CoreCivic, Inc. Q4 FY2024 Earnings Call

Thank you for standing by. Welcome to the CoreCivic Fourth Quarter 2024 Earnings Conference Call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during the session, you'll need to press star one on your telephone. If your question has been answered, as a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Michael Grant, Managing Director of Investor Relations.

Thank you, operator. Good morning, everyone, and welcome to CoreCivic's fourth quarter and full year 2024 earnings call. Participating on today's call are Damon T. Hininger, CoreCivic's Chief Executive Officer, Patrick Swindle, CoreCivic's President and Chief Operating 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 fourth quarter of 2024 as well as financial guidance for the 2025 year. We will also discuss developments with our government partners and provide you with other general business updates. During today's call, our remarks, including all 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 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 CEO, Damon T. Hininger.

Thanks, Mike. Good morning, and thanks everyone for joining us for CoreCivic's fourth quarter 2024 earnings call. On this morning's call, we will discuss our latest operational results and update you on the latest developments and opportunities with our government partners. Following our opening remarks, we will turn the call over to our CFO, David Garfinkle, who will provide greater detail on our fourth quarter and full year 2024 financial results, as well as introduce our 2025 financial guidance. Dave will also provide an update on our capital structure initiatives, including progress on our leverage target and share repurchase program. I'm going to tag team to open your remarks today with our Chief Operating Officer, Patrick Swindle, who was also named CoreCivic's President in December 2024. Patrick has been with CoreCivic for seventeen years in positions of increasing responsibility within finance and operations. He has excelled as our Chief Operating Officer and Chief Corrections Officer for the past seven years. Patrick is an excellent problem solver and brings experience and a great strategic and financial perspective to the president position. We truly look forward to his leadership during what we anticipate to be a period of rapid growth and opportunity. So let me start with this. I've worked at CoreCivic for thirty-two years, and this is truly one of the most exciting periods in my career with the company. Having just wrapped up a strong 2024, we're anticipating significant growth opportunities, perhaps the most significant growth in our company's history over the next several years. We believe CoreCivic is exceptionally well positioned operationally and financially to meet what we expect to be a sharp acceleration in demand from our partners, particularly our key federal partners, Immigration and Customs Enforcement or ICE, and the United States Marshals Service. The change in presidential administration on January twentieth has ushered in significant policy and legislative changes that directly impact our business. And I would like to run through a few of those that are the most significant. Upon inauguration, President Donald Trump issued nine executive actions intended to secure the borders of the United States and remove illegal immigrants. These initial orders included the declaration of a national emergency on the southern border aiming to effectively shut down the border to illegal immigration. One notable executive order issued on January twentieth was titled 'Protecting the American People Against Invasion.' In this EO, the president calls for the federal government to faithfully execute the immigration laws of the United States, including the removal of aliens, particularly those who threaten the safety of the American people. Included in this EO is language calling on the Secretary of Homeland Security to take all appropriate action and allocate all legally available resources or establish contracts to construct, operate, control, or use facilities to detain removable aliens. The Secretary of Homeland Security further shall take all appropriate actions to assure the detention of aliens apprehended for violations of immigration law pending the outcome of their removal proceedings, or their removal from the country, to the extent permitted by law. Effectively, this EO increases interior enforcement by ICE, and directs the Department of Homeland Security to detain those arrested by ICE pending their removal. The Lincoln Riley Act was passed by the Senate with bipartisan support on January twentieth and signed into law by President Trump on January twenty-ninth, making it the first law of the current Congress. The act was named for Lincoln Riley, the nursing student who was murdered on the University of Georgia campus by an undocumented immigrant with a history of arrest and releases. The Lincoln Riley Act requires ICE to detain certain non-U.S. nationals who have been charged, arrested, or convicted of crimes, including burglary, theft, assault of a law enforcement officer, as well as killing or injuring another person. ICE has estimated that this act could require sixty thousand to a hundred and ten thousand additional detention beds. This obligation is not specifically funded. However, since this requires mandatory detention, funding will have to be secured shortly. Also, on January twentieth, President Trump reversed a January twenty-six, 2021, executive order that had directed the Justice Department, which includes the Federal Bureau of Prisons and the United States Marshals Service, to not renew direct contracts with privately operated criminal detention facilities. The administration had the authority to waive its own order where no alternative capacity is available, and it often did so over the past four years, renewing a number of significant Marshals' contracted facilities. Still, the prior executive order did result in a closure of two CoreCivic facilities that were previously contracted to the Marshals: our West Tennessee Detention Facility in Mason, Tennessee, and our facility in Leavenworth, Kansas, now named the Midwest Regional Reception Center. We enjoy a strong relationship with the United States Marshals Service, our second largest customer, and it is very helpful to both parties to have the tool of direct contracting available again. The Marshals Service, we believe, prefers the level of service the private sector can provide in relation to what they receive from local county jails, and we look forward to renewing discussions about those and other locations with them. We expect increased demand to come from the United States Marshals, which could require an additional ten thousand or more beds over the next several years, based on past usage. Finally, as for the Bureau of Prisons, one item of note. During her Senate confirmation hearing, Attorney General Pam Bondy emphasized the importance of fully implementing the First Step Act, a law that was passed with strong bipartisan support in 2018. Specifically, she referenced the need to increase capacity above their twelve thousand current community placements. The First Step Act allows federal adults in custody, especially in minimum and low-security facilities, to earn time credits through meaningful programs, reducing their sentences, and expanding pre-release custody options like halfway houses or home confinement. The law is intended to significantly increase the population in community-based custody, but the Bureau of Prisons has faced criticism and lawsuits for delays in the implementation. Because of this, I think the BOP will lean on the private sector to fill this gap in implementation. For over twenty years, we have been a trusted partner to the BOP for residential and home confinement community services. We believe we are well positioned to help accelerate the First Step Act implementation with our cost-effective available bed capacity and industry-leading reentry technology and services. Regarding new contracts, we are engaged in active conversations with ICE and the United States Marshals Service in preparation for their increased secure bed needs. This has included the submission of multiple proposals of our capabilities, tours of existing facilities, and anticipated cost estimates. Additionally, as noted in our press release, we are leaning forward on expenditures for facility CapEx and transportation assets with a current estimated range of expenditures between forty to forty-five million dollars. For ICE, most new contracts may come after funding is established via a congressional budget agreement, and the timing and structure of those contracts are still to be determined. That said, it is possible that contracts could precede a congressional budget agreement. We're still just a few weeks into the administration, so stay tuned for more on ICE contracting. One final comment on ICE, if I may. The detention beds supplied by the private sector are the least expensive, most humane, most efficient logistically, have the highest audit compliance scores in the system, and are readily available. Additionally, with forty-two years of operating experience with ICE, the private sector beds are the least likely to be legally challenged. Looking at specifically previously publicly identified opportunities, little has changed since our discussion last quarter, as contracting activity typically is interrupted around the handoff from one administration to the next. In order to incorporate the guidance of the new administration, we only have one minor update that we mentioned last quarter to an RFP issued in June of 2024 for up to six hundred detention beds in the state of New Jersey, which would expand their capacity in the state. As a reminder, we have responded with our Elizabeth Detention Facility in Elizabeth, New Jersey. ICE has extended our existing contract there several times, now through the end of February, as it continues to evaluate proposals. We continue to believe that the Elizabeth Detention Facility responds well to ICE's needs in that market where bed space is scarce. With respect to state opportunities, during January, we announced that we have been awarded a new management contract with the state of Montana to expand the geographical range of CoreCivic facilities that can serve the state of Montana east of the Mississippi. We expect to care for two hundred forty inmates at our two thousand six hundred seventy-two bed Tallahatchie County Correctional Facility in Tuckahoe, Mississippi, under this contract commencing during the first quarter of 2025. The base term of the new management contract with the state of Montana, which is for an unspecified number of inmates and therefore could grow beyond two hundred and forty, runs through December of 2026, and contract extensions could run as long as seven years. During January of 2025, we also received an additional one hundred and twenty Montana inmates at our eighteen hundred and ninety-six bed Saguaro Correctional Facility in Eloy, Arizona, under an existing contract with the state of Montana. And those beds bring us close to that facility's capacity. We enjoy a strong partnership with Montana, and we appreciate the trust they put in our company and our facility teams. CoreCivic remains in active dialogue with several other existing state partners as well as new state partners that could result in additional populations including the possible use of one or more idle facilities. These opportunities could manifest as early as 2025. Now, I'll pass it over to Patrick Swindle for an overview of the fourth quarter.

