CoreCivic Q2 2024 Earnings Call Transcript

Quartr
Provided by Quartr
August 8, 2024

There are 8 speakers on the call.

Operator

Good day, and thank you for standing by. Welcome to the 2024 Second Quarter CoreCivic, Inc. Earnings Conference Call. At this time, all participants are in a listen only mode. After the speakers' presentation, there will be a question and answer session.

Operator

Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mike Grant, Managing Director of Investor Relations. Please go ahead.

Speaker 1

Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us today. Participating on today's call are Damon Hininger, Korslevic's President and Chief Executive Officer and David Garfinkel, our Chief Financial Officer. We're also joined here in the room by our Vice President of Finance, Brian Hammonds. On this call, we will discuss financial results for the Q2 of 2024 as well as financial guidance for the 2024 year.

Speaker 1

We will also discuss developments with our government partners and provide you with other general business updates. During today's call, our remarks, including our answers to your questions, will include forward looking statements pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our Q2 20 24 earnings release issued aftermarket yesterday, as well as in our Securities and Exchange Commission filings, including Forms 10 ks, 10 Q and 8 ks reports. You are also cautioned that any forward looking statements reflect management's current views only and that the company undertakes no obligation to revise or update such statements in the future. Management will also discuss certain non GAAP metrics.

Speaker 1

A reconciliation of the most comparable GAAP measurements is provided in the corresponding earnings release and included in the company's quarterly supplemental financial data report posted on the Investors page of the company's website at corecivic.com. With that, it is my pleasure to turn the call over to our President and CEO, Damon Hininger. Thanks, Mike. Good morning and thanks everyone for joining us for CoreCivic's Q2 2024 Earnings Call. On today's call, I will provide details of our Q2 financial performance.

Speaker 1

I will also discuss our latest operational results and update you on the latest developments with our government partners and our capital allocation strategy. Following my remarks, I will turn the call over to our CFO, Dave Garfinkel, who will provide greater detail on our financial results and on our 2024 financial guidance. Dave will also provide an update on our ongoing capital structure initiatives, including details on our stock repurchase plan, debt repayments and progress on our leverage target. I'll start with a high level overview of our 2nd quarter financial results. In the 2nd quarter, we generated revenue of $490,100,000 a 6% increase compared with the prior year quarter.

Speaker 1

During this quarter, we experienced revenue growth from all 3 of our partner groups, federal, state and local governments. I will provide more color on each later in this call. For the Q2 of 2024, we generated normalized funds from operations or FFO of $46,600,000 or $0.42 per share compared with $37,800,000 or $0.33 per share in the Q2 of 2023, representing a 27% per share increase. The increase in FFO was driven by higher federal, state and local populations in our Safety and Community segments, combined with expense normalization and lower interest expense resulting from our debt reduction strategy. These increases were partially offset by slightly higher G and A expenses and decreased lease revenue in our property segment resulting from the previously disclosed expiration of a lease with the State of California at our California City Correctional Center effective March 31, 2024.

Speaker 1

Federal partners, primarily Immigrations and Customs Enforcement or ICE and the United States Marshals Service comprised slightly over half of CoreCivic's total revenue. During the Q2 of 2024, revenue from our federal partners increased 7% versus the Q2 of last year. Revenue from ICE, our largest partner, was up significantly as Title 42 was still in place for approximately half of the comparable quarter of last year. As a reminder, Title 42, which was invoked in March of 2020 at the start of COVID-nineteen response, empowers federal health authorities to deny migrants entry to the United States in order to prevent the spread of contagious diseases. Title 42 officially ended May 11, 2023 and our populations with ISF been consistently higher since then.

Speaker 1

During the Q2 of 2024, revenue from ICE was $151,000,000 compared to $136,700,000 during the comparable quarter of 2023. Now I'd like to review ICE's usage of detention capacity broadly. Following passage of the bipartisan funding bill in March of this year, which provided funding for 41,500 detention beds, ICE's actual usage of detention beds dipped from 39,000 at the start of March to roughly 34,000 to 35,000 in April before increasing to roughly 37,000 to 38,000 to the end of the quarter. The most recent ICE detention count was just over 37,000 on July 13, 2024. Note that funded beds also include payment for a number of beds reserved under fixed payment contracts, but not fully used at certain facilities.

Speaker 1

So beds paid for do not equal beds used and therefore the actual number in detention won't necessarily reach that full 41,005 100 funded level. ICE reserves these beds under fixed payment contracts to ensure that they have capacity when needed. Seasonality, economics and geopolitical dynamics both abroad and here in the United States all influence immigration and as such ICE detention populations can fluctuate considerably. CoreCivic's role is to work closely and responsibly with ICE to assist them in their important mission, providing them with bed capacity in locations where needed in a safe, secure and humane environment. CoreCivic's revenue from state partners in our Safety and Community segments in the Q2 grew 5% versus the prior year.

