CoreCivic, Inc. Q1 FY2024 Earnings Call

Good day, and thank you for standing by. Welcome to the Q1 2024 CoreCivic Incorporated Earnings Conference Call. Please be advised that today's conference is being recorded. I'd now like to hand the conference over to your first speaker today, Mike Grant, Managing Director of Investor Relations. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us today. Participating on today's call are Damon Hininger, CoreCivic's President and Chief Executive Officer; and David Garfinkle, our Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. On this call, we will discuss financial results for the first quarter of 2024 as well as updated financial guidance for the 2024 year. We'll also discuss developments with our government partners 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 first quarter 2024 earnings release issued after market yesterday as well as 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. Management will also discuss certain non-GAAP metrics. A reconciliation of the most comparable GAAP measurement is provided in the corresponding earnings release and included in the company's quarterly supplemental financial data report posted on the Investors page of the company's website at corecivic.com. With that, it is my pleasure to turn the call over to our President and CEO, Damon Hininger.

Thank you, Mike. Good morning, and thank you for joining us for our first quarter 2024 earnings call. On today's call, I will provide details of our first quarter financial performance. I will also discuss with you our latest operational results and update you on the latest developments with our government partners and our capital allocation strategy. Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will provide greater detail on our financial results and our updated 2024 financial guidance. Dave will also provide an update on a very active quarter for our ongoing capital structure initiatives, including details regarding our recently completed debt refinancing. I'll start with a high-level overview of our first quarter financial results. In the first quarter, we generated revenue of just over $500 million, a 9% increase compared with the prior year quarter. This is our highest level of quarterly revenue achieved since the third quarter of 2019, 18 quarters ago. And it is also our highest rate of year-over-year revenue growth since the same quarter of 2019. The composition of our revenue growth also speaks to the current strength of our business as well as to the level of our partners' needs and their trust in us. During this quarter, we experienced revenue growth from all three of our partner groups: federal, state, and local governments. I will provide more color on each later in this call. For the first quarter of 2024, we generated normalized funds from operation, or FFO, of $52.6 million or $0.46 per share compared to $38.9 million or $0.34 per share in the first quarter of 2023, representing a per share increase of 35%. The increase in FFO was driven by the higher federal, state, and local populations combined with expense normalization and lower interest expense resulting from our debt reduction strategy, partly offset by higher G&A expenses. Revenue from our federal partners, primarily Immigration and Customs Enforcement and the United States Marshals Service, increased 11% versus the first quarter of last year. ICE, in particular, saw significant growth as Title 42 was still in place in the comparable period of last year. As a reminder, Title 42, which was invoked in March of 2020 at the start of the COVID-19 response, is a law that empowers federal health authorities to deny migrants entry into the United States in order to prevent the spread of contagious diseases. Title 42 officially ended on May 11 of 2023, and our populations with ICE have been consistently higher since then. As mentioned in our earnings release, during the first quarter of 2024, revenue from ICE was $153.8 million compared to $130.7 million during the comparable quarter in 2023. After several months of deliberation, Congress passed a bipartisan funding bill in March, providing for 41,500 ICE detention beds. Note that these funded beds also include a number of beds reserved at certain facilities under fixed monthly payment contracts, so the actual number detained will likely not achieve that full 41,500 level in the near term. Interestingly, ICE's total detainee population declined towards the end of the quarter and into the start of the second quarter. The most recent detention count published by ICE was 34,373 as of April 20th, down from roughly 37,000 to 39,000 during most of the first quarter of 2024. We believe that this was a result of an expectation of lower number of funded detention beds following the unsuccessful passage of the supplemental funding bill in the early part of the calendar year. As you know, ICE populations are rarely static, and we continue to work closely with ICE's system in their important mission. Our state revenue in the first quarter grew 5% versus the prior year based on higher per diem rates and sturdy occupancy from many of our state government partners as well as contributions from two new state contracts signed in the fourth quarter of 2023. Now, in its second full year under a management contract with the State of Arizona, our La Palma Correctional Center in Eloy, Arizona continues to show stable occupancy as well as improving operating and financial metrics. During the first quarter, we were able to discontinue the facility's reliance on temporary labor resources and incentives due to strong local hiring and management oversight. This is a welcomed accomplishment as La Palma is our second largest facility by capacity. So movement in financial performance in the right direction has been and continues to be a priority. To close our revenue discussion, local revenue, which is primarily revenue generated from contracts with county governments, grew by 44%, albeit off a smaller base. This was the first full quarter with both Hinds County, Mississippi and Harris County, Texas as partners resulting from management contracts signed during the second half of 2023. Both populations are housed at our Tallahatchie County Correctional Facility located in Tutwiler, Mississippi. Both contracts are now fully ramped. Our occupancy for the first quarter of 2024 was 75.2%. This is our highest occupancy rate since the first quarter of 2020, which, as you may recall, marks the start of the COVID-19 pandemic response. From the first quarter of 2023 to the first quarter of this year, occupancy in our Safety segment increased from 71% to 76%, and occupancy in our Community segment increased from 59% to 63%. As we have mentioned in the past, our operating model has significant operating leverage to changes in occupancy. This was a