Thanks, Damon. I'll start with a high-level overview of our fourth quarter and full year financial results. Overall, CoreCivic's financial results exceeded our internal forecast and annual assessment helped by tight cost discipline and higher occupancy. Occupancy for the quarter was seventy-five point five percent, marking our highest occupancy level since the first quarter of 2020, right at the start of the COVID-19 pandemic. In the fourth quarter, we generated revenue of four hundred and seventy-nine point three million dollars, a two percent reduction compared with the prior year quarter. Excluding the South Texas Family Residential Center, which closed during the third quarter, and the California City Correctional Center, where the lease ended in March, underlying revenue growth increased eight percent against the prior year quarter. For the full year, CoreCivic generated two billion in revenue. The fourth quarter of 2024 adjusted EBITDA, which excludes expenses associated with debt refinancing, gains on the sale of real estate, and asset impairments, was seventy-four point two million, down from ninety million in the fourth quarter of 2023. For the full year, adjusted EBITDA increased to three hundred and thirty point eight million from three hundred eleven million dollars. The decrease in adjusted EBITDA in the fourth quarter was primarily attributable to the contract termination at the South Texas Family Residential Center and the expiration of the lease with the State of California at the California City facility, partially offset by an increase in occupancy throughout the remainder of our portfolio combined with a general reduction in temporary labor incentives and related costs. Federal partners, primarily Immigration and Customs Enforcement, the US Marshals Service, comprised almost exactly half of CoreCivic's total revenue in 2024. During the fourth quarter of 2024, revenue from our federal partners declined twelve percent compared with the fourth quarter of last year. Revenue from ICE, our largest partner, declined twenty-two percent when comparing the fourth quarter 2024 versus the prior year quarter. However, excluding the South Texas Family Residential Center, revenue with ICE increased five percent versus the fourth quarter of 2023, a rate indicative of ICE's continued detention capacity needs even during a political transition period. Our fourth quarter revenue with the US Marshals Service grew by one percent. Excluding South Texas, overall federal revenue for CoreCivic in the fourth quarter of 2024 increased three percent year over year. Now I'd like to discuss ICE's usage of detention capacity nationally across all facilities. As you will recall, in a bipartisan funding bill passed in March 2024, Congress provided funding for forty-one thousand five hundred detention beds. During the fourth quarter, ICE's usage of detention beds was within a range of thirty-eight to forty thousand, up slightly from thirty-six thousand to thirty-eight thousand in the third quarter. The most recently published ICE detention total was thirty-nine thousand one hundred and sixty-three on January twenty-fifth, 2025, which is just after President Trump's inauguration. From what we are seeing so far, we believe that the total ICE detention population is holding about steady with more arrests from ICE's interior enforcement operations offsetting declining immigration arrests from Customs and Border Patrol at the border. Over the next month or two, we would expect these accelerated rates of interior enforcement arrests to result in capacity limitations at the forty-one thousand five hundred funded beds level. CoreCivic's fourth quarter revenue from State Partners and our Safety and Community segments grew six point four percent versus the prior year quarter. This increase is a result of higher per diem rates and higher occupancy from our state government partners, as well as contributions from new state contracts with Wyoming and Montana signed in the fourth quarter of 2023 and the third quarter of 2024. These new contracts contributed one point three percent of that growth. As Damon mentioned in his remarks, we have added another contract with Montana during January 2025. We've already received one hundred and twenty inmates at our Tallahatchie facility in Mississippi and anticipate receiving additional inmates in the near future. The transfer and intake processes have gone smoothly, and we are pleased to expand our relationship with Montana to boost our Tallahatchie facility to a higher level of occupancy. Within our Safety portfolio, the greatest operational improvements have come in facilities serving ICE. Much of this operational improvement has related to improved staffing levels, which have allowed us to reduce or eliminate expensive short-term labor measures that were necessary during the pandemic. Permanent, locally hired staffing improves facility performance in safety, program outcomes, and audit performance. It is also the most cost-effective and stable approach to staffing our facilities. For example, our La Palma Correctional Center in Eloy, Arizona, experienced meaningful improvements in performance as our investments and work directed at local hiring helped eliminate the facility's reliance on temporary labor resources. I'm also excited to share that Rusty Washburn, the warden of La Palma, was recently recognized as Warden of the Year by the North American Association of Wardens and Superintendents or NAWS. To round out our discussion of fourth quarter 2024 revenue, local revenue in our Safety and Community segments, which is revenue generated from contracts with county governments, increased twenty-six percent. This growth reflects new management contracts signed in the second half of 2023 with Hines County, Mississippi, and Harris County, Texas. Both populations are housed at our Tallahatchie County Correctional Facility located in Tuckahoe, Mississippi. I'd like to thank Warden Luis Rosa and the whole team at the Tallahatchie facility for