Geo Group Inc Q4 FY2020 Earnings Call

Good day, and welcome to The GEO Group Fourth Quarter 2020 Earnings Conference Call. All participants will be in a listen-only mode. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Pablo Paez, Executive Vice President of Corporate Relations. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us for today's discussion of The GEO Group's fourth quarter and full-year 2020 earnings results. With us today are George Zoley, Chairman, Chief Executive Officer and Founder; Brian Evans, Chief Financial Officer; Ann Schlarb, President of GEO Care; and Blake Davis, President of GEO Secure Services. This morning, we will discuss our fourth quarter and full year results and our outlook. We will conclude the call with a question-and-answer session. This conference call is also being webcast live on our investor website at investors.geogroup.com. Today, we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and the supplemental disclosure we issued this morning. Additionally, much of the information we will discuss today, including the answers we give in response to your questions may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements, as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q and 8-K reports. With that, please allow me to turn this call over to our Chairman and CEO, George Zoley. George?

Thank you, Pablo, and good morning to everyone. Today, we reported our fourth quarter and full-year 2020 results and issued our final guidance for 2021. During the fourth quarter, our operating divisions continued to face challenges associated with the ongoing COVID-19 pandemic. Over the course of the pandemic, we experienced a decline in overall occupancy levels at several of our federal facilities. Due to the decline in overall federal population, we have previously announced that the Federal Bureau of Prisons had decided not to renew three of our BOP contracts that are scheduled to expire during the first quarter of 2021. More recently, the President issued an executive order directing the Attorney General to not renew DOJ contracts with privately operated criminal detention facilities. While we continue to monitor the scope and implementation timeline for this order, we have assumed that it could result in additional non-renewals of our BOP contracts in 2021 and coming years, and we have incorporated this assumption into our guidance. Unlike the BOP, the U.S. Marshals Service, which is also under the U.S. Department of Justice does not own and operate its facilities. The U.S. Marshals Service contracts for bed capacity, which is generally located in areas near federal courthouses, to house pretrial offenders, who have been charged with federal crimes under the laws passed by Congress. The U.S. Marshals Service contracts for these facilities primarily through intergovernmental service agreements and to a lesser extent direct contracts. The U.S. Marshals Service may determine to conduct a review of the possible application of the executive order on its facilities. Our GEO Care segment has also been impacted by lower occupancy levels across our reentry centers, day reporting programs, and youth services facilities due to COVID-19. During the fourth quarter, we incurred a non-cash goodwill impairment charge associated with our reentry centers, primarily due to the negative impact that the pandemic had on this segment. Despite these challenges, we believe our company remains resilient and is underpinned by long-term real estate assets and supported by contracts entailing essential government services. We've provided these essential services to government agencies at the federal and state levels under both Democratic and Republican administrations and during times when either party has been in control of the legislative branch of the government. Our frontline employees remain focused on providing high-quality services and humane care for all those entrusted to us. During the past year, our employees have shown incredible commitment and resilience as our company has managed through unprecedented times, and we are very proud of their dedication. From the outset of the pandemic, we have implemented company-wide steps to mitigate the risks of COVID-19 to all those in our care and our employees, and we continue to evaluate these steps. Ensuring the health and safety of all those in our facilities and our employees has always been our number one priority. We also recognize that in addition to the challenges associated with COVID-19, heightened political rhetoric has led to a mischaracterization of our role as a government services provider and has created concerns regarding our future access to financing. Our Board of Directors and our management team are aware of the importance of allocating capital to pay down debt in the current environment. Consistent with our previous guidance, we paid down approximately $100 million in net debt during 2020. To continue our focus on paying down debt, our Board recently reduced our quarterly dividend payment to $0.25 per share for the quarter. Our Board will continue to evaluate our dividend and capital allocation strategy, including our planned capital expenditures with the goal of targeting a minimum of $75 million to $100 million in net debt repayment in 2021 and annually thereafter. Additionally, we continue to evaluate cost-savings opportunities at the corporate and facility levels and we have identified several company-owned assets that could potentially be sold. We remain committed to balancing our continued creation of value for our shareholders with prudent management of our balance sheet. At this time, I'll turn the call over to Brian Evans to review our financial results, guidance, and liquidity position.

