Geo Group Inc Q4 FY2021 Earnings Call

Thank you, Operator. Good morning everyone, and thank you for joining us for today's discussion of The GEO Group's fourth quarter 2021 earnings results. With us today are George Zoley, Executive Chairman of the Board; Jose Gordo, Chief Executive Officer; Brian Evans, Chief Financial Officer; and James Black, President of GEO Secure Services and Ann Schlarb, President, President of GEO Care. This morning, we will discuss our fourth quarter 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 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 Executive Chairman, George Zoley. George?

Thank you, Pablo, and good morning to everyone. And thank you for joining us on our fourth quarter 2021 earnings call. I'm pleased to be joined today by our senior management to review our financial results for the fourth quarter and the full year, the trends for each of our business segments, our financial guidance for 2022, and the recent developments impacting our government agency partners. With respect to our quarterly performance, we continue to be pleased with the strength of our operating and financial results. In the fourth quarter of 2021, we reported revenues of $557.5 million, which is only approximately 3.5% lower than our quarterly revenues for the fourth quarter of 2020, despite the non-renewal of seven of our Federal Department of Justice contracts in 2021. During the fourth quarter, we incurred a one-time non-cash deferred tax charge and additional tax expenses related to our transition to a taxable C Corporation, which resulted in a net loss attributable to GEO of $0.41 per diluted share. Excluding the deferred tax charge and other extraordinary items from net loss attributable to GEO, our fourth quarter 2021 adjusted net income increased by 15% to $0.38 per diluted share. Our AFFO for the fourth quarter of 2021 increased by 5% to $0.65 per diluted share. And our adjusted EBITDA increased 15% year-over-year to $124 million in the fourth quarter of 2021. Despite the ongoing challenges associated with the COVID-19 pandemic and the non-renewal of seven of our Federal Department of Justice contracts in 2021, our diversified business units delivered consistently better than expected performance throughout the year. For the full year, we reported revenues of approximately $2.26 billion, which was less than a 5% decline from 2020 despite all the challenges we faced during the year. Our full year adjusted net income of $159 million exceeded our full year 2020 results, and our full year AFFO of $299 million was largely consistent year-over-year. And our adjusted EBITDA for the year increased by 6% to $467 million. Looking at each of our segments in more detail, our GEO Secure Services owned and leased facilities experienced a year-over-year decline in compensated occupancy rates of 200 basis points ending the year at 85% of capacity for our active facilities. Our Secure Services owned and leased segment is comprised primarily of facilities under contract with our three federal government agency partners: The Federal Bureau of Prisons, the US Marshals Service, and the US Immigration and Customs Enforcement. The BOP and Marshals Service are part of the US Department of Justice and ICE is part of the US Department of Homeland Security. In addition to the impact of the COVID-19 pandemic, the BOP and Marshals Service are subject to the President's January 2021 Executive Order, which directed the US Attorney General to not renew the Department of Justice contracts with privately operated criminal detention facilities. As a result of the Executive Orders, six of our company-owned facilities under direct contracts with the BOP were not renewed at different times during the year, resulting in the phase-out of approximately $240 million in annualized revenues. As of the end of the year, we only had one company-owned facility under direct contract with the BOP, which generates approximately $38 million in annualized revenues, which we expect will not be renewed when the current contract option expires at the end of September 2022. In addition, one of our company-owned facilities under direct contract with the US Marshals Service with annualized revenues approximately $19 million was not renewed in March 2021. And we successfully sold the facility in August of 2021. At the end of 2021, we had three company-owned or company-leased facilities under direct contracts with the US Marshals Service with annualized revenues of approximately $135 million. One of these facilities has a contract option period that was extended for a six-month period and expires at the end of March this year, while the other two expire in 2023. At this time, our 2022 guidance does not include that facility, although we continue to work on options for keeping the facility in operation. With respect to ICE, detainee populations have remained significantly below historical levels, in part due to the impact of COVID-19 related restrictions. At the end of 2021, ICE facilities housed approximately 21,000 individuals nationwide, while ICE is currently funded for 34,000 beds. In addition to court mandates related to COVID-19 that limit capacity utilization on certain facilities, a driver of low utilization across ICE facilities has been the Title 42 COVID-related restrictions placed at the Southwest border since March 2020. While these restrictions have been eased or lifted for family units and unaccompanied minors, they remain largely in place for single adults, which is the population that our ICE facilities have historically housed. We have, however, seen an increase in the utilization of alternatives to detention programs. The Intensive Supervision and Appearance Program, or ISAP, is a key component of the federal government's alternatives to detention. Our BI subsidiary provides a full suite of monitoring and technology services under the ISAP contract to ensure compliance for individuals undergoing the immigration review process. During 2021, ISAP almost doubled the number of participants under the program. Moving to our managed-only business, our facilities have continued to experience stable occupancy rates ending the year at 97% capacity. During the fourth quarter, we renewed two managed-only contracts in our Secure Services segment. In Florida, our contract for the Blackwater River Correctional and Rehabilitation Facility was renewed for a two-year term. In Arizona, we renewed our contract for the Central Arizona Correctional Facility for a five-year term. Our owned and leased reentry services facilities experienced a year-over-year increase in occupancy rates of 100 basis points but remained at below 50% capacity at year-end as COVID-19 related challenges continued to impact this segment. Throughout the pandemic, new intake at residential reentry centers has significantly slowed down as government agencies across the country have opted for non-residential alternatives including furloughs, home confinement, day reporting, etc. Our non-residential business experienced an increase consistent with these trends with compensated man-days for our day reporting programs and locations and electronic monitoring services growing by approximately 25% in 2021. Our electronic monitoring and supervision segment has continued to enjoy strong growth, increasing annual revenues by 15% in 2021. Despite the ongoing COVID-19 challenges in our residential reentry services business, we successfully renewed five residential reentry contracts during the fourth quarter, including four contracts with the Federal Bureau of Prisons. As we look forward to 2022, our operational focus remains on mitigating the challenges of the COVID-19 pandemic while delivering high-quality support services on behalf of our government agency partners. While we experienced a significant increase in COVID cases in the early part of 2022 consistent with the spread of the Omicron variant across the country, we are currently seeing significant declining cases among our staff and the individuals in our care. Our commitment to operational excellence is unwavering, and our continued success is underpinned by the dedication of our frontline employees who provide humane and compassionate care to all those entrusted to our facilities and programs. One of the significant challenges we face is the ability to recruit and retain staff in what has become a very difficult labor market. We've been working collaboratively with our government agency partners, who themselves are facing the same challenges. Over the past year, we have increased wages in several states and are evaluating additional initiatives, including bonuses, changing benefits and policies, and alternatives to address the challenges of finding adequate and affordable housing. At the management and Board level, we remain focused on reducing our debt and deleveraging our balance sheet. During the fourth quarter, our Board unanimously approved a plan to terminate our REIT election and become a taxable C corporation effective for the 2021 fiscal year. The Board also voted unanimously to discontinue our quarterly dividends. We expect the change in our corporate tax structure will give us additional flexibility to allocate free cash flow towards reducing net recourse debt. Over the last two years, we have reduced our net recourse debt by approximately $250 million, and we expect to focus all our excess cash flow over the next several quarters towards further reducing our net recourse debt. The decisions made by our Board are consistent with the proactive and multifaceted approach we have implemented to address our future debt maturities, which include our continuing focus on net recourse debt reduction and delivery. Our review of potential sales of company-owned assets and businesses and our ongoing discussions with our banks and the advisors for our lender and bondholder groups concerning a potential transaction to further reduce our funded recourse debt and extend our debt maturities. We believe that these are prudent steps that are in the best interest of our shareholders and other stakeholders. After attaining our objective of net recourse debt reduction and delivery, we plan to evaluate the allocation of a portion of free cash flow to fund quality growth opportunities and potentially return capital to shareholders in the future. Before I turn the call over to Brian, I'd like to highlight another important milestone we achieved in the fourth quarter of 2021. With the publication of our third annual human rights, environmental, social, and governance report, this report includes new disclosures related to our Board oversight of human rights and ESG matters, employee diversity and training programs, corporate governance, and environmental sustainability. Our ESG report also highlights our continued commitment to respecting human rights and improving the lives of those entrusted to our care. Our ESG report reinforces our commitment to providing enhanced rehabilitation and post-release support services through our award-winning GEO Continuum of Care program. During 2021, our Continuum of Care facilities delivered approximately 2.8 million hours of enhanced rehabilitation programming. We also awarded approximately 2,100 GEDs and high school equivalent degrees; 6,800 vocational certifications; 5,500 substance abuse treatment completions; and 38,600 behavioral program completions. We continue to be committed to advancing our ESG goals throughout our organization, and to that objective, our Board committee structure has been expanded to include a committee on criminal justice, rehabilitation, and human rights. We look forward to continued engagement with our shareholders and other stakeholders as we evaluate additional human rights and ESG initiatives. At this time, I'll turn the call over to Brian Evans to address our debt reduction initiatives in more detail and review our financial results and guidance.