all their efforts in satisfying the needs of seven different government partners, including four new partners at this facility over the past two years. CoreCivic's overall occupancy in our Safety and Community segments for the fourth quarter of 2024 increased to seventy-five point five percent from seventy-four percent in the prior year period. This growth in occupancy stems from both higher use of existing contracts, particularly with ICE, and greater utilization of the four new contracts signed in the second half of 2023 as well as the new contract with Montana at Saguaro signed in the third quarter of 2024 that we previously mentioned. From the fourth quarter of 2023 to the fourth quarter of this year, occupancy in our Safety segment increased from seventy-four point seven percent to seventy-six percent, while occupancy in our Community segment improved from sixty-three point seven percent to sixty-eight point eight percent. As we have mentioned in the past, our operating model is significantly embedded with operating leverage to changes in occupancy. And this was a factor in our margin performance during the fourth quarter. Throughout 2024, our ongoing labor attraction and retention efforts generated operational and financial improvement following the very challenging labor markets experienced as a result of the COVID-19 pandemic and its immediate aftermath. Broadly, labor inflation has now returned to relatively normal levels and labor markets in most of our geographies are displaying stability. We've invested significantly in our frontline employees and implemented human capital attraction and retention strategies. I'm excited to report that our staffing has improved to nearly pre-pandemic levels and that has allowed us to reduce elevated spending on temporary staffing expenses. Maintaining strong staffing levels in our current base facilities is particularly important as we now look forward to higher demand under existing contracts and the possibility of future activations. In short, improved staffing positions us well operationally to maintain the trust of our partners to manage their higher population needs and respond swiftly to new opportunities. Our Safety segment, which includes our large higher security level prison and detention facilities, is CoreCivic's largest segment, having provided ninety-three percent of 2024 total revenue. Net operating income for our Safety segment fell three percent during the fourth quarter of 2024, reflecting the termination of the South Texas facility, offset by cost management efforts and occupancy gains elsewhere. For the full year, Safety's facility net operating income increased six percent. CoreCivic's Community segment comprises twenty-one residential reentry facilities serving the Federal Bureau of Prisons as well as various state and county governments. The Community segment facilities are typically smaller than our Safety facilities and are engaged primarily in the vital work of preparing individuals for successful reentry to their communities after a period of incarceration or as an alternative to incarceration. CoreCivic's electronic monitoring and case management services are also included in our Community segment. As mentioned, occupancy in the Community segment increased in the fourth quarter of 2024 compared with the fourth quarter of 2023 due to the sale in the third quarter of 2024 of an idle residential reentry facility. Net operating income of six point three million dollars in this segment declined one million dollars versus the fourth quarter of last year. For the full year, community facility net operating income increased slightly to twenty-one point seven million dollars. Similar to our Safety segment, our Community segment facilities have been able to normalize their staffing levels and reduce dependence on temporary solutions. We remain positive about the occupancy outlook for the Community segment as more of our government partners, including the BOP, return their focus to successful reentry in order to curb the recidivism challenge. To conclude this business update, we believe the longer-term macro environment for federal, state, and local business remains positive, particularly as we enter a new presidential administration that is emphasizing public safety and immigration priorities. Our government partners face complex challenges, including capacity limitations, aging, expensive to maintain and expensive to build facilities, persistent staffing challenges, and populations that are increasing in numbers and evolving in their needs. Conversations with our partners highlight the growing need, as do other metrics, including jail backlogs and prison population forecasts. 2025 is likely to bring significant opportunities, particularly on the federal side, and these opportunities may require activations of several of our idle facilities. CoreCivic has already taken proactive steps, including capital improvements, preparatory maintenance, and labor force readiness to prepare facilities for activation. From an operations perspective, CoreCivic's activation team has already been busy at a number of our facilities in anticipation of potential new contracts with ICE or other partners. CoreCivic's team stands prepared to start hiring and training as soon as our government partners are ready. When we believe the need is clear, we do not wait for a contract award to begin preparation. Also, just as important as facility activations are likely to be in the next several years, we recognize that growth only works if our foundation of existing facilities remains strong. With that, we are continuing to commit the necessary resources to fortify operations at our current facilities and build on the operational progress we have made in areas of staffing, contraband intervention, and program outcomes. I'll turn the call over to David Garfinkle, who will provide a detailed look at our fourth quarter financial results, our capital market activities, and assumptions included in our 2025 financial guidance.