Thank you, George. Good morning, everyone. Today, we reported fourth quarter revenues of approximately $578 million and net income attributable to GEO of $0.09 per diluted share. Our fourth quarter results reflect a non-cash goodwill impairment charge of approximately $21 million. This goodwill impairment charge is associated with our community-based reentry centers, which have been negatively impacted by the COVID-19 pandemic. Our fourth quarter results also reflect a $5.7 million pre-tax loss on real estate assets, a $2.3 million pre-tax gain on the extinguishment of debt, and $2.5 million in pre-tax COVID-19-related expenses. Excluding these items, we reported fourth quarter adjusted net income of $0.33 per diluted share. We also reported fourth quarter AFFO of $0.62 per diluted share. Moving to our outlook. The COVID-19 pandemic continues to have a negative impact on several segments of our company. The pandemic has resulted in lower occupancy levels at several of our facilities and programs beginning last March and continuing through the end of 2020. As we have previously disclosed, the Federal Bureau of Prisons has decided not to renew our contracts for the D. Ray James, Georgia; Rivers, North Carolina; and Moshannon Valley, Pennsylvania facilities due to the decline in the federal prison populations more recently as a result of the COVID pandemic. The D. Ray James facility contract expired on January 31, and the two other contracts are set to expire on March 31, and our guidance for 2021 accounts for these expirations. Additionally, the administration has issued an executive order directing the U.S. Attorney General to not renew DOJ contracts with privately-operated criminal detention facilities. While we continue to monitor the scope and implementation timeline of this order, our guidance presently accounts for the potential non-renewal of three additional BOP contracts that have option periods expiring in 2021. The COVID-19 pandemic has also resulted in lower occupancy levels across our other federal reentry and youth facilities. Our 2021 guidance assumes the continued impact of COVID-19 in the first part of the year with a slow recovery to more normalized operations by year end. Our guidance also reflects the activation of our three ICE annex facilities in California and our U.S. Marshals facility in Eagle Pass, Texas, which began last year. We expect to achieve normalized operations at these four facilities over the course of 2021. Taking all these factors into account, we expect full-year 2021 net income attributable to GEO to be in a range of $0.88 to $0.98 per diluted share on total revenues of approximately $2.24 billion to $2.27 billion. We expect full-year 2021 AFFO to be in a range of $1.98 to $2.08 per diluted share. And we expect full-year 2021 adjusted EBITDA to be in a range of $386 million to $400 million. For the first quarter 2021, we expect net income attributable to GEO to be in a range of $0.18 to $0.20 per diluted share on quarterly revenues of $579 million to $584 million. And we expect first quarter 2021 AFFO to be between $0.48 and $0.50 per diluted share. Moving to our capital structure. At the end of the fourth quarter, we had approximately $284 million in cash on hand and approximately $136 million in borrowing capacity available under our revolving credit facility, in addition to an accordion feature of $450 million under our credit facility. With respect to our capital expenditures, we expect total CapEx in 2021 to be approximately $104 million including $26 million for maintenance CapEx and $77 million in gross CapEx. Our estimated gross CapEx for the year includes $32 million to upgrade our BI electronic monitoring devices to the new 5G cellular network and $45 million for facility CapEx. To continue our focus on paying down debt, our Board reduced our quarterly dividend payment to $0.25 per share last month. In 2020, we paid down approximately $100 million in net debt consistent with our prior guidance. Our Board will continue to evaluate our dividend and capital allocation strategy, including our planned capital expenditures, with the goal of targeting a minimum of $75 million to $100 million in net debt repayment in 2021 and annually thereafter. Additionally, we continue to dialogue with our lenders and creditors and are monitoring credit market conditions. We are also continuing to evaluate potential cost savings opportunities, as well as the potential sale of a number of company-owned assets. During the first quarter of 2021, we completed the sale of our interest in the Talbot Hall reentry facility, with net proceeds of approximately $13 million. At this time, I'll turn the call over to Blake Davis for a review of our GEO Secure Services segment.

