Earnings Call Transcript - CXW Q2 2020

Operator, Operator

Good morning. My name is Casey. And I will be your conference operator today for this call. As a reminder, this call is being recorded. At this time, I would like to welcome you to CoreCivic’s Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers’ remarks, there will be a question-and-answer session. Thank you. I would now like to turn the call over to Cameron Hopewell, CoreCivic’s Managing Director of Investor Relations. Mr. Hopewell, you may now begin.

Cameron Hopewell, Managing Director of Investor Relations

Thanks, Casey. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today’s call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. On the call today, we will focus on our financial results for the second quarter, yesterday’s announcements of our intentions to change our corporate structure and institute a new capital allocation strategy, and an overview of the evolving impacts of the COVID-19 pandemic. 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 second quarter 2020 earnings release issued after market yesterday and in our Securities and Exchange Commission filings, including Forms 10-K, 10-Q and 8-K reports. You are also cautioned that any forward-looking statements reflect management’s current views only and that the Company undertakes no obligation to revise or update such statements in the future. On this call, we will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data on our Investors page of our website corecivic.com. With that, it is my pleasure to turn the call over to our President and CEO, Damon Hininger. Damon.

Damon Hininger, President and Chief Executive Officer

Thank you, Cameron. Good morning, everyone, and thank you for joining our second quarter 2020 conference call today, which is also a day of great historical significance for our company. With last night’s announcement noting our plan to convert to a Taxable C Corporation, we are positioning our company better over time to improve our already strong financial position and ultimately move our share price back to levels that reflect our strong fundamental business. By doing so, we will be able to build on our unprecedented leadership in supporting life-changing reentry programs, policies, and services that address America’s recidivism crisis, and help those in our care succeed with their next step in life. So for today’s call, Dave and I will provide an overview of our second quarter financial performance, yesterday’s announcement of our intention to revoke our re-election and become a Taxable C Corporation in 2021, including its implications on our forward-looking business and capital allocation strategy, and our ongoing response to evolving developments resulting from the COVID-19 pandemic. First, I will briefly touch on our second quarter financial performance. On the top line, our revenue in the second quarter was $472.6 million, which was a decline of 3.6% over the prior year quarter. The majority of this decline was experienced in our CoreCivic Safety segment. Normalized funds from operations, or FFO, was $0.56 per share in the second quarter, which represented a 90% decrease from the prior year quarter. The largest impact on our revenue and normalized FFO in 2020 has been due to lower utilization levels from our largest government partner, Immigration and Customs Enforcement, primarily due to the COVID-19 pandemic. While current utilization levels by ICE are well below historic averages, the second and third quarters in 2019 were already going to present a difficult comparison because in those periods last year, ICE reached historically high utilization levels. If you look at our financial performance sequentially, compared with the first quarter of 2020, our normalized FFO per share increased by 4% in the second quarter of 2020. Dave will discuss our financial results in great detail after I wrap up my comments. But before I turn things over to him, let me take a moment to appreciate our tremendous CoreCivic professionals who have dedicated nearly three decades of their careers to our company. Starting as a frontline correctional officer in Kansas at The Leavenworth Detention Center in 1992, I’ve seen a lot. COVID-19 is unprecedented in every way. For settings like correctional facilities, the pandemic presents a unique set of challenges. Fortunately, at CoreCivic, we prepare for these types of situations all the time, and we acted early. We are known to prioritize what matters with all our people in the field. They have a tough but rewarding job that has been made even more demanding. I have had the opportunity to get out into our facilities to see how they are doing and how we can help. Let me tell you that our CoreCivic professionals are an inspiration to me every day, especially now. During our first quarter earnings report, I talked about the Hero Bonus and Extra Paid Day Off that we provided to thank our people in the field. But as we all know, COVID-19 has required the same level of vigilance in recent weeks as it did in the beginning. That is why last month, we were pleased to once again show our gratitude to our field employees with mid-year raises. These salary adjustments, which nearly match what we did in the first half of the year, will bring our full-year additional investment in our people to $15 million. The Board and the Management team recognize that this is the right thing