factor in our margin improvement during the first quarter. In addition to receiving larger populations from existing contracts with ICE and state customers, our strong occupancy also reflects the successful ramp-up of four new contracts announced during the third and fourth quarters of 2023. These new contracts include a contract for 120 Montana inmates at our Saguaro Correctional facility in Eloy, Arizona, a contract for 240 Wyoming inmates at our Tallahatchie County facility in Mississippi, and the two new county contracts mentioned previously for up to 610 detainees also at our Tallahatchie facility. These four new contracts completed their initial intakes during the fourth quarter of 2023 and into the first quarter of 2024 and contributed to our growth in occupancy and revenue. We are grateful for the high degree of trust from our partners that these existing and expanded contracts represent. I couldn't be more proud of our dedicated employees who helped earn that trust by providing the flexibility and timely delivery of quality services our partners rely on to fulfill their missions. Next, I want to provide an update on labor attraction and retention, an essential component of our business that became unusually challenging starting with the onset of the COVID-19 pandemic. During 2022 and 2023, labor market pressures necessitated temporary incentives and related incremental operating expenses. During those two years, we designed and deployed different human capital strategies and made significant investments in our frontline employees. Through these actions, we have increased our staffing levels through improved recruiting and retention. We are now seeing significant normalization in our labor markets as well as greater workforce stability. Financially, as we review first quarter results, our improved staffing has allowed us to dial back the higher spending on temporary incentives and associated travel expenses and has positioned us well operationally to manage our customers' higher population needs. Turning to our Community segment, which comprises 23 residential reentry facilities, we experienced an increase in occupancy to 63.1% in the first quarter of 2024 versus 59.4% in the prior year period. Our facilities in this segment served the Bureau of Prisons as well as state and county governments, and the increase in occupancy in this segment was broad-based. We also provide electronic monitoring and case management services in our community segment. Our Community segment represents a final part of our reentry mission and is often critical to the successful reentry of residents in our care. Net operating income in this segment increased 56% in the first quarter of 2024 from the prior year quarter due to increased occupancy and per diem increases obtained in connection with contract renewals. Similar to our Safety segment, our Community segment facilities have been able to reduce temporary staff incentives. The positive occupancy trend in the Community segment is likely to continue now that pandemic-related public health policies have ended and as more of our government partners have returned to these important residential reentry programs that help individuals better prepare for successfully returning to our communities. The strong financial results reflected throughout our business have enabled us to execute on our long-term capital allocation strategy with more intensity. During the first quarter of 2024, we repurchased 2.7 million shares of our common stock at a cost of nearly $40 million, surpassing the amount we repurchased during all of 2023. Even after these repurchases, we ended the quarter with leverage measured as net debt-to-adjusted EBITDA at 2.7x for the trailing 12 months, placing us for the first time within our target leverage range of 2.25x to 2.75x that we established in August 2020. This is a significant accomplishment, and we are proud of the strategy, focus, and discipline that has led us here. We believe maintaining a disciplined capital allocation strategy, combined with strong financial results, also contributed to the successful refinancing of a substantial proportion of our debt during the quarter, including the issuance of $500 million of senior unsecured notes and the repayment of nearly $600 million of our senior unsecured notes. Dave will provide you further detail regarding the significant capital market activities. Looking ahead, the longer-term macroenvironment for our federal, state, and local business remains positive. Our government partners are facing complex capacity, infrastructure, budgetary, and population challenges. We see increased opportunities to serve their evolving needs. This demand potential is evident from looking at jail backlogs, prison forecasts, and from discussions with our government partners. In particular, we remain in discussions with federal, state, and local government agencies, including agencies we do not currently serve, to help address their various challenges in the near to long-term. In conclusion, the macroenvironment in which we operate continues to improve. Our financial results, including those published last night, reflect that improved environment. But those results also reflect the hard work, the attention to detail, and the smart decisions made by our dedicated team here at CoreCivic. Our occupancy is rebounding to its highest level in nearly four years, and our margin is beginning to illustrate the operating leverage that comes with higher occupancy and a normalized expense structure, reflecting our progress against labor-related cost pressures that rose sharply during the COVID-19 pandemic. Our strong financial results and disciplined capital allocation strategy have provided us with tremendous balance sheet flexibility to better maximize shareholder value. Based on our financial performance to start 2024 and positive outlook for the remainder of the year, we have updated our full-year financial guidance, including increases to our adjusted EBITDA by nearly $10 million, adjusted EPS by $0.06, and normalized FFO per share of $0.08. One more comment, if you don't mind, before I turn the call over to Dave. This week is National Correctional Officers and Employees week, a week started by President Ronald Reagan in the 1980s to recognize the contributions of the professionals in our vocation. I would like to express my sincere appreciation for our teachers, nurses, chaplains, those who wear the uniform, and all who work within our company for what you do in helping us achieve our mission each and every day. Now, I will turn the call over to Dave Garfinkle, our CFO, who will provide a more detailed look at our strong first quarter financial results, assumptions included in our newly updated financial guidance, as well as further details regarding our capital market activities. Over to you, Dave.