Thank you, George. Good morning everyone. As a result of our transition to a taxable C corporation in fiscal year 2021, during the fourth quarter, we incurred a one-time non-cash deferred tax charge of approximately $71 million. We also incurred approximately $21 million in incremental income tax in the fourth quarter due to our new higher effective tax rate, including a catch-up tax expense of approximately $17 million related to the first three quarters of 2021. Due to these tax items, we reported a GAAP net loss attributable to GEO of $0.41 per diluted share during the fourth quarter with revenues of approximately $557.5 million. Our fourth quarter results also include a $700,000 pretax gain on real estate assets, $2.2 million in startup expenses, $4.1 million in M&A-related pretax expenses, a $1.3 million pretax loss and settlement on asset divestiture for the divestiture of our used services business, $3.3 million in close-out pretax expenses, and a $2.6 million tax benefit in the adjustment to net income attributable to GEO. Excluding these items, the one-time non-cash deferred tax charge, and the portion of additional income tax expense associated with the first three quarters of 2021, we reported fourth quarter adjusted net income of $0.38 per diluted share and AFFO of $0.65 per diluted share. Our fourth quarter 2021 adjusted EBITDA increased by 15% to $124 million. Our performance for the entire year exceeded our prior expectations, which we believe demonstrates the stability and strength of the business. Despite the non-renewal of seven of our federal facility contracts in 2021, which represented annualized revenues of about $259 million, our company delivered strong financial results. Our full year 2021 revenues declined by less than 5% to $2.26 billion. Our full year 2021 normalized FFO was $234 million and AFFO was $299 million, which were largely consistent year-over-year, and our full year 2021 adjusted EBITDA increased by 6% to $467 million. Looking ahead to our financial guidance for 2022, we anticipate full year net income attributable to GEO and adjusted net income to be in a range of $0.99 to $1.07 per diluted share on annual revenues of approximately $2.17 billion. We expect full year 2022 AFFO to be between $2.05 and $2.13 per diluted share, and adjusted EBITDA to be in a range of $422 million to $438 million. We intend to continue our focus on reducing net recourse debt in 2022, consistent with the efforts over the past two years during which we reduced net recourse debt by about $250 million. For the first quarter 2022, we forecast net income attributable to GEO and adjusted net income to be between $0.21 and $0.23 per diluted share, and AFFO to be between $0.48 and $0.50 per diluted share with quarterly revenues of $550 million to $555 million. Our 2022 guidance reflects the normalization of the non-renewal of our seven Department of Justice contracts during 2021 which had combined annualized revenues of about $259 million. It also does not include two additional Department of Justice direct contracts with contract option periods expiring in 2022, which had combined annualized revenues of around $90 million. Our guidance anticipates higher operating expenses, largely due to wage increases and bonuses for our facility staff, which we have implemented in collaboration with our government agency partners, and have been primarily supported by increases in our per diem rates. Regarding other inflationary pressures, the main impact on our facilities from inflation is due to the rising labor costs, which have always constituted our largest operating expense. In terms of occupancy rates, we have not assumed significant improvement in utilization for our reentry centers and ICE facilities, which currently remain well below historical levels, partly due to the effects of COVID-19 restrictions. Despite these factors, we are pleased that our guidance indicates a decline of less than 10% in our projected adjusted EBITDA for 2022. Our guidance also anticipates a higher effective tax rate, which we expect to be around 29% because of our transition to a taxable C corporation. Lastly, working with our financial and legal advisors, we are engaged in discussions with our banks and advisors representing our term loan lenders and bondholders. The aim of this process is to reach agreements on transactions to reduce our net recourse debt and extend the maturities of our senior unsecured notes, revolving credit facility, and term loan on reasonable terms. We believe that our company, along with our lenders and bondholders, shares an interest in achieving this goal, and we are encouraged by our ongoing and productive discussions with these groups and their advisors. We will update our financial guidance as needed. If we successfully complete a transaction to account for the expected rise in interest expenses, a 1% increase in our weighted average cost of debt would raise our annualized interest expense by about $18 to $20 million, based on our current net recourse debt. Regarding our capital structure, at the end of 2021, we had about $506 million in cash, primarily from the previously announced drawdown of our revolving credit facility. Taking into consideration our cash on hand, our net recourse debt now stands at roughly $2.1 billion, excluding non-recourse debt, finance lease obligations, or the mortgage on our corporate headquarters. We have been executing a multifaceted approach focused on reducing our balance sheet leverage. Between 2020 and 2021, we decreased net recourse debt by approximately $250 million. Going forward, we plan to continue emphasizing net recourse debt reduction with the goal of lowering it by at least $150 million to $200 million annually. We also believe we will be able to address our debt maturities in due time on reasonable terms. Our strategy includes exploring potential opportunities to sell company-owned assets and businesses. Between January 2021 and February 2022, we completed or entered into contracts for eight sale transactions with proceeds of approximately $64 million. At this time, I will turn the call over to James Black for a review of our GEO Secure Services segment.