to do to take care of our people now and retain them over the long term. Now we would like to spend some time discussing our announcement from yesterday, which is the conclusion of our process to evaluate corporate structure and capital allocation alternatives. Our Board of Directors unanimously approved a plan to revoke our election as a real estate investment trust or REIT and convert to a Taxable C Corporation. This election will be effective January 1, 2021, as we are confident our year-to-date dividend distributions are already sufficient to ensure we qualify as a REIT for the 2020 tax year. To be abundantly clear, we have not been satisfied with the trading multiple of our stock. For the past several years, our trading multiple, whatever metric used to measure it, has steadily declined, even as our earnings have grown, as they did in 2019. Continuing to pay a dividend yield in excess of 50% is simply not sustainable, and the recent trading multiple below 10 times, and certainly the current multiple of low five times is not acceptable. It translates to a higher cost of capital inhibiting our ability to execute our business plan. As a REIT, because we are required to distribute a substantial portion of our cash flows as dividends, we need to have continuous access to capital at reasonable prices to make higher-return investments. With many investors incorrectly categorizing CoreCivic as a non-ESG investment, despite our unprecedented leadership in supportive reentry programs and public policies designed to keep people out of prison for good, the cost of our capital has increased. Revoking our REIT election will provide us with more flexibility in how we allocate our substantial free cash flow. We believe the change in corporate structure will improve our overall credit profile and reduce our cost of capital. This change in corporate structure will also provide us with significantly more liquidity, which will enable us to reduce our reliance on the capital markets and decrease the size of our bank credit facility. Following our first priority on debt reduction, with a targeted total leverage of 2.25 to 2.75 times, we expect to allocate a substantial portion of our free cash flow to returning capital to shareholders, which could include share repurchases and future payments of dividends. As detailed in our press release, we will have more flexibility to pursue attractive growth opportunities, all of which will require capital deployment. We are also evaluating the sale of lower-yielding non-core real estate properties outside our corrections portfolio. These mission-critical, primarily single-tenant government-leased properties are built to suit according to stringent government requirements. The quality of the properties, combined with long-term in-place leases and the top-notch credit quality of our government tenant, is a clear distinction among other REIT classes, particularly in the current environment which is favorable for government lease assets. This has resulted in significant inbound interest in this portfolio. Selling these properties, which are more appropriately owned by non-taxpaying entities, could enable us to do so accretively while accelerating our capital allocation strategy. With our 2013 conversion, the restructuring was the right structure at the right time for CoreCivic, and it remains a great structure for many companies. But we have to recognize the limitations that structure imposed on CoreCivic in this economic and political environment and also recognize the opportunities being a C-Corp affords us. With that, we would adapt to the most appropriate structure that enables us to execute our business plan, further de-risk our balance sheet, and create the most long-term value. Finally, as many of you know, we were a C-Corp for about 12 years prior to our REIT election in 2013, so we know this structure will work very well with our mission and business growth strategy. Now, in our last conference call in May, we spent a majority of our time detailing our response to the COVID-19 pandemic. I would now like to provide you with an update on our operational response, particularly highlighting developments that have occurred throughout the second quarter. Since the beginning of the pandemic, we have been working closely with our government partners to develop and implement facility-specific COVID-19 Medical Action Plans. Our operational plans follow guidelines from leading health experts from the CDC and the World Health Organization, and we have updated them accordingly. During the second quarter, we saw an increase in positive cases across several of our facilities, consistent with the general public and across nearly every correction system in the United States. Our protocols and procedures for addressing positive and suspected cases are well established for both our employees and individuals in our care. However, positive tests for employees can present operational challenges from a staffing perspective. We have successfully navigated these challenges by utilizing available staff from other nearby facilities without positive cases, when necessary. In coordination with our government partners, our facilities continue to manage in-person visitation and interactions to reduce the spread of COVID-19. During the second quarter, many of our government partners have expanded testing of inmate and detainee populations beyond the CDC’s