Thank you, Patrick, and good morning, everyone. In the fourth quarter of 2024, we generated GAAP net income of seven cents per share, including a penny per share for a gain on sale of real estate assets. Excluding this special item, adjusted EPS during the fourth quarter was fifteen cents, exceeding average analyst estimates by six cents per share. Normalized FFO per share was thirty-nine cents during the fourth quarter of 2024, exceeding average analyst estimates by five cents per share, and adjusted EBITDA was seventy-four point two million dollars, exceeding average analyst estimates by seven point nine million dollars. A decrease in adjusted EBITDA from the prior year quarter of fifteen point eight million dollars and decreases in adjusted EPS of seven cents and normalized FFO per share of six cents resulted from the termination of our contract with ICE at the South Texas Family Residential Center effective August ninth, 2024, and a lease expiration with the state of California effective March thirty-first, 2024, at our California City Correctional Center. These terminations accounted for a decrease in facility net operating income of fifteen cents per share from the prior year quarter. These reductions were partially offset by higher occupancy from state and local partners, as well as from ICE across the remainder of the portfolio. Decreases in interest expense, a lower effective tax rate, and fewer shares outstanding also contributed to increases in per share earnings aggregating approximately four cents per share. Federal revenue in our Safety and Community segments decreased thirty-two point eight million dollars from the fourth quarter of 2023 to the fourth quarter of 2024, including a reduction in management revenue at the South Texas facility of thirty-nine point one million dollars. So excluding this facility, federal revenue in our Safety and Community segments increased six point three million dollars or two point eight percent. State revenue in the Safety and Community segments increased twelve million dollars or six point four percent from the fourth quarter of 2023 to the fourth quarter of 2024, which included revenue from new contracts with the states of Wyoming and Montana, awarded in the fourth quarter of 2023 and the third quarter of 2024. We expect our state revenue to further increase from another new contract award from the state of Montana we announced last month, with one hundred and twenty inmates having already arrived at our Tallahatchie County Correctional Facility in Mississippi. Local revenue in our Safety and Community segments increased two point seven million dollars or twenty-six percent from the fourth quarter of 2023 to the fourth quarter of 2024, primarily resulting from new contracts with Hines County, Mississippi, and Harris County, Texas, both awarded in the second half of 2023. Revenue in our Property segment declined seven point four million dollars, primarily due to the aforementioned expiration of the lease at our California City facility. Operating margin in our Safety and Community facilities combined was twenty-three point six percent in the fourth quarter of 2024 compared to twenty-four point four percent in the prior year quarter. The decrease in our operating margin was due to the termination of the ICE contract at the South Texas facility. As mentioned last quarter, the margin at the South Texas Family Residential Center was higher than the portfolio average due to the size and scalability of expenses and due to the unique design and specialized services we provided at the facility. Excluding the South Texas facility, operating margin was twenty-two point eight percent in the prior year quarter. The increase in our operating margin excluding the South Texas facility was due to an increase in occupancy from seventy-three percent to seventy-five point five percent for our Safety and Community segments combined, and a reduction in certain operating expenses. During the fourth quarter, we were able to further reduce registry nursing, temporary wage incentives, and travel, all related to labor market pressures that have normalized over the past several quarters. These three expense categories declined by eight point three million dollars from the fourth quarter of 2023 and during the fourth quarter of 2024, at levels comparable to pre-pandemic levels. Turning next to the balance sheet. During 2024, we repaid ninety-five million dollars of debt, net of the change in cash, including seven point two million dollars repaid in the fourth quarter. In recognition of our earnings outlook and based on our confidence in the business, during the fourth quarter, we resumed share repurchases under our three hundred and fifty million dollars share repurchase program, which we had deprioritized in June upon receipt of the contract termination at the South Texas Family Residential Center. During 2024, we repurchased sixty-eight point five million dollars of our common stock, including nine million dollars in December. Since our share repurchase program was announced in May 2022, through December thirty-first, we have repurchased fourteen point five million shares of our stock at a total cost of one hundred and eighty-one point one million dollars or an average price of twelve point four seven dollars per share. As of December thirty-first, 2024, we had a hundred and sixty-eight point nine million dollars available under the board authorization. Our leverage measured by net debt to adjusted EBITDA was two point three times using the trailing twelve months ended December thirty-first, 2024. As of December thirty-first, we had a hundred and seven million of cash on hand and an additional two hundred and fifty-seven million dollars of borrowing capacity on our revolving credit facility, providing us with total liquidity of three hundred and sixty-four million dollars. We have no debt maturities until 2027 when two hundred and thirty-eight point five million dollars of senior unsecured notes mature. Moving lastly to a discussion of our 2025 financial guidance. We expect to generate