Thank you, Brian. Good morning, everyone. I'd like to begin by providing you an update on the 2021 operational highlights for Geo Secure Services. Throughout the year, our operational efforts have been focused on the continued implementation of mitigation strategies to address the risks associated with the COVID-19 pandemic. These mitigation initiatives and practices are consistent with the guidance issued by the Centers for Disease Control and Prevention. Our employees have continued to have access to paid leave and paid time off to be able to remain home as needed. We have made facemask and cleaning supplies continuously available across our facilities. We made a significant investment of $2 million to deploy Abbott Rapid test devices across our facilities, allowing us to screen new arrivals at intake and isolate and quarantine positive cases. Through the end of 2021, we had administered approximately 206,000 COVID tests at our Secure Services facilities since the start of the pandemic. We also invested $3.7 million to install bipolar ionization systems at select care services facilities to reduce the spread of airborne bacteria and viruses. We continue to work closely with our government agency partners and health departments to make vaccinations available at our facilities. At the end of 2021, approximately 48,000 individuals in our Secure Services facilities had been vaccinated. At this time, 72% of our staff, close to half of our detainees, and 80% of state inmates are vaccinated across our Secure Services facilities. We continue to evaluate these steps and we'll make adjustments based on updated guidance by the CDC and other best practices. Despite the unprecedented challenges associated with the pandemic, our employees and facilities achieved several important milestones in 2021. Our facilities successfully underwent over 150 audits, including internal audits, government reviews, third-party accreditations, and certifications under the Prison Rape Elimination Act. Our medical service staff undertook more than 400,000 quality health care-related encounters, including intake health screenings, medical and dental visits, sick calls, and off-site appointments. In 2021, we also completed more than 1.9 million employee training hours and over 42,500 training sessions. Our GTI transportation division safely completed approximately 13.5 million miles driven in the United States and overseas. We are proud of our frontline employees for their commitment to operational excellence and dedication to delivering humane and compassionate care to all those in our facilities. Moving to a review of trends impacting our government agency partners, starting at the federal level, our prisons have experienced a decline in federal prison populations over the last decade. This decline has accelerated in the last two years as a result of the COVID-19 pandemic, which slowed the adjudication of criminal cases in the federal courts, further slowing the rate of new intakes into the federal prison system. After the signing of the President's executive order in January of 2021, the BOP did not renew the direct contracts of our six company-owned facilities, totaling more than 10,000 beds that had contract option periods expiring in 2021. Throughout 2021, we worked closely with the Bureau of Prisons to transition those populations at these facilities. We have enjoyed decades-long partnerships with the Bureau of Prisons, and our facilities provide high-quality support services during times when the federal prison system was facing overcrowding challenges. At the end of 2021, we now have only one remaining company-owned facility, with 1,800 beds under direct contract with the Bureau of Prisons, and we expect this contract to not be renewed at the end of September 2022. Unlike the BOP, the US Marshals Service has had stable population levels over the last several years. The USMS houses pretrial detainees who are facing criminal charges and are awaiting sentencing in the federal courts. The USMS does not own and operate detention facilities. This agency contracts for detention capacity primarily through intergovernmental agreements and to a lesser extent direct contracts with private sector service providers. In 2021, one of our company-owned facilities under direct contract with the USMS was not renewed when its option period expired at the end of the month. We have since sold that facility. Additionally, one other facility, which we leased from a third party as a direct contract with an option period that was set to expire at the end of September 2021, was extended by the US Marshals Service through the end of March 2022. Our current guidance does not include that contract, although we continue to work on options for keeping the facility in operation. We also have one other company-owned facility and one company-leased facility that have direct contracts with the US Marshals Service. In those cases, the contract option period expires in 2023. With respect to ICE, the processing centers that the agency relies on continue to face COVID-19-related restrictions and their utilization remains significantly below historical levels. Court-mandated guidelines related to social distancing and the Title 42 public health restrictions at the southwest border have been the primary driver of this lower utilization. At the end of 2021, ICE processing centers nationwide housed approximately 21,000 individuals. ICE is currently funded for 34,000 beds, and the agency is currently under a continuing resolution. Appropriations bills for the current fiscal year, which ends on September 30, and for the next fiscal year, which begins on October 1, are currently being considered by Congress. Our focus continues to be on providing high-quality support to ICE and the Department of Homeland Security. The ICE processing centers where GEO provides support services, offers 24/7 access to quality healthcare, access to legal counsel, culturally sensitive meals approved by registered dietitians, access to faith-based and religious opportunities, and enhanced recreational amenities including artificial turf soccer fields, covered pavilions, and exercise equipment, etc. Moving to a discussion of our state government agency partners, nationwide correctional agencies are facing significant staffing challenges as a result of a rapidly changing labor market. Over the last year, we have increased wages at several of our facilities, and we are exploring additional initiatives to improve the recruitment and retention of staff in the communities where our facilities are located. These initiatives include paying bonuses, enhancing paid time off policies, and considering alternatives to address the challenges our staff often face in finding adequate and affordable housing. We are undertaking these efforts in a collaborative way with our government agency partners. Over the last couple of years, we have been able to secure additional funding in Arizona, Georgia, Florida, Oklahoma, and other states, either through the legislative appropriations process or working directly with our customers to support wage increases and other recruitment and retention efforts. With respect to contracted activity during the fourth quarter, we already renewed two state correctional facility contracts. In Florida, we renewed our contract for the Blackwater River Correctional and Rehabilitation Facility for a two-year period. In Arizona, our contract for the Central Arizona Correctional Facility was renewed for a five-year term. The significant challenges of the COVID-19 pandemic have also highlighted the need for modern facilities to replace older inefficient prisons that are more costly to operate. Several of our state government partners have in recent years pursued initiatives to replace older infrastructure with more modern facilities under public-private partnerships. In Arizona, the state recently announced the closure of several older prisons to be replaced with the increased use of public-private partnership facilities. In Alabama, we recently entered into a purchase agreement for the state to buy our idle Perry County Correctional Facility. In New Mexico, the state transitioned our Guadalupe County Correctional Facility to a lease-only agreement with the Department of Corrections taking over the management functions. In Georgia, the current budget under consideration by the State Legislature includes funding for the state to purchase or lease a public-private partnership facility and separately build a new prison. In Florida, the state legislature is considering construction of two new 4,500 bed correctional facilities as part of its correctional modernization program. Temporarily other states, including Hawaii, are considering building replacement facilities to replace older prisons. At this time, I will turn the call over to Dr. Ann Schlarb for a review of GEO Care.