testing guidance. This broader testing has varying results in terms of the rate of positive cases, but overall performance of our facilities has been strong. Also, consistent with broad-based testing performed at government-operated facilities, we see a higher rate of asymptomatic positive test results. Many health experts have highlighted the challenges presented by asymptomatic positive individuals because they have the potential for spreading the virus without their knowledge. This was particularly relevant before our businesses and governments implemented hygiene, social distancing, and PPE protocols in March and April. The broad-based testing being performed across inmate and detainee populations has been a helpful tool to potentially reduce the spread of the virus, but testing does have its limitations and cannot replace the need to follow proper hygiene, distancing, and PPE protocols. We will continue to be responsive to the COVID-19 pandemic and work closely with our government partners to implement best practices as they evolve. COVID-19 is certainly on the top of everyone’s mind, but our government partners continue to face challenges that predate the pandemic, which have presented new opportunities for us to serve their needs. For example, in July, we commenced the lease of our previously idled 656-bed South East Correctional Complex with the Commonwealth of Kentucky Department of Corrections. We originally entered into this lease agreement in December 2019, which has an initial lease term of 10 years and includes five two-year renewal options. This is a great solution for the Commonwealth, which has a significant need for additional correctional capacity, and we are pleased we can quickly deliver a solution in state with our idled capacity. Many states are facing budgetary challenges from lost tax revenues due to business closures in response to COVID-19. It is still too early to tell the full economic impact of the pandemic and how quickly the U.S. economy can recover. However, there remains the potential for federal aid to provide assistance to help state and local economies facing challenges as a result of this pandemic. These matters will take time to develop, but we have already seen a number of states looking to trim their budgets, including corrections budgets. In July, we agreed with the state of Oklahoma to close our 1692-bed Cimarron Correctional Facility in order to generate budget savings. While we were disappointed for our dedicated staff members at Cimarron, all of them have been provided opportunities to stay with the company at other facilities. We recognize that tough budget-driven decisions have to be made when facing a significant budget shortfall. Although Oklahoma’s prison population has declined as a result of COVID-19, the state continues to face challenges in its correctional infrastructure and could very well utilize the Cimarron facility once their budget challenges subside. We have had discussions with many other government partners about ways to quickly generate taxpayer savings in response to these budget challenges, and we are sure those discussions will continue. The COVID-19 pandemic has changed the typical playbook for corrections departments in responding to budget challenges because of the need for more physical space to ensure social distancing. There also remain a number of market opportunities as correction systems look to address their infrastructure challenges. The State of Alabama is continuing its RFP process to partner with the private sector to build three modern large-scale correctional facilities to modernize its system and close approximately 15 outdated facilities. An initial award, as the first facility for this procurement is expected in the next few months сwith subsequent awards being announced next year. The State of Nebraska is also pursuing a similar path for constructing new correctional facilities but they are not as far along in the procurement process. We anticipate similar opportunities will continue to emerge because nearly every state has a significant portion of its correctional infrastructure that has reached the end of its useful life. Modern facilities provide significant operational cost savings due to thoughtful, efficient design that cannot be retrofitted for older prison facilities. This is particularly relevant today with the threat of budget cuts forcing government agencies to become more efficient. There will also be a growing appreciation for the need to modernize correction systems, especially after the COVID-19 pandemic subsides. Let me also make a comment on the federal side of the safety segment. We were just awarded this week a new ten-year contract with ICE at our T. Don Hutto Residential Center in Taylor, Texas. This is a renewal of a contract we have had in place for many years with ICE at this facility. We also expect to receive a similar award from ICE for Houston Processing Center in the next few days, which will also be a new ten-year contract and again, a renewal of a long-held contract we have had with ICE at this facility. ICE is expected to make millions of dollars in investments to renovate the physical plant of each facility, which reinforces their intention to use these facilities over the long term. I would now like to pass the call over to Dave to provide a more detailed look at our financial results in the second quarter and other recent trends. Dave.