Thank you, Damon, and good morning, everyone. In the first quarter of 2024, we reported GAAP net income of $0.08 per share compared with $0.11 per share in the prior year quarter. Excluding special items, adjusted EPS during the first quarter of 2024 was $0.25 compared with $0.13 per share in the prior year quarter. Special items in the first quarter included $27.2 million of expenses associated with debt repayments and refinancing transactions and a small gain on the sale of real estate assets. Normalized FFO per share was $0.46 during the first quarter of 2024 compared with $0.34 in the prior year quarter, an increase of 35%. Adjusted EBITDA was $89.5 million during the first quarter of 2024 compared with $73.7 million in the prior year quarter, an increase of $15.8 million or 21%. The increase in adjusted EBITDA resulted from higher occupancy from federal, state, and local populations and the continued normalization of our operating expense structure, partially offset by an increase in G&A expenses. These factors, along with a lower normalized effective income tax rate in the current year quarter also contributed to the increase in adjusted EPS and normalized FFO per share. The lower normalized effective income tax rate resulted from an income tax benefit associated with stock-based compensation vesting, contributing to a favorable impact of $0.02 per share. While this tax consequence occurs every year, the benefit was amplified by a rise in our stock price since the grant date, resulting in a higher tax deduction. In our Safety segment, our largest segment, facility net operating income increased $18.4 million or 21% to $107.6 million in the current year quarter from $89.3 million in the prior year quarter. The increase in NOI was driven by an increase in occupancy in this segment from 70.9% to 76.1%, primarily resulting from higher populations from ICE due to the expiration of Title 42 on May 11, 2023. Since Title 42 expired, ICE detention populations have grown nationwide. Occupancy also increased due to new contracts signed in the second half of 2023, including two new state contracts with Montana and Wyoming, and two new county contracts with Hinds County, Mississippi, and Harris County, Texas. In our Community segment, facility net operating income increased $2.1 million or 56% to $5.8 million in the current year quarter from $3.7 million in the prior year quarter. Occupancy in the community segment increased from 59.4% to 63.1% and was broad-based as more of our government partners are returning to these important residential reentry programs that help individuals to be better prepared for successfully transitioning from incarceration into our communities following systemic disruptions during the COVID-19 pandemic. Operating margins in our safety and community facilities combined improved to 23.7% in the first quarter of 2024 compared to 21.2% in the prior year quarter. The increase in our operating margins was due to the increase in occupancy from 70.1% to 75.2% for our Safety and Community segments combined. Per diem increases we have successfully obtained served to increase revenue per mandate by 4.1% over the prior year quarter and the normalization of operating expense trends we have experienced over the past several quarters continued into the first quarter of 2024. During the first quarter, we were able to continue reducing certain incremental labor-related expenses, such as registry nursing, temporary wage incentives, and travel despite inflation and labor market pressures that have been steadily easing over the past several quarters. In our Property segment, facility net operating income declined $1.3 million due to the expiration of the lease with the state of Oklahoma at our North Fork Correctional facility effective June 30, 2023, partially offset by the transition of the Allen Gamble Correctional Center from a facility we operated in our Safety segment to a facility we leased to the State of Oklahoma in the Property segment effective October 1, 2023. Turning next to the balance sheet. During the first quarter, we completed the issuance of $500 million of unsecured notes at an interest rate of 8.25%. The proceeds of these notes, which have a maturity date of April 15, 2029, were used to tender for our then outstanding 8.25% unsecured notes with a maturity date of April 15, 2026. Noteholders with an aggregate principal amount of $494.3 million or 83.3% of the aggregate principal amount of the old 8.25% unsecured notes outstanding tendered their notes by the expiration date on March 11. On April 15, we redeemed the remaining $98.8 million balance outstanding. In addition to the net proceeds received from the issuance of these notes, we used borrowings under our revolving credit facility and cash on hand to fund the tender and redemption of the old 8.25% unsecured notes. The old 8.25% unsecured notes were originally issued in 2021. We were very pleased to be able to issue the new notes with the same coupon as the old notes even though treasury rates have risen by approximately 325 basis points since then, which we believe is a testament to our disciplined capital allocation strategy and ongoing strength of our business. During the first quarter, we also repurchased 2.7 million shares of our common stock at an aggregate purchase price of $39.4 million or $14.52 per share, exceeding the $38.1 million of shares we repurchased throughout all of 2023. Since our share repurchase program was announced in May 2022 through March 31, we have repurchased 