diluted EPS of forty-eight cents to sixty-one cents and FFO per share of one point three seven dollars to one point five zero dollars. Our guidance assumes steady increases in federal populations throughout 2025, assuming higher utilization of existing contracts. As a reminder, compared with 2024, our 2025 guidance includes a collective per share reduction of forty cents from 2024 resulting from the termination of the contract at the South Texas Family Residential Center effective August ninth, 2024, and the lease termination of the California City Correctional Center, effective March thirty-first, 2024. Our guidance includes some expenses in anticipation of higher populations. Although consistent with past practice, our guidance does not include the impact of new contract awards because the timing of government actions on new contracts is always difficult to predict. Based on immigration policies of the new administration, as well as newly enacted legislation requiring the utilization of more detention for certain criminal violations, we expect new contracts to require the activation of one or more of our idle facilities. We currently own nine idle correctional and detention facilities that have over thirteen thousand available beds. Although we can provide no assurance, activations could also include the South Texas Family Residential Center, which is owned by a third party. We will revise our financial guidance throughout the year as new contracts are signed. The activation of an idle facility generally requires four to six months to hire, train, and prepare the facility to accept residential populations, which results in substantial startup expenses before we realize additional revenue. To the extent any new contract requires the activation of an idle facility, our guidance will likely be negatively impacted by these startup expenses unless awarded in the very short term with ample time to generate sufficient EBITDA to offset our startup expenses in the calendar year. Therefore, any idle facility activations this year would likely be more favorably impactful in 2026. Activating an idle facility is a complex and fluid process. We generally estimate startup expenses to be four thousand dollars to six thousand per bed for the startup period before we are able to accept residential population. Positive EBITDA and cash flows occur at approximately fifty to sixty-five percent occupancy depending on the contract structure. We plan to spend sixty million dollars to sixty-five million dollars on maintenance capital expenditures during 2025 compared with sixty-three point five million dollars in 2024 and six million dollars to seven million dollars for other capital expenditures compared with seven million dollars in 2024. Even though our guidance does not include any new contract awards, our 2025 forecast also includes forty million dollars to forty-five million dollars of capital expenditures associated with potential idle facility activations in order to prepare these facilities to quickly accept residential populations if opportunities arise, as well as to provide transportation services. We review our activation plans frequently and could decide to incur additional capital expenditures in anticipation of additional activations if we have better visibility on specific needs and if the lead time to complete the capital expenditures exceeds the period needed to hire, train, and prepare a facility to accept residential populations. We estimate capital expenditures to reactivate an idle facility of two thousand five hundred dollars to five thousand dollars per bed depending on how long a facility has been idle. Although we have seen an increase in M&A opportunities in our core business, our guidance does not include any M&A activity. However, we could deploy additional capital for a tuck-in acquisition where we believe cash flows are sustainable over the long term and where returns justify the capital deployed. Our 2025 guidance contemplates staying within our targeted leverage of two and a quarter times to two and three quarters times. However, as mentioned, our guidance does not include the reactivation of any idle facilities, which could result in an increase in our leverage during the startup period. Our guidance also does not contemplate any share repurchases beyond those completed today or M&A activity. Accordingly, we could temporarily exceed our leverage target in the short term, maintaining focus on our leverage ratios, balancing the use of our free cash flow between reducing our debt and modifying the pace of our share repurchases, taking into consideration our earnings, stock price, liquidity, and alternative opportunities to deploy capital, and would expect to naturally achieve and sustain our targeted leverage over the medium and long term. We are entering a unique period that could result in significant growth in earnings and cash flows. Our balance sheet and cash flows remain strong, with low leverage and no near-term debt maturities and readily available bed capacity, positioning us well to take advantage of opportunities in the marketplace. We expect adjusted funds from operations or AFFO, which we consider a proxy for our cash, to be between one hundred and forty-eight point five million and one hundred and sixty-five point five million for 2025. For modeling our quarterly results, as a reminder, compared to the fourth quarter, Q1 is seasonally weaker because of two fewer days in the quarter, higher utilities, because we incur approximately seventy-five percent of our unemployment taxes during the first quarter, resulting in a collective four cents per share decline from Q4 to Q1 and negatively impacting our operating margins. We expect our normalized annual effective tax rate to be twenty-five percent to thirty percent with a lower rate in Q1 compared with the other quarters. 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 2025 to be between one hundred and forty-five and one hundred and fifty million dollars. I will now turn the call back to the operator to open up the lines for questions.