David Garfinkle, Chief Financial Officer

Thank you, Damon. And good morning everyone. In the second quarter, we generated $0.18 of EPS, or $0.33 of adjusted EPS, $0.56 of normalized FFO per share, and $0.57 of AFFO per share. Adjusted EBITDA was $101.1 million for the quarter. Adjusted amounts exclude $8.2 million of incremental expenses associated with COVID-19, non-cash impairments of $11.7 million, $0.3 million of expenses associated with our evaluation of corporate structure alternatives, and a $2.8 million gain on the sale of a real estate property. Of the $8.2 million of COVID-19 expenses, $6.3 million represents the Hero Bonuses paid to facility line staff. Compared with the prior year quarter, adjusted EPS decreased $0.14, normalized FFO per share decreased $0.13, and AFFO per share decreased $0.10. As mentioned in our previous two quarterly earnings calls, we do not expect the elevated federal populations experienced in 2019 to be sustainable in 2020 and lowered our initial 2020 guidance from 2019 per share levels to reflect lower federal populations. The federal government's decision effective March 20, 2020, to deny entry at the southern border for asylum seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of COVID-19 has amplified the reduction in people being apprehended and detained by ICE. Declines in state populations in our safety segment and in resident populations in case management services in our community segments, largely driven by COVID-19, also contributed to declines in per share results. Partially offsetting these reductions were new contracts signed with the U.S. Marshal Service and ICE in the prior year and in Mississippi in the first quarter of this year. Finally, a reduction in G&A expenses, partly due to lower incentive compensation and partly due to a reduction of certain other expenses such as travel due to restrictions imposed by COVID-19 resulted in savings relative to the prior quarter. I normally don’t review financial results compared to the previous quarter, but I think this comparison is particularly relevant this quarter since we did not begin to see the impact of COVID-19 until the end of March. During the second quarter, adjusted EPS increased by $0.03 and normalized FFO per share increased $0.02 from the first quarter. Although no doubt COVID-19 has had an impact on our business, occupancy in our safety and community facilities declined from 79% in the first quarter to 75% in the second quarter, translating into a decrease of 3,337 average daily resident populations. Occupancy in our property segment remained at 97.3% for both quarters. Total revenue declined by $18.5 million, or 3.8% from the first quarter to the second quarter. However, we were able to adjust our expense structure to align with the reduction in occupancy. As a reminder, our first quarter always includes higher unemployment taxes when base wage rates reset, resulting in a per share increase of $0.02 from Q1 to Q2. A new contract with Mississippi signed in the first quarter, combined with lower interest and G&A expenses, collectively accounted for about $0.03 per share offset by lower populations in our safety and community segments. As a result of these factors, adjusted EPS and normalized FFO in the second quarter outperformed the first quarter. Although we have excluded the impact of COVID-19 expenses from our adjusted per share results, they are included in the operating margins and metrics presented in our supplemental disclosure report. Our total facility operating margin would have been 25.3% for the second quarter, excluding COVID-19 expenses, slightly higher than the 24.6% in the first quarter. Our cash flow was stronger in the second quarter. AFFO, which we use as a proxy for cash flow after maintenance CapEx but before debt repayments, was $69.3 million compared with $70.3 million during the first quarter. Net cash provided by operating activities as presented in our statement of cash flows was $98.9 million during the second quarter compared with $75.4 million in the first quarter. This increase included positive fluctuations in working capital balances. The resiliency of the business is due to the essential nature of our facilities and services in our safety and community segments further enhanced by the diversification and stability of our property segment, with all three segments supported by the strong credit of our government customers. As of June 30th, we had $364 million of cash on hand after paying $51 million in dividends during the second quarter compared with $335 million as of March 31, 2020. At June 30th, we also had $154 million of availability on a revolving credit facility, which matures in 2023. Our cash balance reflects a partial draw that we made on our credit facility at the end of March out of an abundance of caution due to uncertainties associated with COVID-19 and to maintain maximum balance sheet and operating flexibility. We repaid $50 million of this draw in July and expect to continue to pay down the balance. Our leverage measured by net debt to EBITDA is 3.9 times using trailing twelve-months, and we have no debt maturities until October 2022 and no material capital commitments. Therefore, we have no need and do not anticipate accessing the capital markets in the short term. We are on track to achieve the 10% reduction in our maintenance capital expenditures mentioned on our last call, which we expect to total $54 million, split evenly between real estate and non-real estate assets. Our 2020 capital expenditure forecast also includes approximately $7 million of tenant improvements and leasing commissions associated with new lease agreements, unchanged from our estimates at the beginning of the year. Although we continue to perform well and generate significant cash flows, risks and uncertainties associated with COVID-19 remain. Operations in the Criminal Justice System have not yet normalized. The southern border remains effectively closed and many state budgets will have significant holes to fill. As Damon mentioned, during the third quarter of 2020, largely due to a lower number of inmate populations in the state of Oklahoma caused by COVID-19 combined with the consequential impact of COVID-19 on the state’s budget, we agreed with the state to idle our 1692-bed Cimarron Correctional Facility later this quarter. Prior to the pandemic, we were negotiating with the state to provide them with additional bed capacity in the state at our Diamond Back facility. We also closed the 200-bed Oklahoma City Transitional Center during the second quarter, and during the third quarter consolidated the remaining resident populations at our 390-bed Tulsa Transitional Center to Oklahoma’s system, either in