12.8 million shares of our stock at a total cost of $152 million or an average price of $11.87 per share, leaving $73 million available under our $225 million Board authorization. Our leverage, measured by net debt-to-adjusted EBITDA, was 2.7x using the trailing 12 months ended March 31, 2024, down from 2.8x at December 31, 2023, and reaching our targeted leverage of between 2.25x and 2.75x. We achieved our targeted leverage in the first quarter despite using $32 million of cash for costs associated with the debt repayments and issuance of the new notes and despite repurchasing shares of our stock at an accelerated pace during the quarter. Following the repayment of the old 8.25% unsecured notes, we have no debt maturities until 2027, with a modest $243.1 million of unsecured notes at a rate of 4.75% mature. As of March 31, we had $111.4 million of cash on hand and an additional $257 million of borrowing capacity on our revolving credit facility, providing us with total liquidity of $368.4 million. We used $106.9 million of this liquidity to fund the aforementioned final redemption of the old 8.25% unsecured notes in April, including the redemption premium and accrued interest on these notes. Moving lastly to a discussion of our 2024 financial guidance, we expect to generate adjusted EPS of $0.66 to $0.76, up from our previous guidance of $0.58 to $0.72, and normalized FFO per share of $1.56 to $1.66, up from our previous guidance of $1.46 to $1.61. Our guidance reflects our outperformance in Q1 relative to our internal forecast, leaving the remainder of our forecast essentially unchanged from our previous guidance. Relative to 2023, our guidance continues to reflect growth in state and local residential populations, largely attributable to the new contract awards obtained during the second half of 2023. Our guidance further reflects an increase in our average daily federal populations in 2024 compared with 2023, mainly due to the expiration of Title 42 in May. As with our previous guidance, we expect federal populations to remain within a stable range throughout 2024. Even though Congress appropriated additional funds for 41,500 detention beds, ICE detention populations nationwide have yet to approach this higher funded level. If federal populations increase towards the higher levels funded for detention beds, there could be upside to our guidance. Consistent with our last guidance, our updated guidance contemplates the continuation of a normalized hiring market for labor with less reliance on temporary incentives, but resulting in higher staffing costs as we continue to increase staffing levels in response to the higher occupancy we are experiencing post-COVID. Our guidance continues to contemplate the expiration of the lease with the State of California and our California City Correctional Center effective March 31, 2024. This facility generated EBITDA of $7.2 million and $25.5 million for the three months ended March 31, 2024, and the 12 months ended December 31, 2023, respectively, and is therefore expected to result in a per share reduction of $0.06 from Q1 to Q2 and $0.15 to $0.16 from 2023 to 2024. Our guidance does not include any other contract losses or any new contract awards not previously announced because the timing of government actions on new contracts is always difficult to predict. With respect to our capital allocation strategy, we expect to repurchase additional shares of our common stock, taking into consideration our leverage, earnings trajectory, stock price, liquidity, and alternative opportunities to deploy capital. Our guidance includes a range of repurchase scenarios at various amounts and at various assumed prices. But we will not likely sustain the pace in Q1 unless we experience a larger increase in populations than we have forecasted, maintaining discipline on our targeted leverage ratio. We also expect to use our cash on hand and cash flow from operations to continue paying down debt, prioritizing debt repayments on our revolving credit facility, which we utilized to redeem the remaining balance of our old 8.25% unsecured notes in April. Given the strength of both our balance sheet and cash flows and newly extended debt maturities, we have considerable flexibility in how we deploy our liquidity and free cash flow, as well as how we balance our capital allocation strategy between debt repayments and share repurchases. Again, our guidance contemplates a range of scenarios associated with debt reduction and share repurchases. We expect AFFO, which we consider a proxy for our cash flow available for capital allocation decisions, to range from $172.8 million to $185.3 million or $1.55 to $1.66 per share, up from our previous guidance of $158.3 million to $175.3 million or $1.42 to $1.57 per share. We expect our normalized effective tax rate to be approximately 29% for the remainder of the year, which after considering the lower effective tax rate for the first quarter equates to an annual effective tax rate of approximately 27%. The full-year EBITDA guidance in our press release provides you with our estimate of total depreciation and interest expense. We are forecasting G&A expenses in 2024 to be slightly higher than 2023. We plan to spend $62 million to $66 million on maintenance capital expenditures during 2024, unchanged from our previous guidance, and $8 million to $10 million for other capital investments, up $1 million from our previous guidance. I will now turn the call back to our operator to open up the lines for questions.