Certainly. And our first question for today comes from the line of Joseph Gomes from Noble Capital. Your question, please.

Good morning. Thanks for taking my questions. Nice end to the year. Can you guys hear me?

Yes.

So, Damon, first question I wanted to look at big picture. What total capacity do you think ICE might need with all the actions that are going on, and what impact, if any, do you see for some of the other alternatives that have been put out in the press, Guantanamo, El Salvador, idled government prisons, in terms of what demands might be for the private sector?

Hello? I believe our speaker line is currently muted. You'll need to unmute at this time.

Again? Great. We can hear you now. Thank you for that, Joe. Can you hear me okay?

I can hear you.

Very good. Well, good morning again, my friend. I heard your question completely. So let me give you the answer. We've been talking to members of the transition team and parts of the administration daily since the election in November. One thing that's very clear to us is that there is a very strong focus on detention. You're seeing that play out in the press, and spokespeople for the administration are talking about that. The need for additional capacity in detention is a key focus. On the bed number question, this has been a little fluid, but in the last two to three weeks the numbers have been circling in a close range. One number we've heard is about one hundred thousand beds for enforcement operations, both on the southwest border and for interior enforcement. The other number, more recent, relates to the Lincoln Riley Act. We've heard a range of about sixty thousand to a hundred and ten thousand beds needed for that requirement, which mandates detention for certain individuals arrested for certain crimes. Combining those, the range on needed capacity could be one hundred thousand to two hundred thousand beds. If you want a more precise range, it feels like one hundred fifty to two hundred thousand is where they may end up. That will be driven by the budget. The Senate released some detail about a two-bill approach for reconciliation, with one bill focusing on border security, defense, and energy. The detail released in the last few days proposes roughly one hundred and seventy-five billion dollars for border security in that reconciliation approach. To put that in perspective, the current funding budget for the current fiscal year is nine point six billion, which covers forty-one thousand beds. So nine point six billion is the current run rate for ICE for forty-one thousand beds. The proposed one hundred and seventy-five billion in the reconciliation materials is a significant increase. If bed counts were one hundred fifty to two hundred thousand, that funding level would be consistent with those needs. On alternatives such as Guantanamo Bay, El Salvador, or soft-sided structures, we believe our value proposition is superior across several factors. First, cost: we estimate that operating Guantanamo would be five to ten times more expensive than private sector beds, and soft-sided structures two to three times more expensive. Second, humane conditions: our facilities meet national requirements and are operated in a way that is humane. Third, logistical efficiency: our facilities are located in the U.S. near ports of entry and airports, unlike overseas alternatives. Fourth, audit performance: we are heavily audited and have high compliance scores. Fifth, availability today: we have capacity available immediately. Sixth, legal risk: with forty-two years of experience, the private-sector beds are least likely to face legal challenges. Regarding our specific capacity, we've submitted a proposal to ICE for twenty-eight thousand beds. That total includes existing facilities with available capacity, vacant facilities that can be activated quickly, surge capacity above rated capacity in some locations, and third-party capacity such as the South Texas facility operated by Target. Dave will touch on margin opportunity, but at a high level, twenty-eight thousand beds could imply roughly one and a half billion dollars of revenue potential for the company. We are investing forty to forty-five million dollars in CapEx toward the first five or six facilities we expect ICE to prioritize, and we've been preparing staffing readiness and other steps in the last four to six weeks.

Sure. Thanks, Damon. And thanks, Joe, for your question. We estimate that if we activated all of our idle capacity, which is nine facilities totaling over thirteen thousand beds plus the South Texas Family Residential Center, we could generate incremental EBITDA of two hundred to two hundred seventy-five million dollars, roughly, at margins consistent with our historical federal government margins. The twenty-eight thousand-bed proposal Damon mentioned includes multiple components, and the rolled-up numbers show the material potential impact on EBITDA if those beds were activated.

Great. Thanks for that very detailed answer. Just on South Texas for a second: there are indications from ICE and the administration that they want to reopen a family center. You remain in discussions with Target on that. Are there other alternatives for a family center? Would that have to go through an RFP, or could there be an emergency dispensation to open that facility without an RFP? How quickly could that facility be reopened since it wasn't closed that long ago?

Great question. We think ICE is considering a couple of alternatives. Karnes, which is under Target's control, is potentially an opportunity for families. We're talking to Target daily and they are a great partner. If the need is greater than the size of Dilly, we're discussing expansion either locally or elsewhere in the Southwest. Because the South Texas facility was recently deactivated, reopening could be much quicker than starting from scratch. We're leaning forward on staffing to activate quickly, and we've had recent conversations with ICE on this topic. Patrick, do you want to add?

Only to add that we've taken steps to prepare for activations that might typically occur later in the activation cycle. We're doing our best to minimize the cycle time required to accept the first group of detainees. We're prepared to support the mission and deliver quickly to the extent we receive that phone call.

Okay. One more: Laredo facility has been above a hundred percent of rated occupancy all year. Is that something you can do at other ICE facilities? At what point is capacity maxed out and how long could you operate above rated capacity?

Each facility is uniquely designed, so the ability to operate above rated capacity varies. We must ensure safe, humane environments, but many facilities can repurpose space to increase capacity beyond rated capacity for short-term surges. For longer-term increases, we have looked at permanent capacity additions or conversions to make flex capacity more permanent. It will vary from facility to facility, but where we maintain ICE contracts, we can flex capacity up in many locations on a short-term basis.

To add, the twenty-eight thousand-bed proposal includes surge capacity where we can operate above rated capacity in certain locations. ICE has that information in front of them with location-level capability.

You talked about the forty to forty-five million in additional CapEx for reopening idle facilities and some transportation dollars. What impact, if any, would that additional CapEx have on share repurchases?

Joe, that CapEx has been factored into our thinking. Our guidance contemplates staying within our leverage target of two and a quarter to two and three-quarters times, which incorporates the forty to forty-five million dollars. It won't impact our plan. Factors that would change our pace of share repurchases include the pace of reactivations, other M&A opportunities, and capital deployment choices. We could temporarily exceed our leverage target in the short term if all stars align, but once a reactivation generates cash flow, we expect to be back within our targeted leverage over the medium term.