Thank you, James. And good morning, everyone. I'd like to review the 2021 operational highlights for our GEO Care business unit, which includes our reentry services and electronic monitoring and supervision segments, as well as our GEO Continuum of Care program. Consistent with the efforts that our Secure Services facilities, GEO Care facilities and programs focused on implementing COVID-19 mitigation strategies throughout the year. These strategies and practices are consistent with the guidance issued by the CDC. Our efforts continue to be focused on increased sanitation, testing, deploying facemasks, additional screening measures for entry into our facilities, as well as ensuring that our employees have access to paid leave and paid time off to remain home as needed. We evaluate these steps on an ongoing basis, and we will make adjustments based on updated guidance from the CDC and other best practices. Looking at each of our segments, our GEO Reentry services facilities continue to operate significantly below historical occupancy levels throughout 2021. Our residential reentry centers have been impacted by the spread of COVID-19 and the imperative of providing safe environments that include social distancing measures and other practices. As a result, government agencies across the country have prioritized placement of justice involved individuals into non-residential alternatives like furloughs, home confinement, day reporting, and electronic monitoring programs. Notwithstanding these challenges during 2021, GEO Reentry services renewed 31 residential reentry contracts, including 15 contracts with the Federal Bureau of Prisons. Additionally, our non-residential business experienced strong growth in 2021 as a result of these trends. Throughout the year, we opened 12 new Day reporting centers in Idaho, Tennessee, Louisiana, and California with the capacity to provide services for up to approximately 1,000 individuals. Our electronic monitoring and supervision segment also continued to grow during 2021, with annual revenues increasing by 15%. BI provides a full suite of electronic monitoring and supervision solutions, products and technologies on behalf of federal, state, and local agencies across the country. At the federal level, BI supports the US Department of Homeland Security, providing technology solutions, ballistic case management, supervision, and monitoring under the intensive supervision and appearance program, also called ISAP. ISAP is a key component of the federal government's Alternative to Detention Program, or ATD. BI has provided services under the ATD program since 2004 and was awarded the five-year contract for ISAP in 2020, through a competitive rebid that is effective through July of 2025. Over this long tenure BI has established itself as the premier provider of comprehensive community-based case management, supervision, and monitoring services with an unparalleled footprint of offices, technology, and partnerships with community-based and non-governmental organizations. During 2021, the number of non-citizens under the ISAP program almost doubled. Recently, ICE issued a competitive procurement for a new ATD program, which is incremental to ISAP. This new program involves young adults and is expected to have approximately 16,000 participants. This program is expected to closely resemble the family case management programs that ICE implemented seven years ago, which GEO Care bid on and won back then. We expect ICE to bid on this new ATD program for young adults and we believe that we are well-positioned for this procurement given ICE's unparalleled expertise and scope. Finally, despite the significant challenges associated with the COVID-19 pandemic, we are proud that our GEO Continuum of Care programs achieved several important milestones throughout the year. In 2021, we completed approximately 2.8 million hours of enhanced rehabilitation programming. Our academic programs awarded approximately 2,100 GEDs and high school equivalency degrees and our vocational courses awarded approximately 6,800 vocational training certifications. Our substance abuse treatment programs awarded approximately 5,500 program completions, and we achieved over 38,000 behavioral program completions. We also provide post-release support services to more than 4,500 individuals returning to their respective communities. Our GEO Continuum of Care integrates enhanced in custody rehabilitation, including cognitive behavioral treatment, with post-release support services that address community needs of released individuals, including housing, food, clothing, transportation, and employment assistance. We believe that the scope of our award-winning program is unparalleled and provides a proven successful model on how the 2.2 million people in the US criminal justice system can be better served in changing their lives. We're very proud of our frontline employees who have continued to deliver rehabilitation and reentry programming to those in our care throughout these difficult times. At this time, I'll turn the call to Jose for closing remarks.