Thanks, Brian, and good morning everyone. I'd like to provide you with a brief update on the 2020 operational highlights for our GEO Secure Services business unit. Over the last 12 months, our operational efforts have been focused on implementing mitigation strategies to address the risks associated with the COVID-19 pandemic. From the start of the pandemic, we began taking steps at our facilities to implement best practices consistent with the COVID-19 guidance that was issued for correctional and detention facilities by the Centers for Disease Control and Prevention. These practices included the implementation of quarantine, cohorting, and medical isolation procedures. We have also provided educational guidance to our employees and the individuals in our care on the best preventative measures to prevent the spread of COVID-19. We have continuously exercised paid leave and paid time-off policies to allow our employees to remain at home if they exhibit flu-like symptoms or care for family members. We remain focused on implementing increased sanitation measures and deploying personal protective equipment, including face masks for all employees and all those in our care. We have also taken steps to increase testing at our facilities, including the deployment of Abbott rapid test devices. We have administered over 51,000 COVID tests in our facilities at the close of 2020. We continuously evaluate these steps and will make adjustments based on updated guidance by the CDC and other best practices. Despite the unprecedented challenges associated with the pandemic, our frontline employees have remained focused on providing high-quality services and delivering humane and compassionate care for all those in our facilities. During 2020, our employees and facilities achieved several important milestones. Our facilities successfully underwent 100 audits including internal audits, government reviews, third-party accreditation, and certification under the Prison Rape Elimination Act. Our medical services staff undertook over 350,000 quality health care-related encounters including intake health screenings, sick calls and off-site medical visits. During the year, we achieved over 42,000 employee training completions and our GTI transportation division safely completed over 14 million miles driven. We are incredibly proud of our employees for their dedication and daily commitment to operational excellence. Before I turn the call over to Ann, I'd like to address the recent executive actions that have been announced by the new administration at the federal level. Last month, the President issued an executive order directing the attorney general to not renew DOJ contracts with privately operated criminal detention facilities. While we continue to monitor the order's scope and implementation timeline, as we have noted in our recent announcements, the Bureau of Prisons has experienced a decline in federal populations, more recently due to COVID-19. As a result, the BOP has previously announced that it would not renew or rebid three of our existing contracts with the agency. The contract at our D. Ray James Georgia facility ended on January 31. And our contracts at our Rivers North Carolina and Moshannon Valley Pennsylvania facilities expire on March 31. We have three additional company-owned facilities contracted with BOP that have current option periods expiring in 2021. Our Great Plains Oklahoma facility at the end of May, and our Big Spring and Flight Line facilities in Texas at the end of November. Given the President's executive order, and the decline in federal prison populations, we are preparing operationally for the potential that additional contracts with the Bureau of Prisons may not be renewed when their current option periods expire. The BOP owns and operates approximately 90% of the beds housing federal inmates. And since the late 1990s, the agency has used contractor-operated facilities as the swing capacity it needed to deal with overcrowding conditions in the federal prison system. Contractor-operated facilities have historically been used by the Bureau of Prisons to house, almost entirely non-U.S. citizen criminal aliens serving sentences for federal clients committed in the United States. Unlike the BOP, the U.S. Marshals Service, which is also under U.S. Department of Justice, does not own and operate its facilities. The U.S. Marshals Service contracts for bed capacity, which is generally located in areas near federal courthouses to house pretrial offenders who have been charged with federal crimes under laws passed by Congress. The U.S. Marshals Service contracts for these facilities primarily through intergovernmental service agreements and to a lesser extent direct contracts. The U.S. Marshals Service may determine to conduct a review of the possible application of the executive order in its facilities. The administration has also taken several executive actions related to immigration. However, at this time, there have been no directives related specifically to enforcement or detention policies. Earlier this month, the President signed an executive order establishing an interagency task force on the reunification of families to identify migrant minors separated from their families. As we have publicly stated in the past, we do not manage any facilities that house unaccompanied migrant minors. Our ICE Processing Centers are highly rated by national accreditation organizations and provide high-quality, culturally responsive services in a safe and humane environment. Typical amenities at our centers include flat screen TVs in the housing areas, multipurpose rooms, outdoor-covered pavilions, and artificial turf soccer fields. All those entrusted in our care are provided culturally sensitive meals approved by registered dietitian, clothing, 24/7 access to health care services, and full access to telephones and legal services. Health care staffing at our ICE Processing Centers is approximately double that of our state correctional facilities, which is needed to provide appropriate treatment for individuals who have numerous and diverse health and mental health needs. We have provided high-quality services for over 30 years under Democratic and Republican administration, including eight years under President Obama's Administration. And we welcome the opportunity to find ways to improve and deliver the delivery of services and accountability at ICE Processing Centers. At this time, I will turn the call over to Ann for a review of GEO Care.