their Tulsa facility. Other states could face similar challenges. During 2019, these three facilities generated net operating income of $2.8 million, so the closures won’t have a material impact on our financial results. Although a much smaller segment, at 3% of total NOI for the quarter, our community segment has been impacted by a larger percentage than the safety segment as the disruption in court hearings, as well as an overall desire to minimize movement within the system have resulted in a reduction in the number of referrals to our community facilities. This resident population is considered lower risk, so governments have acted faster to transfer certain residents assigned for re-entry facilities to non-residential statuses, such as furloughs, home confinement, or early releases to create additional space for enhanced social distancing within our reentry facilities. We cannot predict how long asylum seekers and anyone attempting to cross the southern border without proper documentation or authority will be denied entry. Therefore, it is difficult to quantify the impact on our more transient federal offender populations. It is also difficult to predict the actions of our state partners in response to any outbreaks in public or private correctional facilities. We cannot predict how long the criminal justice system will be impacted or how long inmate population levels will remain below their pre-COVID-19 levels. Because of all the uncertainties associated with our safety and community segments, we are continuing to suspend our financial guidance until we can provide more reliable estimates. However, we can offer some direction having gone through a full quarter under COVID-19. Offender populations continue to decline mostly due to a reduction in new intakes rather than early releases. Without the court system functioning normally, and with the southwest border still effectively closed, we expect to continue to experience declines in offender populations in our safety and community segments. Although we are somewhat able to adjust staffing levels, we believe it is important, especially at this moment, to provide well-deserved wage increases for frontline facility staff who continue to deliver crucial services to the people entrusted to our care. Most of our facilities received wage increases on July 1. We anticipate margin compression due to wage increases in an environment where it will be difficult to obtain offsetting per diem increases. It is difficult to predict when normal service levels will return, adding to our salaries expense. As previously mentioned, during the third quarter, we will ramp down our Cimarron facility, and we estimate operating losses of $2.1 million at this facility during the quarter due to this transition. Our operating margins will also be impacted by incremental expenses to procure Personal Protective Equipment and other miscellaneous supplies related to COVID-19, which we estimate to be $3.5 million to $4.5 million during the second half of the year, albeit at lower stress levels than reported during the first half of the year. Our G&A expenses will be negatively affected by expenses associated with the evaluation and implementation of our corporate structure conversions from a REIT to a Taxable C Corporation, which we estimate to be $5 million to $6 million. Note that we will exclude these expenses along with the COVID-19 expenses from our calculations of adjusted EPS, adjusted EBITDA, and normalized FFO and AFFO as we did in the second quarter. Despite the pandemic, we continue to make progress on a number of business opportunities that will favorably impact the second half of 2020. On July 1, 2020, a new lease with the Commonwealth of Kentucky commenced at our 656-bed Southeast Correctional Complex. Kentucky will operate the facility in our property segment under a 10-year lease agreement with five two-year renewal options. This facility has been idled since 2012. Last month, the state of Mississippi exercised their second expansion option through October 4, 2020 for their management contracts in our safety segment, after expanding the contract from 375 inmates to 1,000 during the first quarter of 2020. Last month, the Idaho Board of Corrections authorized the Idaho Department of Corrections to enter into a contract with CoreCivic to care for Idaho offenders at our Arizona facilities. Although we have not yet executed a contract, we are optimistic that a final contract will be executed in the coming weeks, with an expectation of receiving offenders at our facility shortly thereafter. The states of Kansas and Nevada, which are both expected to return their inmate populations to their respective states upon expiration of their management contracts this year, both extended them for another year to avail themselves of our capacity during the pandemic. Although not incremental for the second half of the year, Damon mentioned the renewal of a contract with ICE at our T. Don Hutto facility in Texas for up to an additional 10-years. We also expect a similar renewal of a contract at our Houston Processing Center under the same procurement in the coming weeks, both demonstrating the continued demand for these beds. Finally, we continue to pursue a long-term opportunity in Alabama to design, build, and finance construction for up to three new correctional facilities for the state, which the state would operate. We are one of two remaining bidders and remain optimistic about a contract award by the end of the year. Damon covered our decision to become a Taxable C Corp starting in 2021 in detail, so I will conclude my remarks by pointing you to an investor presentation on our website that further describes the strategy. In it, you will see among other things, our historical ability to repurchase $500 million of stock in the three years preceding our conversion to REIT in 2013. Because of our durable cash flows, we are confident that the C-Corp structure will open new pathways to build shareholder value, including strengthening our balance sheet, improving our credit profile, returning capital to investors, and investing in growth opportunities. We look forward to the potential to sell lower-yielding non-core real estate outside of our correctional portfolio, possibly at levels accretive to FFO per share, which would accelerate the implementation of our revised capital allocation strategy. As we are seeing in these volatile times, CoreCivic has a durable business model and financial strength thanks to the essential nature of our services and facilities and the embedded, long-standing culture of service excellence of our professionals. I will now turn the call back to the operator, Casey, to open up the lines for questions.