Thank you, Ann. We are very proud of all of our employees who have demonstrated incredible commitment and dedication during this unprecedented global pandemic. We are pleased with our operational achievements and financial performance throughout 2021. We recognize the challenges that our facilities continue to face. We are very focused on efforts to enhance the recruitment and retention of staff across the country. This is one of the most significant challenges facing both public and private organizations today, and our management team fully recognizes its importance. We're also working diligently to address our debt maturities. We recognize the constraints related to our ability to access financing in the future. We have made significant progress towards reducing our net recourse debt over the last two years, and that will continue to be a key focus going forward. We have laid out a multifaceted approach to address our future debt maturities, including a continued focus on debt reduction and deleveraging, the change in our corporate tax structure from a REIT to a taxable C Corporation, ongoing review of potential sales of company-owned assets and businesses, and more recently, our ongoing engagement with our banks and with the advisors of our lender and bondholder groups. Our goal with this process is to be able to reach agreement on and execute a transaction or series of transactions to reduce our net recourse debt and extend the maturities of our outstanding senior unsecured notes, our revolving credit facility, and our term loan, all on reasonable terms. We are engaged in these discussions in good faith and believe that we share a common interest with our lenders and bondholders to successfully complete this process. But we also plan to evaluate other capital structure alternatives with the assistance of our financial and legal advisors. After attaining our objective of net recourse debt reduction, we plan to evaluate the allocation of a portion of free cash flow to fund quality growth opportunities and potentially return capital to shareholders in the future. We believe that our company remains resilient with strong cash flows that are supported by valuable real estate assets and diversified contracts entailing essential government services. That completes our remarks. We would be glad to take questions.