Thank you, Blake, and good morning, everyone. I'd like to briefly review the 2020 operational highlights for our GEO Care business unit. Consistent with the efforts undertaken by our GEO Secure Services facilities, we have been focused on implementing COVID-19 mitigation strategies. All of our residential facilities in GEO Reentry and GEO Youth Services issued guidance consistent with the guidance issued by the CDC. We put in place quarantine and cohorting policies and procedures and provide educational and preventative guidance to our employees and all individuals in our care. We have focused our efforts on increased sanitation measures, testing, and deploying personal protective equipment, including face masks. We have continuously exercised paid leaves and paid time-off policies to allow our employees to remain at home as needed. We have also implemented additional screening measures for entry into our facilities. We continuously evaluate these steps and will make adjustments as appropriate and necessary based on updated guidance by the CDC and other best practices. Despite the challenges associated with the pandemic, we have had several recent positive highlights. During the second half of 2020, we completed the reactivation of our company-owned Parkview Center in Alaska under a new 112-bed contract with the Alaska Department of Corrections. We also activated 11 new day reporting program sites with the capacity to serve approximately 2,900 participants under a contract with the Tennessee Department of Corrections. And in Idaho, we activated four non-residential program locations to support up to 500 participants under a new partnership with the Idaho Department of Corrections. More recently, we're pleased to have been awarded a new contract with the Federal Bureau of Prisons for a 118-bed residential reentry center in the Tampa Florida area, which we expect to activate during the second half of 2021. These positive milestones are indicative of the high-quality services delivered by our employees daily. We are very proud of our frontline employees who have continued to deliver rehabilitation and reentry programming to those in our care through these difficult times, often in innovative ways including through virtual technologies. We are particularly proud of our continued efforts in our GEO Continuum of Care programs. Our Continuum of Care program integrates enhanced in-custody rehabilitation programs including cognitive behavioral treatment with post-release support services such as transitional housing, transportation, clothing, food, and job placement assistance. While we were significantly challenged during most of 2020, our COC sites achieved several very important milestones. Our academic programs awarded more than 1,200 high school equivalency degrees and our vocational courses awarded close to 4,000 vocational training certifications. Our substance abuse treatment programs awarded more than 7,600 program completions and we achieved over 34,000 behavioral program completions and more than 31,000 individual cognitive behavioral sessions. We also provided post-release support services to more than 3,600 individuals returning to their communities, with over 1,300 participants attaining employment. We believe that the scope of our Continuum of Care program is unparalleled and represents a significant contribution to criminal justice reform. At this time, I will turn the call back to George for his closing remarks.

Thank you, Ann. We are very proud of our employees, who have demonstrated incredible commitment and dedication during this unprecedented global pandemic. Despite the significant challenges associated with COVID-19 and new policy changes at the federal level, we believe our company remains resilient and is supported by long-term real estate assets and contracts entailing essential government services. We've provided high-quality essential services for more than 30 years under both Democratic and Republican administrations. We recognize that heightened political rhetoric and the mischaracterization of our role as a government service provider have created concerns regarding our future access to financing, and are aware of the importance of allocating capital to pay down debt in the current environment. We continue our focus on paying down debt; our Board recently reduced our quarterly dividend payment and will continue to evaluate our dividend policy and capital allocation strategy. We remain committed to balancing our continued creation of value for our shareholders with prudent management of our balance sheet and capital structure. That completes our presentation, and we would be glad to address any questions.

We’ll now begin the question-and-answer session. And our first question will come from Joe Gomes with Noble Capital. Please, go ahead.

Good morning, George and Brian.

Good morning.

Good morning.

I wanted to ask how you managed to exceed the adjusted guidance for the third quarter, especially given the challenging operating environment. Could you provide more details on this?

Sure. So, I think two main issues. We've consistently, during the pandemic, performed better in a number of cost categories in the facilities, and we continue to see that during the fourth quarter. And going into next year, we haven't necessarily assumed that all that benefit will continue. So we've been conservative with regards to that benefit that we've been able to experience and manage. And then, we also saw some modest improvement in some of our occupancy levels at some of our facilities.