Operator, Operator

[Operator Instructions] We will take our first question from Joe Gomes of NOBLE Capital Markets.

Joe Gomes, Analyst

Good morning. Thanks for taking the questions.

Damon Hininger, President and Chief Executive Officer

Good morning, Joe.

David Garfinkle, Chief Financial Officer

Good morning, Joe.

Joe Gomes, Analyst

A lot to digest here, but let’s start with the operating results, and then maybe we will switch gears to the conversion. On the operating results, looking forward, I know the crystal ball is very cloudy today, but do you guys think that we are getting near a bottom on the ICE and U.S. Marshal type populations? They have declined; I believe the last time I looked, ICE was now below 22,000 on a daily population, versus in the 40s and as high as in the 50s last year. Can I get your view on where we might be seeing a bottom on those?

Damon Hininger, President and Chief Executive Officer

Yes, Joe, thank you so much for your question. You nailed it, and kind of framed it well, looking into a crystal ball because that’s exactly what we would be doing if we were to answer this. It's an obvious point, but all this is going to depend on what happens nationally and internationally related to COVID-19 and the direction that changes in relation to CDC guidance, as well as federal, state and local partners, and, in turn, our government partners, specifically ICE. So, at the moment, it would be pure speculation to provide any kind of view about that. However, I will say that what we are doing, things that we can control, is to continue to recalibrate our resources, our staffing, and our services within these facilities as appropriate based on direction from ICE. It is very clear, and I think it is getting reinforced with this most recent announcement about ICE at Hutto for a 10-year contract that our solutions, our capacity, the locations of our facilities, and also the additional services that we can help them provide -- like courts and space for attorneys and case managers -- continue to resonate, and with that, they want to sign long-term agreements. It’s hard to provide any forecasts on populations right now. The trajectory has narrowed and flattened slightly, but we continue to see a decline based on all the reports. Let me pass it over to David Garfinkle to add anything to that.

David Garfinkle, Chief Financial Officer

Yes, I think the pace of declines is slowing a bit. As a reminder, we discussed last quarter that about two-thirds of our federal contracts have guarantees with fixed monthly payments. So we are protected on the downside to some extent. That arrangement is to provide the capacity to the federal government in the event that they see a surge or an increase in population. Based on the conversations we’ve had with our federal government partners, they believe that increases in federal populations will eventually happen. The challenge is predicting when that will occur.

Joe Gomes, Analyst

Have any of the ICE or U.S. Marshals come back to you yet to say, 'Hey, we want to renegotiate'?

Damon Hininger, President and Chief Executive Officer

No, it's actually the contrary. We’ve had some conversations with leadership, and they are always preparing for what happens in the coming days, weeks and months with not only the pandemic but also potential outcomes in Congress and in the White House heading into 2021. They are preparing, and we are working with them to plan. Yes, I think important to reinforce that our solutions and the announcement this week regarding the Hutto contract show that they want to maintain capacity nationwide.

Joe Gomes, Analyst

Okay. I want to switch gears over to the community segment. As you mentioned, you have seen a larger impact there. I noticed in the quarter that you did take some impairment charges. If we start to see the community segment continue to be negatively impacted, are we at risk of seeing more impairment charges going forward there?

Damon Hininger, President and Chief Executive Officer

Yes, great question. This is Damon. I would discuss this with Dave a bit, but I would say the value and desire by the government to invest in these facilities with this mission is really strong. You've probably heard me say that I've been with the company for almost 30 years. The last 10 years have been very encouraging in that context, as governors, legislators, and federal officials have prioritized investment into expanding programs and enhancing facilities. That message continues to be very strong. However, I do appreciate that in a challenging fiscal environment, some jurisdictions must make tough decisions, which could lead to impairments. But I do not foresee any widespread potential actions; we will monitor the situation closely in the upcoming days.

David Garfinkle, Chief Financial Officer

The only thing I would add, as I mentioned in my comments, is that governments in the community segment have acted faster regarding lower-risk populations. They seem more comfortable transferring them to home confinement and similar situations. We see this as a short-term drop in the community facility, and while our total NOI for the quarter was $3.8 million, it is not a significant number for the company; however, it is quite substantial relative to the segments. Eventually, we expect these populations to return. Again, defining a timeline is challenging, but the push for reintegration into society and reducing recidivism remains a crucial part of the discussion.

