contract, specifically the ICE contract from the state, is confirmed, can you discuss the economics of the potential new alternatives to detention contract and explain how that works?

I can't speak to the economics yet, just because, again, it's only been out for a couple of weeks. But keep me honest here, Dave. I know the advertisement indicated probably about 16,000 participants.

Right.

It provides an idea of the number of people who would be in the program. We are just starting to go through the proposal process, but it seems likely that they would compensate us on a per-individual basis. Therefore, the actual participants in the program would be reimbursable to us from ICE. There is still more to learn, but the number, which is 16,000, gives a good indication of the quantity.

I apologize. You answered the question I asked, but not the question I was hoping you could answer. I meant more in general. Not specifically to this contract, but in general, how do those contracts work? What are the economics of those contracts for you? You have some in place now. How does that look on a per-day basis, in terms of revenue and margins? I guess that's what I was aiming at. And again, it can be round numbers, so you don't have to disclose anything you don't want to.

Yes. To clarify, we do not have an agreement like this with ICE. We offer these types of services in other jurisdictions, including our community and safety segment. However, we do not currently have a contract that I can refer to concerning revenue and margin. Generally, we examine this across the entire profession and market. Typically, the margins are quite consistent with those in our owned and managed segment, usually ranging from 20% to 30%. That's generally what we see with other providers delivering these solutions for the government.

And what are the per diem ranges for existing services, not for ICE, just to get an idea of per diem?

Yes, that being through a pending competitive procurement, it probably wouldn't be appropriate for me to give any detailed cap rate.

We'll now take our last question from Michael Christodolou with Inwood Capital Management.

Good discussion, and thanks for all the time on the call. I've got a few questions about occupancy and operating leverage. So first, at La Palma, Damon, you mentioned that's your second-largest facility. As I look at the sheet, it's I think the second-lowest occupancy right now at 60%. So looking through all the noise of 2022, it looks like that facility might jump to 88% occupancy when things stabilize in 2023. What kind of operating margin lift should that facility have, again, under a normalized cost structure? And then, I guess the same question would apply to the whole system. You're at 75,000 beds, 73% occupancy. La Palma would add 3.6 points, gets you towards 77%. You might lose a little bit, as you say, if ICE takes some prisoners back to Florence. But it looks like you could be high 70s operating margin or utilization. And then if you had Title 42 or COVID relax, could we see north of 80% occupancy? And talk through maybe what the operating leverage would be at that point.

Yes, that's a great question. I'll have Dave add some information about La Palma specifically, but I'll address the last part of your question. Before COVID, I believe our system-wide occupancy was in the low 80s.

81.9%, yes.

Yes, we were gaining great momentum there, especially with many new contracts on the state side. Currently, we are about 7,000 beds away from that occupancy mark. It’s possible to see $40 million to $50 million in EBITDA growth without needing to invest any capital. We believe this is very achievable, which is why we are proactively working this year to restore staffing levels. This could help us reach that occupancy level potentially within the next 24 to 36 months. I'll let David address the first part of your question regarding La Palma.

Yes. So La Palma, in 2021, has been subject to the occupancy restrictions for ICE to prevent the spread of COVID-19. And across the ICE portfolio, I think they tried to keep occupancy below 75%. You're right. I would say, generally speaking, across the portfolio, it is a leveraged model. You get mostly fixed costs. Your staffing doesn't fluctuate that much unless you're opening up a new housing unit or closing a housing unit. So obviously, the higher the occupancy, the more leveraged the model becomes, and the higher your margins are. And to go back on Damon's point, yes, at 81.9%, that was actually the number I was using in my script by saying we're down 7,000 residents from 2019 occupancy levels. If you just took Q4, it was 79.4%. So that would be about 5,200 residents that translates into about $45 million of incremental EBITDA, if you were to get those residents back.

There are no further questions at this time. This concludes today's call. Thank you for your participation. You may now disconnect.