Okay. Thank you for that. And on the BOP, I was wondering if you might be able to give us an idea of on the three facilities that may be closed this year or non-renewed, I guess, I should say this year. What kind of level of revenues are we talking about on an annual basis do those three contribute? And how do you think you can make up for that lost business? And I know last quarter you talked a bit about there. Nebraska was doing an RFP. You were talking about potential ICE contract here in the northeast. I think Hawaii is looking for some more space. Maybe you can just give us a little kind of color on where else you're looking to offset some of the decline in the BOP business?

We will be marketing those facilities should they become available and vacant to other correctional agencies, federal, state, and local. So, those facilities are generally well located in relationship to large populations and are among the most modern facilities in the country. So, we think we have well-designed assets that are well located and can be recommissioned for other clients in the future. And we will devote our energies to achieve those objectives.

And can you quantify what the non-renewals run on an annual basis in terms of revenues?

Each of those facilities has approximately 1,800 beds, and they generate between $30 million and $35 million in revenue.

Okay. Thank you for that. You said you sold one facility, I think, early this year. In the third quarter call, you mentioned that you were in the process of identifying potential sales. Where are you guys in that process? Are you still thinking that that $100 million in total sales over time is still a good number? Or do you think you might have identified some more facilities? And any color or detail there would be appreciated?

Yes. We are currently targeting around $100 million, and we believe that's a solid figure. We anticipate achieving this in a timeframe of approximately 12 to 24 months.

Okay. I understand that particularly on the ICE side, the facilities have minimum contract guarantees. It's evident that the ICE populations have significantly decreased during the COVID period. Can you provide any insight into the percentage increase in those populations that would be necessary for you to exceed the minimum guarantee level?

We're significantly below the minimum guarantee level presently because of COVID and the closure of the southern border. But the formula for what we can expect in the future is an interplay between new administration governmental policies, the eventual opening of the southern border, and the eventual passing of the COVID pandemic. The interplay between those three things will result in the new normalized norm, which may not occur until by the end of the year. So, I think of ourselves right now in a transition period as those three things play out over the course of the year.

Okay. And just one more from me and I'll get back in queue. George, I was wondering if you could provide more detail on the current situation. I read an article mentioning that a recent study found the private providers at the U.S. Marshals Service were performing significantly better in COVID testing, tracking, and other measures than the public facilities, which suggests that the private sector is doing a good job. I am curious if you could share your perspective on where things are heading. I know it's early days and the new administration makes it challenging, but any insight on state budgets and their potential impacts on the business would be appreciated. You touched on ICE, the Marshals, and the BOP, but any additional insights or details would be helpful.

You've mentioned several topics. Let me address them in order. Firstly, regarding the proposed COVID relief bill, we believe it would provide significant additional funding to the states. The suggested $350 billion allocation would greatly benefit all states, particularly those in the Sunbelt region. From my review of the data, it appears that the private sector has effectively managed the COVID situation. This success can be attributed to the private sector's ability to respond swiftly to operational challenges. In our case at GEO, we quickly implemented testing for our employees and detainees. We acquired 45 rapid testing machines for our facilities and rapidly sourced masks and other protective equipment. In some locations, we installed a new bipolar ionization system to purify the air. Our facilities are all air-conditioned, and the population levels, especially in our ICE facilities, are typically below 40% of their designed capacity, allowing for adequate social distancing. We have taken extensive measures beyond the standard actions recommended by government agencies to reduce the risk of COVID transmission in our facilities. Notably, out of the 65,000 individuals we served through ICE this past year, we experienced only one fatality, which, while tragic, reflects positively on the quality of care in our ICE facilities and the effectiveness of our response efforts. These initiatives, though not specifically required contractually, were implemented voluntarily to enhance safety by procuring PPE, rapid COVID testing equipment, and new air purification systems.

Great, thanks for that George. Much appreciate it.

Our next question will come from Mitra Ramgopal with Sidoti. Please, go ahead.

Yes, hi. Good morning. Thanks for taking the questions. I just want to start with the impact of COVID first. And again I know a lot of moving parts here. But if you can maybe give us a big-picture sense in terms of the impact it had on the business in 2020. And I know you indicated, you expect it to normalize by year-end 2021, but how cautious are you in terms of the recovery as it relates to the guidance?