Joe Gomes, Analyst

Okay, and on the cash flow, I think you generated roughly $100 million from operations in the quarter. Are you anticipating a similar level for the next two quarters?

David Garfinkle, Chief Financial Officer

Our AFFO was pretty much flat with what it was in the first quarter. The $98.9 million is what you will see in the statement of cash flows for Q2, which represents year-to-date through June 30th. If you back out the first quarter, that is the number you get close to $100 million. It included some positive working capital fluctuations, so we collected on some receivables; our receivables were relatively low at the end of the second quarter. I wouldn't expect to see that level of cash flow reflected in our statement of cash flows for the next two quarters. We do not have guidance out there, but given the declining occupancy and populations, it will be tough to achieve the same AFFO in Q3 as we did in Q2. This is why we do not provide guidance; it's just challenging to predict.

Joe Gomes, Analyst

And guys, to be cautious, you took down the liquidity earlier this year. You recently paid back $50 million, but you still have a significant amount of cash on the balance sheet. Why just pay back $50, and why not a bigger number? Is there something else out there that’s keeping you wanting to maintain a large cash balance?

Damon Hininger, President and Chief Executive Officer

Great question, Joe. I mentioned that drawdown in the first quarter was a precautionary measure. We initiated the evaluation of the corporate structure and began discussing what to do with the dividend, which led to our cautious approach. I fully expect in the second half of the year to continue to take that cash and pay down the revolver consistently.

Joe Gomes, Analyst

Okay, and then let’s switch gears before the credit conversion. Can you walk us through a little bit more about the thought process and what other alternatives your financial advisor brought to the table as you considered this conversion? Is there a cost perspective from the C-Corp versus a REIT? Can you address your plans and confidence in growing into those new programs and services?

Damon Hininger, President and Chief Executive Officer

Sure, Joe. Also, I’ll team up with Dave on this. The crux, as you’ve heard from me numerous times, is that the multiple of our stock is simply inappropriate. If you look at the underlying real estate value, the replacement cost it would take for the government to replace that real estate, we are looking conservatively at maybe $3 billion to $12 billion. We are just not getting credit for real estate nor for the essential services we provide to our government partners during this COVID-19 period. That is why the Board of Directors and management all engaged in this process. Over the past few months, we've held numerous meetings to evaluate options like OpCo/PropCo or even going private. This decision was on the table for a while and ultimately made the most sense to go C-Corp, consolidating functions under one roof. Second, we’re familiar with this structure, having been in it for 12 years until our REIT election in 2013. Operations won’t skip a beat; employees serving our government partners won’t notice a change in how we operate on a day-to-day basis. In this low-interest environment companies are heavily leveraging their debt; however, we haven't seen the appropriate rates due to misclassification of our business in the market. That further necessitated this change. The C-Corp restructure allows us to take control of our capital and reduce reliance on capital markets.

David Garfinkle, Chief Financial Officer

I would emphasize that there’s no material difference in costs, in terms of G&A labor or expenses transitioning from a REIT structure. Our finance department has now some different operating requirements, but it won’t significantly alter any operational costs. So, managing as a C Corp versus as a REIT is a different approach, not necessarily more costly. Additionally, under a C Corporation structure, we can self-fund the business, retaining our cash flows. Targeting 2.25 to 2.75 times leverage is reasonable; with improved cash flow, we anticipate potentially seeing upgraded credit ratings. This should improve our overall credit profile and reduce our overall cost of capital. Importantly, we want to prioritize our business needs without being too reliant on external markets.

Damon Hininger, President and Chief Executive Officer

Adding to that, we've made significant strides in reducing our risk profile over these last few years. As I mentioned, we have effectively managed down our exposure to managed-only businesses over the past decade, shedding about 20,000 beds. Those have come with low margins and minimal CapEx needs. Additionally, California and BOP were responsible for about 25-30% of our revenue; that figure today is down to just 2%. Our focus has been to secure the high-value government contracts offering the best profitability. As we transition into this new structure, we believe we will be in a better position to control our destiny and lower our risk even further.

Joe Gomes, Analyst

Thank you for those answers. I’ll step back and let someone else ask a few here. Thanks again.

David Garfinkle, Chief Financial Officer

Thank you.

Damon Hininger, President and Chief Executive Officer

Thank you, Joe.