Great. Thanks for taking my questions.

Great. Thanks, Joe.

Thank you, Joe. And our next question comes from the line of Greg Gibas from Northland Securities. Your question, please?

Hey. Good morning. Thanks for taking the questions.

Good morning.

I appreciate the color provided earlier on your proposal to ICE. I want to clarify the bed counts. Previously you mentioned about eighteen thousand available beds. Can you update where those additional beds came from and how to think about the two hundred to two seventy-five million EBITDA uplift? Does that reflect the eighteen thousand or the total twenty-eight thousand opportunity?

I'll tag team with Dave on the breakdown. The twenty-eight thousand consists of several buckets: facilities currently operating today with lower occupancy, vacant facilities that can be activated, surge capacity above rated capacity in certain locations, and third-party capacity such as South Texas with Target. Those building blocks together make up the twenty-eight thousand number.

Thanks, Greg. The two hundred to two hundred seventy-five million dollars of incremental EBITDA reflects activating our idle capacity, which is roughly fifteen thousand beds plus the South Texas facility. The additional beds beyond that, the eighteen thousand you referenced, are already embedded in our guidance where applicable and include beds under contract with ICE; the uplift number I cited pertains to the idle beds plus South Texas.

Makes sense. For near-term trends, does your guidance account for any strength you're seeing in Q1 so far? How has Q1 trended relative to Q4? You provided ICE national numbers earlier, but can you speak to how things are trending relative to the prior quarter and your guidance?

Populations are up slightly since inauguration—only a few hundred—which is not a significant increase. Our guidance for Q1 does not assume a big population increase; it assumes a steady increase throughout the year from Q1 to Q4.

On the activation commentary, you mentioned activations could negatively impact guidance due to startup expenses until revenue catches up. Can you provide more color on degree of impact and how long on average it takes to cover those costs?

It takes about four to six months to activate a facility, depending on the facility. The startup cost I referenced covers that four to six month period. Then there's another six to twelve months of ramp-up because intakes happen at a limited rate per week. The startup expenses are generally four thousand to six thousand dollars per bed for the initial period before residential population is accepted, and EBITDA and cash flow turn positive around fifty to sixty-five percent occupancy depending on contract structure.

To add, budget action will drive utilization. Watch the process in the House and Senate—timing could be March or early April for budget moves. We also see potential steps to shift funding to ICE in advance of congressional action to increase utilization quickly. Funding will be key in the days and weeks ahead.

I think that covers it.

Thank you. Very helpful and congrats on the quarter.

Thank you.

Thank you. And our next question comes from the line of Anne Merrick from Zacks. Your question, please.

Thank you. In your prepared remarks, you indicated that you might act in advance of actually securing a contract if you believe the need is clear, based on consistent and extensive conversations with customers. Can you walk us through low-cost initiatives you might do to shorten startup time in activating a currently idled facility?

Sure. We've been taking steps since the late third quarter of last year to prepare. We built an internal activation team and a project management plan for each facility. We've completed a significant amount of pre-activation work to make facilities ready for populations. Historically, much of this pre-activation work would be done post-award, but we've acted earlier to prepare. We evaluate priority by location and are putting facility leadership teams in place, preparing advertising and hiring plans, and standing up training teams so we can hit the go button quickly. By doing these activities before an award, we may shorten the typical four to six month timeline by two to three months for priority locations. That will vary by site. We are prudent but aggressive in locations where priority is highest.

So six months is conservative; early activations could be much shorter if you're already doing prep work, particularly for the first and second locations?

Yes. We're prioritizing facilities we think would be high priority for our customer and are leaning forward at those sites. If we are ready for receipt of the first group of detainees sooner, we'll offer that capacity to ICE. We aim to activate more quickly while ensuring safe, high-quality operations.

Last question: specifically on the South Texas facility, if renewed under an ICE contract, would it require retrofitting or significant changes to operate under a more standardized contract versus the higher-cost model previously used?

Very modest. The facility was deactivated about six to seven months ago, so there are some items to work on with Target, but reopening needs are relatively modest given the recent deactivation.

Okay. Thank you.

Thank you. And our next question comes from the line of Kirk Ludtke from Imperial Capital. Your question, please.

Hello, everyone. Thank you for the call. Can you talk a little bit about how ICE deportations might ramp and how you're protecting yourself with contracts that have minimum beds and contract length? How does that all work and how do you protect yourself?

Short answer: we expect new ICE agreements to be similar to historical contracts. Those agreements are clear on fixed costs within facilities, and ICE understands the need for that structure. Contract features that limit our fixed cost exposure historically would be in new or modified contracts. Also, we don't see alternatives as mutually exclusive; they'll likely need all available capacity. If we look at the scale discussed earlier, both private-sector and other alternatives will be utilized to meet demand.

Have you heard anything on ISAP or alternatives to detention from the new administration?

Not much. Our conversations with ICE and the administration have been focused on detention. Alternatives to detention could be a tool down the road and we've discussed our capabilities, but detention is the near-term priority.

On acquisitions, are you thinking about idle facilities of other operators or buying other operators?

A little of all the above. Our real estate team tracks vacant facilities nationwide and evaluates factors like age, size, location, and labor market. We remain prepared to pursue acquisitions, leases, or first-refusal opportunities where prudent. Many existing facilities have room to expand within their property footprint, offering additional capacity without greenfield builds. We're preparing for near- and long-term needs.