It's my impression that the COVID impact has been 15% to 20% reduction in our financial profitability. It could have been much worse, if it weren't for some of these guarantees. And let me speak to the reason for the guarantees. When we operate a facility we're required by contract to have a certain number of employees staffed regardless of the actual occupancy on a day-to-day basis. And that's because it takes so long through the clearance process to bring any new employee on board. It's a matter of several weeks, if not months. So you can't just scale up and scale down very quickly in any of our federal facilities. They need to be rather quarterly normalized, as far as the staffing levels and that requires the payment of the labor costs which are 70% of the overall cost at any facility. And of course you have the cost of the building. Whether you use all the building or just part of the building the cost of the building is the same. So that's why guarantees are in place.

Okay. No, that's good. And as it relates to vaccinations and hopefully using that to get occupancy levels back up, if you can give us an update in terms of where you stand in terms of your facilities receiving vaccines and being able to do that?

Well in our federal facilities we are kind of waiting in line as to when there'll be a broader distribution of vaccines. But I know in some of our state facilities that they're able to move more quickly on that. I'll ask...

We have reached out to every local state and county health board and health department to secure our place in line for vaccinations at all our facilities across the country. Some states, like New Mexico and Indiana, are distributing vaccines at a faster pace, so we are getting our staff vaccinated in those areas. Additionally, we have established relationships with the local health departments at all our locations, ensuring we are in the distribution queue and will be prioritized as vaccines become available. We are eager to vaccinate everyone and are patiently waiting, like many others across the country, as our turn approaches.

Okay. Thanks. Regarding ICE, I've noticed there has been an increase in border crossings recently, and I'm uncertain how the administration is addressing this issue. It appears that they are retaining more individuals instead of releasing them right away, unlike what we observed in the previous administration. I was curious if you have any thoughts on this and whether you see it as a potential advantage moving forward with the new administration.

Well we know ICE is doing a lot of planning, but I think the situation it's fair to say is fluid. And between the ICE storm and COVID, there's a lot of things that have to be factored into their planning. And I think they're mindful that there's tens of thousands of people waiting in Mexico at our southern border, and they'd like to bring some of them in, in an orderly fashion. But that needs to be planned out, and I think that's what they're focusing on at this time.

Okay. Thanks. And then just switching to community-based youth services. The occupancy certainly declined pretty meaningfully this past year due to the environment. And I was just wondering if you see this basically as a bottom. It sounds like you have quite a few initiatives going forward in terms of activating some new facilities and it seems like you might have a good pipeline there in terms of bringing on new business.

So this is Ann. The new business that I spoke of was our reentry residential centers. So yes, we do see that beginning to build back slowly with COVID. And direct to your question about the youth facilities, COVID had quite an impact on the census reduction. And in most cases across the country, the court stopped intakes referrals were stopped. So we were really at a standstill. And then just to ensure social distancing to make sure all the CDC guidelines and protocols are in place, the census came down significantly. We are beginning to see a bit of a build as we see the positive COVID cases decline quite dramatically on the youth side of the division.

The next question will come from Kirk Ludtke with Imperial Capital. Please, go ahead.

Good morning.

Good morning.

Good morning.

I have a couple of questions. First, regarding your fiscal 2021 guidance and second, about your dividend policy. I can understand how challenging forecasting must be. However, you mentioned that four facilities will ramp up during 2021 and contribute to the guidance. Could you provide an estimate of how much additional EBITDA those four facilities will generate?

No. I mean, we don't historically give EBITDA guidance by facility. I think we've indicated the revenue impact from the facilities that are expected to go away. I don't have the exact revenue impact of the facilities that are coming online, but we typically provide that guidance as well. As I said, the BOP facilities that are expected to roll off this year, there's about $100 million in revenue between the three of them, but all of that revenue won't impact this year. Some of the revenue that will impact is the facilities that have already been announced for termination plus these others that we expect to terminate offset by the facilities that are coming online which are mainly the facilities in California and the U.S. Marshals facility in Texas.

Okay. That's helpful. Thank you. And with respect to pricing, another I'm sure difficult thing to model right now. But you mentioned, there are a number of facilities where the occupancy rates are low. How did you think about pricing and contract minimums on the new contracts that are renewed this year?

Most of our contracts are set with pricing mechanisms at renewal time, within the full contract term. For our federal contracts, price increases are already included in the agreements. On state contracts, we may need to go through an appropriations process to secure an incremental increase for inflation adjustments. However, the other terms of the contracts remain unchanged and were established when we entered into the initial base period.