Our first question comes from Joe Gomes of NOBLE Capital.

Damon and David, congratulations on the quarter. I wanted to start by asking about the ICE populations at an overall level. Could you provide more detail about what you've observed in your population, particularly as it declined at the end of the first quarter into the second quarter? What kind of rebound have you noticed since they reached their lowest point?

Yes, sir. So this is Damon. Let me give you a couple of numbers. So as of yesterday, our systemwide population was 10,310. So 10,310 was our systemwide population as of yesterday. In April, let me give you two numbers. On April 1, we were at 9,772, and then on April 20, and I'd say the 20th because that's the last publicly available report for ICE nationwide populations. So on April 20, our system population was 9,208. So coming into the month of April, we were almost at 10,000. We went as low as 9,200 on April 20, and as of today, or I should say yesterday, we were at 10,310. So as you know, and as I said in my comments, again, the last publicly available report for ICE was 34,600 or 34,500. So we don't know what the new numbers are nationally. But our sense is if our populations are going up, likely the nationwide number is going up too.

And just looking through the supplemental, and if I look at the Safety segment, the revenue per compensated mandate is now $102, which is up from the $90 level a couple of years ago. How much more increase do you think you can get out of that? Are you seeing any pushback from your government partners on the steady increase in the revenue per compensated mandate?

Yes, that's a good question. I'll expand on that a bit. First, we've made significant investments in our employees, and we appreciate our state partners for helping us secure salary increases through various state legislatures, allowing us to be reimbursed through per diem increases in our contracts, either during renewals or for new contracts. The labor market appears to be stabilizing, as reflected by a significant drop in vacancy rates and the reduced need for major adjustments in wages. It seems we're moving towards a normal year-over-year increase in this area. For our federal contracts, wage adjustments are mandated, which means we must pay our employees those rates. If wages increase, we are reimbursed dollar for dollar, which is a beneficial aspect of those contracts. Wages tend to rise more slowly in federal contracts compared to state contracts, so we might see notable salary increases through the wage adjustment process in the coming years, leading to meaningful reimbursements. While this may not apply as much to state business, we could see changes in federal contracts over the next year or two as wage adjustments align with labor market trends. What do you think, Dave?

Yes. I believe 2022 was a decent year, and 2023 was even better. Specifically for our state government partners, per diems typically increase on July 1, aligning with the renewal of their fiscal years, making 2023 a positive year for us. As Damon mentioned, we have been recovering a significant portion of the salaries we were providing our staff. Our clients, operating in a unique industry, share similar experiences, and they have noticed the rising demand for salaries within the public sector. These discussions are often difficult since securing budget dollars is a challenge. However, we have found some understanding from them as they recognize the labor market situation. We have successfully obtained per diem increases over the last couple of years. Currently, most states are in legislative sessions, so it's uncertain what will happen on July 1, 2024. Nonetheless, we are actively engaging in discussions, especially in states where we did not receive per diem increases that adequately covered the wages provided in the previous year or two.

Okay. And you mentioned the California City lease has expired here now. Maybe give us a little more update or color on what you're doing there. Who do you think could be a potential partner there and taking that facility if you can come to some type of agreements there? Who are your target customers, I guess, for that facility?

Yes. Thank you for the question. Regarding California City, we believe it presents a strong long-term or midterm solution for the state despite the lease having expired. The state’s needs are evolving, especially since its population has been significantly affected by COVID and is declining. We will maintain open communication with state officials. As we have mentioned before, given our location in Southern California and the Southwest, we recognize that ICE has fluid and dynamic needs. There is considerable discussion both nationally and regionally regarding border security and ICE’s requirements, which may lead to a demand for greater capacity. We see this as a potential fit for the agency when they require more resources, not just in that region. Would you like to add anything to this, Dave?

I think we've mentioned before, both ICE and the Marshals have used that facility before California was in it. So they're familiar with it. They've toured it. We think it would be a good solution for them as well.

Okay. Regarding the monitoring, the ISAP contract is set to expire in about 15 months. Can you share your thoughts on the monitoring ISAP contract? Is it something you plan to pursue again?

Yes, absolutely. That contract is due for rebid and is set to expire in July of next year in 2025. We have the capability, as our Community division has been monitoring for decades. Importantly, no one has worked with ICE longer than we have, so we have a deep understanding of the agency. We have successfully delivered complex, significant solutions for them over the years, such as our facility in South Texas, which is an example of a project within our expertise. We are preparing ourselves for this opportunity and have participated in the procurement in previous years. Our strong relationship with the agency, along with our experience in handling complex projects, positions us well. Additionally, we have a solid track record of innovation and achieving great outcomes. As ICE considers the future of the program and potential changes in performance metrics, we believe we can offer substantial value.