Operator, Operator

Thank you. [Operator Instructions] We will take our next question from [Indiscernible] of Rubicon Partners.

[Indiscernible], Analyst

Good morning, gentlemen. Thank you for taking my call. Just a couple of quick questions about the debt levels you are targeting. Based on what I’m seeing, and maybe I’m mistaken, but the level of debt reduction you are targeting is around $800 to $830 million, is that correct?

David Garfinkle, Chief Financial Officer

I’m not sure which period you are referring to, but I would say this: In 2019, we generated over $300 million of AFFO. As I mentioned in my comments, we used AFFO as a proxy for cash flow after maintenance CapEx but before debt repayments. Our pre-pandemic guidance included AFFO around $283.5 million at the midpoint for 2020. We will incur taxes, so if you apply a 28% tax rate on 2019 pretax income, we would have paid an additional $15 million annually in taxes, and $43 million if you applied it to 2020 guidance. This translates to slightly over $200 million of annual pay downs on debt.

Damon Hininger, President and Chief Executive Officer

Let me add to that answer and the previous too. I mentioned earlier what we’re seeing within the industry in terms of yield for outstanding bond maturities. I can tell you that if you look at the bond prices in the last 30 to 45 days, we are trading much tighter than others in the industry following this announcement. So the bond market signals loud and clear that they like the idea of us transitioning back to a C Corp, giving us greater control over our destiny.

David Garfinkle, Chief Financial Officer

Additionally, I should mention that this does not account for property sales. We’ve identified lower-yielding government-leased properties outside the corrections portfolio. Selling those would only accelerate our capital allocation strategy. We could potentially sell them creatively without killing earnings, enhancing our business without diluting our overall results. This means that we may achieve our leverage ratios sooner while also enabling share repurchases and dividend payouts.

[Indiscernible], Analyst

Thank you for the clarity. If we’re looking at that total amount needed to reduce the debt, to reach a target of 2.25, are we looking at approximately $500 million?

David Garfinkle, Chief Financial Officer

Yes, if you go back to our pre-pandemic guidance and split the baby from our 2.25 to 2.75 leverage, that would look around $1 billion, meaning we currently have about $1.5 billion in recourse debt. So, we’d be looking to pay down roughly $500 million to meet that targeted level.

Damon Hininger, President and Chief Executive Officer

Those properties sold are indeed in the ballpark you’ve mentioned.

David Garfinkle, Chief Financial Officer

A few of those properties have debt on them, so you'll need to account for their total net proceeds considering any non-recourse debt, defeasance costs, etc. We’ve indicated in our press release that net proceeds could be approximately $150 million; that is just a marker and could be more or less.

[Indiscernible], Analyst

Got it. So with the $150 million and assuming the dividends were suspended at around $100 million this year, we’re looking at potentially raising half of what the overall target is just based on that?

David Garfinkle, Chief Financial Officer

Exactly right. If we maintained the dividend, or perfectly suspended it, we'd have approximately $250 million available to apply toward our debt obligations.

[Indiscernible], Analyst

It seems you guys are going ahead with the conversion next year. Besides the potential $150 million this year and the $100 million next year, are you looking at what level ultimately you would pay down based on the pre-COVID estimates? Is that looking at a payout of around $160 million per year in cash?

David Garfinkle, Chief Financial Officer

Yes, the appropriate number in a pre-pandemic context would be around $200 million. The pandemic is certainly a factor.

[Indiscernible], Analyst

So we could be seeing that target debt level reached by mid-2022?

Damon Hininger, President and Chief Executive Officer

If we observe a return to normalcy in 2021, then yes, possibly sooner, but that remains uncertain.

[Indiscernible], Analyst

Understood. Thank you for your thorough responses.

Damon Hininger, President and Chief Executive Officer

Thank you very much for your questions.

Operator, Operator

Thank you. This concludes today’s question-and-answer session. I will now turn the conference back over to Damon for closing remarks.

Damon Hininger, President and Chief Executive Officer

Thank you so much, Casey, and thank you to everyone for joining the call today. In the coming days and weeks, feel free to reach out to Cameron Hopewell or other members of the management team. With this announcement we made today, we're open to any additional questions offline. Also, just a reminder of what Dave said earlier, we have an updated investor presentation on our website that provides more color and context about the strategy regarding the conversion. Thank you for your continued interest and support of CoreCivic. Have a good rest of your day.

Operator, Operator

Thank you, ladies and gentlemen. This concludes today’s presentation. You may now disconnect.