Oh interesting. Okay. Thank you. And then with respect to your dividend policy, will you continue to flex the dividends with profitability? Or is there a dollar payout that you want to maintain? Is there a floor on the dividends?

Well, we have to maintain a certain amount of dividend to maintain our REIT status. And as far as increasing the dividend, we will evaluate whether we're going to increase or decrease or change the dividend or hold it steady on a quarterly basis, I think based on the guidance that we've already established looking at our capital requirements, the cash flows and trying to also maintain debt reduction of $75 million to $100 million a year.

Okay. And then lastly, have there been any developments that the Board did not anticipate the last time you considered your REIT status?

When you say when we considered the REIT status when we converted to our REIT?

I believe in the last call you mentioned that the Board had assessed the REIT status and chose to remain a REIT. Since that decision, has anything unexpected occurred that might lead to a reevaluation, or has everything that has transpired in the past few months been mostly anticipated?

Well, I think the dividend policy like we said will be reevaluated. As George said there, it's a little bit of a transitional period. I think there were three items he mentioned: policy of the new administration, how the pandemic wanes or adjusts during the year and then the impact of occupancies on our facilities due to border policy.

I would acknowledge that the new executive orders had an impact. That's the newest thing that's occurred and we have factored that into our budget for this upcoming year.

Okay. Great. I appreciate. Thank you.

The next question will come from Jordan Sherman with Ranger Global. Please, go ahead.

Thanks. I want to clarify a point regarding the BOP situation, which actually involves two points followed by a broader question. Have you received any notice about the three facilities expected to roll off this year? If not, when do you anticipate receiving specific notice about those?

Blake, when is it required?

Typically, we would receive notes about 60 days prior to that option period if they were going to provide us notice.

Okay. And then beyond the three that have been already cancelled, the three that would roll-off, how many additional BOP facilities are there? And what would be the timing of that contract expiry? Or...

Well, there's three other contracts. One that is an owned facility similar in size to the other ones we've discussed 1800 beds about $35 million in revenue. That contract the next renewal point would be September of 2022.

North Lake too?

North Lake, yes. And then there's two other facilities that are sort of unique managed-only facilities where we provide senior-level management services. We don't own the real estate. And combined between the two, they're only about $5 million to $7 million in revenue per year. Both of those have renewal dates that are also in 2022.

Would you expect those to be part of this process as well?

They could be.

But not clear yet.

It's not clear.

From a policy perspective, there's been considerable discussion about the progressive movement, especially regarding the memo on the DOJ's decision not to renew private prison contracts. As you consider how this will be implemented and how it might influence future administration policies, how reassured do you feel by leaders in prominent positions like Alejandro Mayorkas at Homeland Security and Merrick Garland at the DOJ? Additionally, with President Biden and Susan Rice leading the Domestic Policy Council, all of whom have practical experience and moderate views, how do you interpret the broader implications from a policy standpoint?

I agree that we consider all three moderates, but we recognize that there is a different philosophy influenced by the technical aspects of changing immigration policies, the historical context of those policies, the legal implications involved, the ongoing COVID situation and whether it improves or worsens, and the eventual opening of the border. Therefore, even if there is a desire for fundamental change, those challenges must be addressed in implementing any new policies.

Right. Okay. A lot is happening regarding ICE detention levels. The border is currently closed, but as mentioned earlier, encounters in the southwest have increased significantly. Court systems have either slowed down or shut down. There's a shift towards catch and release rather than detaining as many people, which is the goal. However, it remains to be seen how effective this will be, along with potential changes in interior enforcement and alternatives to detention. As you consider the timeline for these changes, I'm particularly focused on the ICE budget as one data point. What other aspects will you be monitoring as the potential re-opening of the border approaches, and what do you anticipate the timeline for these changes will be?

I initially expected things to progress more rapidly, but I now believe it will take the entire year for everything to come together and return to normal. Therefore, I anticipate that normalization will likely occur toward the end of the year.

But no specific deadline other than the budgets discussion, which has its own, there are no specific deadline data points that you can reference at this moment.

No, not that I'm aware of. And when you have a freak snowstorm hit the United States and loss of power involving millions of people, it throws a wrench into any kind of operational reformatting of prior policies.