The only thing I'd add there was that reporting and release management RFI last year. We don’t know what it’s going to look like, whether they want the same services that are currently provided under ISAP or whether they're going to expand it like they contemplated under the RRM RFI. We have not seen an RFP, and it hasn’t come out yet. I expect that would come out sometime during the second half of 2024. They're probably still compiling data from the responses to that RFI. It depends on how much money gets appropriated toward that type of monitoring case management program as well. There could be multiple vendors, both profit and non-profit depending on what it looks like. So we're standing ready to see what that RFP looks like, which we’d expect in the second half of this year, and we'll respond accordingly.

And one last one for me, I'll get back in queue. Anything new on state and local opportunities?

Yes, that's a great question. We've been on a strong path lately. In the second half of last year, we developed numerous valuable new relationships, including ones in Wyoming, Hinds County, and Harris County. It's important to mention that many of the opportunities we've secured in the past 6 to 10 months have come from proactive engagement with these partners to better understand their complex issues and challenges. We are excited to have these new partners join CoreCivic. Looking ahead, we closely examine prison forecasts for the next five years. We've previously discussed some of those projections. Excluding the Federal Bureau of Prisons, which we only engage with on the community side rather than safety, our existing state customer base has grown by 30,000 over the last two years. For instance, in Georgia, the population has increased by 3,600, and in Florida, it's around 5,000. States are facing numerous challenges, including issues arising from COVID and facility shutdowns due to staffing or infrastructure problems. As they look to the next 3 to 5 years, they anticipate some population growth, especially if there are reforms in state legislatures. In summary, we are receiving considerable interest from our state partners about their immediate needs and future growth opportunities.

No, I think you covered it, Damon.

Our next question comes from the line of M Marin of Zacks.

I would like to get more information about the Cal City facility. The supplement mentions that it was built in 1999. Have there been any upgrades made? Essentially, I'm asking if you view this facility as a long-term solution for ICE due to its location and your established relationship. Would you need to make any upgrades to the facility to initiate a new contract, or is it ready to go as is?

Yes. Thank you for that question. That's a good one. I would say there's probably some modest improvements we would need to make to it. Again, we've been working with ICE for 40 years. So we know kind of their MO on how they think about physical plant and maybe some modifications they want. Those modifications could be additional office space for government staff, lawyers that are helping support the residents and their legal cases. There are some cases where we do courtrooms. We actually have physical space for judges and court staff to come on site. Obviously, the rule has changed here in the last couple of years with COVID. A lot of that stuff is being done virtually even with the pandemic behind us. So it could be the case where it's a little bit of office courtroom but also maybe space for technology where they can do virtual hearings or such, so a pretty modest investment. But again, we've been doing this for a long time for ICE, so we kind of know what they would want. Obviously, we could be flexible if they've got some unique needs. They've got a certain location. To give you another example, it could be that they want more of a very intensive medical component for chronic care or maybe some infirmary beds. Those could be some adjustments to the medical unit. But anything you'd add to that, Dave?

Yes, California just used it and left the facility in March, so all the systems are current. I don't need to allocate any capital expenditure for those aspects. As Damon mentioned, it really depends on the user since each has distinct requirements, and Damon provided details for ICE. It's challenging to estimate without a concrete opportunity, but it could range from minimal to possibly $15 million to $20 million, or even more, depending on the customer.

But it also seems to me from what you're saying that if some of those modifications were made, it would also have a positive impact on your per diems on the facility. Is that the right way to think about it?

Absolutely. Yes. I mean, we build that into our pricing model and make sure that we get an adequate return for any CapEx that we'd have to put into it.

Our next question comes from the line of James Godman of StoneX Group Inc.

Yes. This is actually Ben Briggs from StoneX. First of all, congratulations on the quarter. Congratulations on being able to raise the guidance and really a strong showing here. So most of my questions, frankly, got addressed. But one that I wanted to dive in a little bit on is, obviously, a lot of the federal government increase in revenue came from ICE and that was driven by some of the immigration issues we've seen in the changes in policy during the year. You also saw a pretty significant increase in state and local revenue. I know that some of that was driven by new contracts that you won over the course of the last year or so. But could you give any insight into if there's any macro drivers driving that increased demand by states and localities? And is any of that additional revenue due to increased headcount at contracts that already existed prior to these new ones being added during the year?

Thank you for that question. Make sure I understand the gist of your question. You're asking about some of the macro drivers that are driving state populations, is that correct?

Precisely, yes.