We will now begin the question-and-answer session. The first question will come from Joe Gomes of NOBLE Capital. Please go ahead.

Good morning, and thanks for taking my questions.

Morning, Joe.

I wanted to start by mentioning a report that came out yesterday about a potential US pilot program for BI concerning immigrants under house arrest. I'm curious if this is related to the 16,000 potential participants we’ve discussed, or if they are separate programs. If the pilot program is indeed the same, could you provide some insights on its timing and what it might mean for BI?

Good morning, Joe. This is Ann Schlarb. Thank you for your questions. These are two different programs that you're reading about in the media. The one that is publicly announced is the RFP for a Young Adult Case Management Program, which involves approximately 16,000 participants in around 16 different locations across the company. The second program being discussed in the media is a home confinement pilot, and we're not able to provide more details about that at this time.

Okay. But obviously, there's lots of stuff going on that could potentially be a positive incremental factor for BI.

As we discussed, our population has grown significantly, and alternatives are being used extensively. So I believe that is correct.

Okay. Thank you for that. And on the debt reduction, you mentioned a couple of times your objective for net recourse debt reduction, I was wondering, can you kind of quantify that? Are you looking for a specific number or net debt leverage ratio? And also, kind of hand in hand with that, with your discussions with the various groups on the debt holders, they've been going on for a while reportedly, what have you come to an agreement with our close to agreement with, and what still seems to be something that you need to narrow the gap in?

Well, let me address the first part. On an annual basis, we believe we will generate approximately $150 to $200 million in net free cash flow that we can use to reduce debt. We're currently focusing on net recourse debt reduction because we have a significant amount of cash on the balance sheet and haven't paid down much debt this year; we've paid some but are mostly holding cash. This cash will also be used in our negotiations with various creditor groups, and part of those negotiations will involve allocating that cash to different debt tiers we've discussed. We're talking about several items, but I prefer not to disclose specifics publicly. We have released some information regarding issues related to covenants, structure, mandatory payments, excess cash flow, and interest rates. There are numerous factors being addressed, and I believe we are making progress in most of these areas.

Any feel for how much longer this will take, or is it just still, hey, where’s the discussion process, and they could just drag on for a while here?

I believe that all parties and their advisors are actively involved and engaged. We hope for progress at a reasonable pace, though it's a complicated process. There are different groups involved, including banks, term loan lenders, and note holders, each with their own interests. While it's complex to navigate these issues, we are optimistic about making significant progress in the first half of the year.

Okay. And kind of similarly, you've talked about potential or reviewing potential asset sales or business sales. Can you give us any kind of color update on the no progress there, and what kind of timing you might be looking at for completion of that review?

Well, I would say it's an ongoing review, as I think I mentioned, and maybe George mentioned as well that we've sold over the last year or so about $65 million worth in net proceeds, mostly of asset sales. And mostly we're looking at idle facilities as they become available that we believe makes more sense to sell rather than try to redeploy. Most of those have been smaller facilities. The most recent one was our Perry facility in Alabama that was about $15 million. And there are some other land that we own, other idle assets, more assets that we continue to market and try to sell.

Okay. Thanks on that. And you mentioned, as we all know, the government's operating under a continuing resolution, and you talk about some of the bills that are for the rest of this government fiscal year and going into the 2023 government fiscal year that are currently being reviewed in Congress, and could you give us maybe some color as to where the current negotiations are in funding compared to where they've been historically? You mentioned a couple of times that there's today roughly around 19,000 ICE detainees, they have funding for 34,000. Do you still think they're going to stay or that 34,000 levels of funding, or do you think that's going to come down from there?

Well, we really don't know. The current discussions are about another short-term continuing resolution of just four to six weeks, I believe. So, following that, there'll be an attempt to do a full budget for the balance of the fiscal year. But it could be another continuing resolution. I think somebody said it's been maybe 20 years since there's been an actual budget that has been approved. So since then, we've been working on continuing resolutions of some sort or another.

Okay. Thanks for that. And I guess one more, if I may. Any kind of new news that you guys might be seeing on when Title 42 might be lifted?

No, we really don't have any insight into that. We've been hearing that it's imminent, but it's been imminent for a long time.

Yes, that is true. Well, thanks for taking the questions. Really appreciate it.

Thank you, Joe.

Thank you.

Yes. Hi, good morning. Thanks for taking the questions. First, a couple as it relates to the labor environment. Most likely, you should be seeing a pickup in occupancy rates with the pandemic receding and mandates being largely lifted, etc. I'm curious in terms of your ability to handle increased occupancy given the tight labor market?

We are experiencing our lowest vacancy levels in state facilities compared to our federal facilities, where wages are considerably higher, and there is often a contractual obligation to maintain nearly full staffing. The main concern lies within the adult state institutions, and we have been collaborating with our governmental partners to raise those wages, and I believe we have made good progress on a client-by-client basis. We hope that by the middle of the year or slightly later, the labor market will stabilize, allowing us to return to pre-pandemic conditions.

Okay. So, you do have the ability to go back to the clients fairly quickly to sort of mitigate the…

Yes, we do.