To add, any acquisitions would be in our core business and we will remain disciplined, focused on long-term sustainable cash flows.

Great. Thank you for the extra time.

Thank you. And our next question comes from the line of Jay McCanless from Wedbush. Your question please.

Good morning. First question: you talked about the Marshals and that you're again permitted to do direct contracts. What's the path to getting safety occupancy back above eighty percent and keeping it there longer term?

With ICE demand alone you can reach an occupancy in the mid-eighties. The Marshals Service is another meaningful opportunity. The Marshals have population historically around fifty-four thousand and have been higher in prior years. As US attorneys and leadership are named, we would expect Marshals populations to increase. We're already in active conversations with the Marshals on facilities they were not able to access recently, and they have shown increased engagement in the past thirty days.

To reinforce, the Marshals could present a sizeable opportunity given their historical population. Our state business has also been growing from recent contract wins, and we see multiple avenues to reach mid-eighties occupancy.

On the state side, recent contracts with Montana and Wyoming have already driven full utilization at some facilities, such as Saguaro in Arizona, so there's momentum there as well.

Second question: you mentioned two hundred to two seventy-five million in incremental EBITDA. Can you walk through where that comes from again?

That estimate assumes activation of all our idle capacity—nine facilities totaling over thirteen thousand beds—plus the South Texas Family Residential Center, totaling roughly fifteen thousand beds. That could generate two hundred to two seventy-five million dollars of EBITDA at historic federal margins.

Last question: with potential inflationary pressures or tariffs, how comfortable are you covering costs if input prices rise?

We work closely with vendors and have visibility into supply chains; in some cases we've pre-purchased necessary goods for activations. Most of our cost structure—about two-thirds—is staffing and benefits, so supplies are a smaller percentage of total costs. We're positioned well in the short run to provide beds cost-effectively and will monitor changes. On staffing, markets are stabilizing and our hiring and retention initiatives have helped normalize costs.

Additionally, under federal contracts we have wage determination mechanisms that require us to adjust pay where applicable, and those increases are generally reimbursed dollar for dollar under federal contracts, which helps mitigate inflationary wage pressures on federal business.

We also operate fully domestically, so tariffs are not a material concern for our core operations.

Understood. Thanks for taking my questions.

Thank you, Jay.

Thank you. And our final question for today comes from the line of Ben Briggs from Stonex Financial. Your question, please.

Good afternoon, guys. Thank you for taking the call and the questions. So I know we've touched on this a few times, but I want to make sure I understand the numbers correctly. You currently have a proposal in front of ICE for up to twenty-eight thousand beds. Is that correct?

That's correct.

And if fifteen thousand of those beds are activated, that could result in up to one point five billion of additional revenue and two hundred to two seventy-five million of additional EBITDA?

Let me clarify. The fifteen thousand idle beds activated plus South Texas would generate approximately two hundred to two seventy-five million of incremental EBITDA. On the revenue side for those idle beds, that equates to roughly seven hundred fifty to eight hundred million dollars of revenue. The larger twenty-eight thousand-bed proposal covers additional components including operating capacity already in use and surge capacity, and the revenue potential for broader usage can be higher, but the fifteen thousand idle bed activation equates to about seven hundred fifty to eight hundred million in revenue and two hundred to two seventy-five million in EBITDA.

Got it. Thanks for clarifying. On mixing populations: can you put ICE detainees with Marshals or state detainees, or are there restrictions? Can you mix populations in the same facility?

Each facility is designed differently, but facilities are very flexible in managing multiple customers. Tallahatchie currently houses eight different customers. We manage services to each contractual requirement, using separation by pod or adjacent housing as appropriate. Generally, we wouldn't house Marshals and ICE in the same pod, but we can have them adjacent and deliver services tailored to each customer. Facilities are designed to maximize utilization while maintaining appropriate separation and safety.

Understood. On new builds: is there any chance of brand new facility construction, or is that further out?

That is a possibility, but given our available system capacity, expansion capabilities within facilities, and potential acquisitions or leases of existing vacant facilities, new builds are not a near-term priority. We will monitor needs and funding and remain open to options, but much of the near-term opportunity can be addressed through existing assets and selective acquisitions or leases.

Finally, now that the prior restriction on DOJ contracts has been lifted, do you see Bureau of Prisons opportunities? BOP was a small percentage of revenue previously; are there growth opportunities there?

Yes. Two points: the most recent BOP director departed recently and the agency is currently led by an interim director; once a permanent director is in place they will set priorities including relations with the private sector. Separately, there's frustration with slow implementation of the First Step Act and a desire to expand halfway house and home confinement capacity. We believe the private sector can help accelerate that implementation, and the BOP may lean on private providers to expand community-based custody and pre-release options.

That's helpful. Thanks very much. That's all for me.

Thank you. This does conclude the question and answer session of today's program. I'd like to hand the program back to Damon T. Hininger for any further remarks.

Alright. Thank you, sir. Well, thank you all so very much. A lot of great questions and sorry we went over a little bit, a lot of detail. As you know, we've got a lot of activity going on in the organization and a lot of opportunities. It's a very exciting time within the company. As always, we're grateful for your support and your investment in our company. We're excited about the near term and look forward to sharing our results in the coming days and weeks as we lead up to the second quarter. Thanks, everyone, for calling in today.

Thank you, ladies and gentlemen, for your participation in today's conference. This does conclude the program. You may now disconnect. Good day.