Got you, very good. Well, I'd point to two things. The first is kind of everything related to COVID. What we saw during COVID on the state populations is that they had the usual behavior of discharges, people getting into sentence, so they would get released from prison. But people coming into prison slowed down pretty dramatically because people that were maybe arrested for a crime and were held in a local jail, their cases were not getting adjudicated because the courts were closed during the pandemic. What we saw from 2020 to 2022 and even a little bit into 2023 is that jail populations were increasing dramatically around the country. In fact, I think in the last quarter or maybe two quarters ago, I shared the metric of a 22% increase in jail populations nationally over two years. That's every city or county that operates the jail. We think that's a record. We don't think we have ever seen a percentage increase like that in a short period of time. And again, what the data indicated, but also what we heard anecdotally is that courts were closed, people were arrested, and cases were not getting adjudicated, swelling populations at the local level, which meant that they were not getting ultimately convicted. Now what we're seeing is courts are back to a natural kind of regular order. People are going through the process, getting the cases adjudicated, and now the population is coming pretty dramatically, pretty quickly into the state level. What the states had done during COVID since populations were down, they either took offline actual units or in some cases, closed actual prisons because they may be old, antiquated, hard to staff, maybe all of the above. We’re hearing anecdotally from a lot of the jurisdictions that they don’t want to reopen those units or facilities through all the reasons I just said. Their footprint, basically their size or their capacity in their system shrunk. We think that's, again, why we're getting a lot of quick engagement from our partners, either existing or new partners that they need help and they need it quickly. Again, I’d point to Montana and Idaho, a couple of jurisdictions for that. The second piece, which is kind of this point going forward is that there has been a fair amount of activity both this year and really in the last two years within state legislatures on adjustments to reform. Most states do a five-year forecast, I'm sure we'll get another set of new forecasts after all these sessions are adjourned around various state legislatures around the country. The data indicates that the next three to five years are looking at pretty meaningful increases in most, if not all states.

Yes. No, I think at a macro level, state populations, if you back out the facility in Oklahoma, the transition from one that we operated to one that we leased, if you back that one out, our populations were up a few percent from Q1 '23 to Q1 '24. Going back to the discussion we had earlier about wage increases and getting reimbursed through per diem increases. It's a combination of those driving the revenue. Certainly, as Damon mentioned more thoroughly, the demand and challenges our state customers are facing are getting more intense.

That's incredibly helpful. One follow-up question is that as states and localities require more space, I know the U.S. Marshals Service has historically utilized both state and local facilities to meet their daily needs. Will states and localities find themselves in a position where they lack sufficient space to lease to the U.S. Marshals Service, and could that present future opportunities for your company?

Yes, that's a great question. The short answer is absolutely. We are hearing about this not only through anecdotes but also in our system, where some jurisdictions are running out of space. Additionally, the federal government, to their credit, has raised their operational standards and requirements, which we've seen reflected with ICE as well. Through our partners, the Marshals Service and ICE, we've learned that some local agencies lack the capacity for various reasons and may have given up, stating they cannot comply with the standards these agencies require for the populations in their cities or counties. Both of these factors are creating opportunities and demand for us to utilize capacity in our system, which we view as a badge of honor. We've been complying with these requirements and standards for years, and we believe it's the right approach.

That's very helpful. And then last one for me is just regarding labor. I know that temporary labor usage has been an issue. It seems like it's less of an issue now as you guys are getting more staffed up. Would you say that we're back to a run rate as far as temporary labor is concerned? And would you consider yourself fully staffed as far as permanent labor is concerned? Or is there potentially a little bit more hiring to do?

Good question. I'll collaborate with Dave on this one. I would say we're close regarding the second part of your question, but not quite there yet. We have made significant progress with permanent staff over the last 12 to 18 months. As for temporary staff, we've mentioned improvements upfront, but to be honest, it's probably not quite where we were before COVID.

Yes. There are a few facilities where we're still deploying temporary staff, but certainly not the magnitude it was throughout 2023 or even '22. We still do continue to incur some of those temporary incentives for that staff. I would expect, as the year goes by, we will have higher staffing levels but less reliance on temporary staff. It's a continuation of that trend that we've been seeing over the past several quarters.

Our next question comes from the line of Kirk Ludtke of Imperial Capital.

Damon, David, Mike, congratulations on the quarter and the refinancing. I have a couple of follow-up questions regarding California City. You mentioned that this used to be a nice Marshals facility. The current ICE population was 34,500, and it's likely higher now. At what level of national ICE population do you think ICE would consider reopening an idle facility?