In cost increases you're seeing right now. Okay. And, as it relates to the debt refinancing, just one clarification here, and I know it's very complicated and still early in the process, but should we be looking for maybe three separate announcements as it relates to 2023, 2024, and 2026, or could it potentially be all taken care of in terms of one big announcement?

I want to be cautious about making any promises, but our goal is to address the bulk of the capital structure simultaneously, which would be a more comprehensive approach. We are aiming for an announcement that pertains to the maturities for 2023 and 2024, across all areas of the capital or debt structure. Additionally, some of the maturities set for 2026 could also be impacted.

Thank you. Brian, regarding the fourth quarter, we noticed several one-time items. I'm interested to know if most of those will be resolved as we move into the first quarter or even into 2022.

Yes, I think that's the case. We had a number, I call it, maybe, transitional items in 2021. We had some asset divestitures. I think we'll continue to maybe see some gain or loss on disposal of assets. And as we're working through this financial restructuring, we'll continue to have some costs associated with that. But I would think that would be the big areas of potential sort of one-off type issues or costs.

Okay. Thanks. And then, just on the revenue guidance, just curious in terms of maybe your assumptions or expectations, as it relates to occupancy rates moving up, whether it's from cross-border apprehensions, etc., or an increase in court sentencing activity, just some more color on your thought process there. And I know you've talked about BI growing really strongly in 2021, and maybe your expectations in terms of that run rate continuing in 2022 and maybe beyond.

Yes, I would say that James provided a detailed overview of our various customer segments. As George mentioned, our state customers are generally operating at high occupancy levels. The Marshalls contracts tend to be more volatile but are also in good condition. We are still experiencing lower occupancy levels in our ICE facilities. In 2021, we clearly stated that we did not anticipate occupancy levels exceeding the minimum guarantees, and we have largely adhered to that in 2022. However, we do expect those numbers to improve later in the year, although we have not projected anything beyond that. As you mentioned, there was notable growth in the ISAP contract during 2021. We are seeing continued growth, but not at that rapid pace, as we will be more cautious about what might happen there. The policies surrounding that can be unpredictable. So we are taking a prudent approach. There is some growth, but it is not as substantial as what we experienced in 2020.

Okay. Thanks. And then on the idle cell piece, I'm assuming you're not counting on any new business, in terms of where things stand on that front right now.

Yes. In our guidance, we usually don't include any speculative new business. We're certainly working aggressively to reactivate some of those facilities. But we haven't included any new business related to those facilities in the forecast.

Okay. Thanks for taking the questions.

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

Hello, everyone. Can you hear me?

Yes, we can.

Wonderful. I just found this call very helpful. Thank you. I have a couple of follow-up questions regarding the guidance and some of the new business opportunities. The revenue guidance for 2022 appears to be down about $100 million year-over-year at the midpoint, and I suspect that part of this is due to the loss of the nine contracts you anticipated would be lost. What are the…

Most of that will be influenced by the closure of the BOP facility and the Marshals facility that ended in 2021, as well as the normalization of those expirations. Additionally, we expect a few contracts from 2022 to transition away. This impact is balanced by various per diem adjustments related to some of our state contracts, addressing wage pressures at those facilities, along with our projections for the non-residential electronic monitoring business.

Thank you, that's helpful. I know you might have mentioned this, but what are your assumptions regarding the ICE contracts that are expiring in fiscal 2022?

So we've assumed the contracts renew as they come up. We don't have any of those going away.

Okay. Fantastic. Thank you. And the margins look pretty consistent with the Scope 21, despite the higher labor costs. It's really, really remarkable. With respect to the new business, you mentioned Georgia and Florida. Do you know how many people reside in those facilities in Georgia that they're scheduled to close?

No. On Georgia there, I don't know that there'll be a closure of a facility…

And they certainly haven't announced any closures in Florida. That's yet to be determined probably over a period of time.

Okay, I thought Georgia had just announced that they are going to build new facilities.

Yes. We believe there's an opportunity in Georgia for us.

Great. Do you know what they're thinking in terms of timing?

No, they are still in legislative session and need to get through that. I assume it will be fairly reviewed and approved by the governor, probably in the second half of the year. The same applies to Florida.

Do you have, I mean, you might have mentioned this, but how big the opportunity in Florida is?

Well, the discussion presently is two 4,500 bed facilities.

Thank you. Lastly, regarding voluntary work programs, I noticed that ICE has allowed you to shut down the program in Washington State. I'm curious if you have plans to do something similar in other ICE facilities and if you can provide any updates about ICE potentially indemnifying you for any losses related to that.

Well, the program that was shut down in Tacoma resulted in a fairly modest increase in contracted services to replace the program. So we have essentially full staffing at that facility and, you know, a modest detainee population level of approximately 500. You know, so there's probably 300 staff, 300 or 400 staff to look after 500 detainees. That's because of the pandemic and COVID-19 the detainee levels and the employee levels are kind of out of whack in the sense there's a lot more employees to look after a lot less detainees.

Thank you. I was wondering if you were terminating the voluntary work programs throughout all of your ICE facilities?

No, no, we're not. And that's not our decision. It's an ICE decision as to where the discontinuation of this program could take place. Because otherwise, it's the contractual requirement for any operator of an ICE facility to administer the volunteer work program.