Understood. Yes. Okay. Can you discuss your debt that is maturing in the next few years? Specifically, there is a couple hundred million due next year, $300 million in 2023, and larger obligations coming due in 2024. What are your plans and thoughts on addressing these?

We will start by addressing the 2022 notes. We plan to explore the capital markets to achieve our goals. Additionally, our revolving credit facility has around $250 million available that can be used to reduce unsecured debt, serving as a safety net. We also aim to pay down between $75 million and $100 million using either free cash flow or our own cash flow. These are the three strategies we will employ to manage the 2022 and 2023 notes. Once we make progress on that front, we believe access to the market will improve, helping us deal with the remaining debt.

And the timing of addressing the 2022's when do you start that process?

First-half of this year.

With the announcement of the details as that comes together?

Yes. There will definitely be an announcement when we take action.

Okay, all right. Thank you very much.

The next question will come from Nick Jarmoszuk with Stifel. Please, go ahead.

Hi, thanks for taking the questions. On the ICE contracts, I know some questions have been asked already but I'm going to try a different approach. In a world where there's going to be limited arrest and deportations, can you help us think about how your ICE facilities fit into an administration that is going to be having such a materially different arrest and deportation policy?

We have been providing these services for over thirty years, and the locations of the facilities have generally been determined by ICE during this time. These are some of the newest facilities in the country, all equipped with air conditioning and accredited by the American Correctional Association in terms of design. We have included desirable amenities such as flat-screen TVs, artificial turf soccer fields, and additional program spaces both inside and outside the facilities. Additionally, these facilities typically have twice the healthcare staff found in other correctional facilities, leading to healthcare departments that are quite comprehensive and unmatched by similar facilities because these are not typical correctional facilities but rather detention centers. We recognize that they need to be designed and operated differently, adhering to rules set by ICE. Over the years, we have worked to align with ICE's objectives in terms of how these facilities look and operate, as well as the amenities provided for the residents. We are also open to further changes as new ideas emerge regarding the appearance and operation of these facilities. Our role is to be a government services provider, fulfilling the requests outlined in solicitations, and we will continue to do what we are asked to do.

So...

...we go beyond that.

So then, it returns to the question of, I agree that, the facilities check off a lot of boxes, in terms of improving, anyone who comes over the border. Their immediate quality of life is better than being outside in the elements. However, from the government services perspective, if the government is no longer arresting and deporting, are your services still needed?

I don't believe they will completely stop making arrests and deportations. There may be a change in the volume you mentioned, but that will need to be adjusted if it occurs or becomes necessary. If you have a facility designed to accommodate a certain number of people and it's operating at a lower capacity, it will require less staff and incur lower costs. We are adaptable in pricing based on the government's requirements. However, I have been aware that there are seasonal fluctuations in the population. The summer months tend to be the busiest, while winter and the fourth quarter see the least activity. Adjusting staffing to accommodate these fluctuations is challenging because recruiting and retaining background-checked staff takes time. Consequently, staffing levels have remained relatively stable. However, if there is a reduction in staffing aimed at long-term goals and lower capacity—during the Trump Administration, the number of residents in ICE facilities increased to 50,000, compared to 35,000 at the end of the Obama Administration. Currently, it's at 16,000, mostly due to COVID. The future direction is uncertain due to numerous influencing factors. Nevertheless, we have been reliable partners with ICE for three decades and hope to maintain that relationship going forward.

So given the fact that nobody really knows what's happening with ICE. I wanted to address the REIT versus C-Corp and the distribution. Leverage from my perspective is high. And given that, there's a lack of clarity in the overall outlook for the business. How do you justify still paying out over $100 million of distribution to shareholders rather than focusing on the balance sheet?

Well, I would think that some of the shareholders have bought into the company's stock, because of the dividend. But we've been trying to balance the interest of both the bondholders and the shareholders. And we've reduced the dividend by almost 50% in the last year. So we think we're looking out for both interests, as we move forward, and paying down debt while reducing our dividend. And as Brian said, we look at this on a quarter-by-quarter basis.

Our time for the question-and-answer session has concluded, at this time. I would like to turn the conference back over to George Zoley for any closing remarks. Please go ahead, sir.

So we thank you for your participation in today's call and your questions. And look forward to addressing you in the future. Thank you.

The conference call has now concluded. Thank you for attending today's presentation. You may now disconnect.