Yes, good question. The short answer is that the population is likely to be higher than it is today. They have funding of 41,500 for the rest of this year, which is a significant increase from last year's funding of 34,000. Last year, they managed to reach a higher population simply due to some reprogramming mentioned by the sector home security last summer. It's noteworthy that they are currently at 41,500. Prior to a recent dip, populations were generally between 38,000 and 39,000. While there may have been some minimum guaranteed beds not occupied in other jurisdictions, once we account for actual population and some contracted beds that are not currently in use, they are effectively at full capacity around that 41,000 mark. Therefore, they are likely to require additional funding, which could potentially occur this year. In previous years, they have reprogrammed for specific needs at the Southwest border, so we will closely monitor developments this year and into the next. I should also mention that there is strong bipartisan support for a higher population number. A supplemental proposal that passed the Senate in February, albeit not the House, proposed a capacity of 50,000 to 55,000 beds, indicating that there is support for additional capacity. We will need to keep a close eye on what transpires for the remainder of this year.

Yes. I still think there is a chance. We have one facility where they could consolidate populations from public sector facilities and move it to a private sector facility. That would not require new funding because they're already using that funding at multiple facilities. I think there's a chance that happens this year. It's not in our guidance, but something we continue to discuss with ICE and continue to monitor.

That's a good point. I should highlight that regarding the previous question about the Marshals Service. ICE is still facing similar pressures. Local jurisdictions, for various reasons, are unable to support the agency's mission due to limitations in capacity or standards. This is an important consideration, as we've seen in previous years where they might say, "Let's consolidate populations at a facility and close down local facilities that are fragmented and distributed over long distances from the agency's office."

That's helpful. I guess the other option might be that California could want it for their own purposes. I know the population there is decreasing. What is the likelihood of them having it in the state of California?

Well, again, they were there for a decade. We know they really, really like the facility. I mean, it was one of the newest, most modern facilities in the state and continues to be. We did some pretty meaningful improvements over the physical plant during a period. I think based on not only their populations but maybe some of the uniqueness they want related to the environment, with programs and other services. The private sector can deliver that faster than any state agency can. If there's continued kind of innovation in their part where they want a unique mission, especially for unique programs or services, that could be a good location for them, because I know they've done some work on the St. Clinton, focusing on the northern part of the state. Cal City in the southern part of the state could be another complementary facility for some of that programming improvement.

And it may take a better budget situation in the state because that may be an impediment right now too.

I appreciate that. Yes, I would think this is materially younger than the average age of the facilities in California. Is that fair to say?

That's super fair to say.

That's helpful. You mentioned the border security bill that didn't pass but had significant support. What are your thoughts on the potential implications for alternatives to detention if that bill had passed?

Good question. I don’t recall any meaningful adjustments on ATD under that bill. The focus seems to be on additional detention capacity. But I think for now, it seems like that focus has shifted here in the last year or so toward more detention capacity.

I don’t. We saw an article yesterday about potential action on bringing back the supplemental. I think that would be focused more on detention than it would be on ATD.

Our next question comes from the line of Brian Violino of Wedbush.

Just to kind of ask the expense question in a different way. I think in the past, you've talked about a 25% NOI margin in the Safety and Community segments combined being sort of the target range going back to be pretty dynamic. You were just under 24% this quarter. It seems like you're seeing some positive trends on the expense side. Just wondering if you have an updated view on when we might be able to get to that level on a sustainable basis? And if there's possible upside given the relief on the labor market that you've seen?

Yes, I'll take that one, Brian. Thanks for the question. Yes, we have made a lot of good progress. The first quarter is usually one of our weakest due to the reset of unemployment taxes, which impacted margins. Moving forward, as I mentioned earlier, we still need to hire more to return to pre-pandemic staffing levels. This will be partially offset by temporary incentives we might incur. We are committed to achieving 25% margins in the Safety and Community segments. Whether we can reach that in 2024 will depend on occupancy, as that significantly impacts the model when occupancy increases. Achieving closer to 80% occupancy will help us reach the 25% margin faster. So, while I'm not certain we'll achieve it this year, it's a possibility.

I'm showing no further questions at this time. I would now like to turn it back to Damon Hininger, Chief Executive Officer, for closing remarks.

Thank you so much. And before we adjourn, let me just also do a public service announcement. Our newest ESG report is available on corecivic.com. We just released that here in the last couple of weeks. It's our sixth consecutive year doing an ESG report. Take a few minutes and check it out. We've completely reformatted it. More importantly, it shows a great window into our organization on what we're doing on the human rights front within our facilities, how we're working on talent acquisition, and most notably, the outcomes that we're producing for the people in our care through programs, including academic and vocational programs. Take a few minutes, browse through it. It shows again a great window into our organization and the great work our team does each and every day. So with that, thank you so much for your time and attention on our call today. Thank you to our investors for your trust and support of the company. And with that, we're adjourned. Thanks, everyone.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.