Got it. Thank you. Is there – and it might be too early for this. But, you know, have they expressed any willingness to share any costs you may be incurring or offering that program to detainees?

Well, we're in discussions on that issue.

Great, thank you very much. Great call.

Thank you.

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

Hey, thanks. Thanks for hanging in there. I just want to clarify something on the guidance. Apologies if I missed it, specifically. You said embedded in the guidance is a current interest rates on the facilities or an expected change in the interest rate on the facilities on your facilities that are in discussions?

The guidance is based on our status quo debt capital structure.

Got it? Okay. Then, wanted to ask you about in terms of assets for sales or is it individual assets? Is it business lines? Is there anything off the table for sale?

Well, I think I described what is for sale. I don't know that I'd say what's off the table. But we described what is for sale. Generally, idle facilities, smaller assets that we feel makes more sense economically to dispose of than it does to try to redeploy those assets.

Okay, I apologize. I missed that comment. And then just lastly, the electronic monitoring business, I'm wondering, there was that comment about the potential pilot program with ICE. Just wondering, from a governance standpoint, that doesn't seem like a particularly difficult business to – I shouldn't say that way. But it doesn't require a new facility to be built. It just requires staffing, essentially, plus some equipment. Why is that a business that's not being run by the government? I mean, like all things considered, what's going on with politically? Why is that something they're considering doing with you rather than doing themselves?

I think most…

Hey, Jordan, this is Ann Schlarb. And I would say, the government would have to respond to this specifically why they were procuring rather than doing it themselves. But ICE is fundamentally a law enforcement agency. And these services that are provided are very much on the case management side. So it essentially becomes valuable to augment it for ICE when they're carrying out their responsibilities. Of note on this particular RFP, it is not a technology-based RFP. So it does not include electronic monitoring. It’s a very case management intensive type of program. And it works very closely with community-based and non-governmental organizations. And those are the types of services that we've been providing for the agency for 17, 18 years now. And so I think there's a proven track record and working closely with the private sector in providing these and generating good outcomes and successes in the programs.

Let me rephrase my question. I appreciate your previous point, but my inquiry wasn't about the reasons behind their decisions. I apologize for the misunderstanding. What I meant to ask is whether state and local agencies typically engage in this kind of monitoring, specifically in case management.

There may be some, but as Ann mentioned, ICE is not an operator. They function more like a law enforcement agency and do not manage any ICE facilities.

They don’t operate a call center…

No. And the Marshals Service are not an operating entity. So it's not unusual. It's nor amended.

No, to George's point, most of the services at the state, federal, or local level are provided by companies like BI and other private sector companies.

Okay. I guess, I appreciate the point about ICE and Marshals, I get it. Even at the local level, you're saying that generally speaking, these are not services provided by governmental agencies.

This is more so social service type services that they're looking at in this RFP again, doing….

Yes.

Yes. No, I apologies. I appreciate that point. I was moving on from that ICE thing to just asking about the electronic monitoring and services business in general, right? So in general, not specifically related to the ICE, this ICE new pilot program, our electronic monitoring services and these other social services also provided by governmental agencies, and outsource in some cases, it's just business. I apologies because it's a business, I've been focused on that as much.

In some cases, like County Sheriff's departments have electronic monitoring program. In other cases, in local government, they contract out those services. So, there are thousands and thousands of local governments around the country. I think it's 3,000. So we don't have an explanation of what all of them do. We know that we have several of those customers, I think, in BI they have 1,000 customers between counties and local governments.

That's correct, George, and there is a variety of models out there. They're pretty numerous where they normally lease the equipment. And then, the intensity of how the provider gets involved in assisting the government is up to how they put their scope of work out, what they're looking for. And that is vary across the thousands of contracts that we have across the country.

Perfect. That's what I was aiming at. Thank you. That’s help.

You're welcome. Sorry, I can be a little literal, in my response.

No, no, no. You asked the right question. That wasn't you. I’m sorry. Thank you.

The next question is from Oren Shaked of BTIG. Please go ahead.

Hi. Good morning. Most of my questions have been answered. But I just had two quick ones. The cost performance in 2021 was obviously excellent. In light of some of the comments that you've made, is it fair to assume that you don't see the same opportunity to potentially outperform again this year?

This is Brian. We've taken a careful view on the cost benefits, which were partially due to lower occupancy levels at our facilities because of the COVID pandemic. There might be some ongoing benefits in 2022, but we've aimed to adopt a reasonable and cautious perspective on that.

Understood. And Brian, the cash did come in a little wider than what you were forecasting in the cleansing docks, can you just help us out with why that is?

So we had one customer, a fairly substantial customer that was delayed in payments, nothing to do with us or any invoicing, they actually put in place a new system of payment processing system, and they're probably about four months behind on payments, which is worth about price $30 to $40 million. So we expect them to catch up in the first quarter at the latest early second quarter.

Understood. That's it for me. Thank you.

And this concludes our question-and-answer session. I would now like to turn the conference back over to George Zoley for any closing remarks.

Well, thank you for joining us on this conference call. We look forward to our next one. Thank you.

Thank you. The conference has now concluded. Thank you all for attending today's presentation. You may now disconnect your lines. Have a great day.