Speaker 1

This increase is a result of higher per diem rates and steady from our state government partners as well as contributions from new state contracts with Montana and Wyoming signed in the Q4 of 2023, which contributed a bit over 1% of that growth. Additionally, as you may recall, the Allen Gamble Correctional Center in Holdenville, Oklahoma transitioned from a management contract with the state of Oklahoma to a lease in October of 2023. Excluding state revenue from the Allen Gamble facility from our Q2 of 2023, which shifted to our Property segment, state revenue in our Safety and Community segments increased nearly 10% year over year. The largest facility occupied by a state government partner in our Safety segment is the La Palma Correctional Center in Eloy, Arizona, where we pivoted from a federal contract to a contract with the State of Arizona roughly 2 years ago. I am pleased to report that financial performance at our La Palma facility continues to progress with stable occupancy and improving operating and financial metrics.

Speaker 1

La Palma's year over year EBITDA improvement in the Q2 was nearly $3,000,000 as we begin to realize returns on our investments and hard work directed at local hiring made there to end the facility's reliance on temporary labor resources and incentives. There is still room for improvement, but it is heartening to see the progress there. To round out our discussion of Q2 2024 revenue, local revenue in our Safety and Community segments, which is revenue generated from contracts with county governments, increased 49%, albeit off a smaller base. This growth reflects new management contracts signed in the second half of twenty twenty three with Hines County, Mississippi and Harris County, Texas. Both populations are housed at our Tallahatchie County Correctional Facility located in Tutwiler, Mississippi and the populations have adapted well.

Speaker 1

CoreCivic's overall occupancy in our Safety and Community segments for the Q2 of 2024 increased to 74.3% from 70.3% in the prior year period. This growth in occupancy stems from both higher use of existing contracts, particularly with ICE and also from the 4 new contracts signed in the second half of twenty twenty four that I have mentioned. From the Q2 of 2023 to the Q2 of this year, occupancy in our Safety segment increased from 70.8 percent to 75.1%, while occupancy in our Community segment declined very slightly from 62.8% to 62.3%. As we have mentioned in the past, our operating model has significant embedded operating leverage from changes in occupancy and this was a factor in our margin improvement during the Q2. In recent calls, we have discussed labor attraction and retention, important components of our business that has become particularly challenging starting with the onset of the COVID-nineteen pandemic.

Speaker 1

Labor market pressures during 20222023 necessitated temporary incentives and related incremental operating expenses, including travel and expense outlays. Using the flexibility that is an integral part of the private market solution set, the CoreCivic team responded by designing and implementing differentiated human capital strategies and investing in our frontline employee compensation. As a result of these initiatives, we have increased our staffing levels through improved recruiting and labor retention. The labor markets we see today in most of our geographies are displaying significant normalization and greater workforce stability. The labor cost increases we see now have returned to relatively normal levels, both on a year over year basis and in relation to per dream rates.

Speaker 1

Our improved staffing has allowed us to dial back elevated spending on temporary incentives and associated travel expenses and has positioned us well operationally to manage our customers' higher population needs. Our Safety segment has provided 92% of total revenue year to date and the net operating income for our Safety segment increased 25% during the Q2 of 2024 over the Q2 of 2023, reflecting the strong occupancy trends and cost management efforts I just detailed. Turning to our Community segment, which is currently comprised of 21 residential reentry facilities serving the Bureau of Prisons as well as state and county governments. The Community segment is engaged primarily in the important activities that prepare individuals for successful reentry to their communities after a period of incarceration or as an alternative to our incarceration. In addition to our 21 residential reuse facilities, our non residential services, electronic monitoring and case management services are also included in our Community segment.

Speaker 1

As mentioned, occupancy in our Community segment was essentially flat in the Q2 of 2024 compared with the Q2 of 2023. However, net operating income in the segment increased 13% due to per diem increases attained in connection with contract renewals in addition to cost discipline. Similar to our Safety segment, our Community segment facilities have been able to reduce temporary staffing incentives. We remain positive about the occupancy outlook for the Community segment now that the pandemic related public health policies have ended and as more of our government partners return their focus to the importance of reentry to curb the recidivism challenge. Our strong financial performance has underwritten our ability to execute on our long term capital allocation strategy.

Speaker 1

During the Q2 of 2024, we repurchased 1,300,000 shares of our common stock at a cost of $20,000,000 We ended the quarter with leverage measured as net debt to adjusted EBITDA at 2.5 times for the trailing 12 months, placing us at the midpoint of our 2.25 times to 2.75 times leverage target range that we established in August of 2020. We have accomplished what we set out to achieve and we are proud of the strategy, focus and diligence that contributed to our success. In his comments, Dave will provide you with further detail regarding our capital markets activities. Before discussing growth opportunities and concluding my remarks, I want to discuss our South Texas family residential center in Dilley, Texas, where operations will officially cease tomorrow, and I would like to start with a bit of history. In 2014, during the Obama Biden administration, ICE came to CoreCivic as a trusted partner to help them solve an emergent and high profile challenge of providing temporary residential space and screening for family groups crossing the southern border.

Speaker 1

Prior solutions attempted by the government have proven it adequate and ICE recognized CoreCivic for its ability to respond to challenges nimbly and swiftly, both inherent advantages of the private sector. We ultimately agreed to a contract for a unique facility, a facility that would be operated under family residential standards. In 2021, at the request of ICE, the facility shifted its mission to the detention of single adults, initially females and then later to males. ICE chose to retain operations under the family residential standards, which embedded higher cost, presumably because it preserved flexibility around future use of the facility. As we disclosed on June 10, ICE communicated to us that based on the cost of the facility, their budgetary pressures and desire for additional more secured detention capacity, which provides them flexibility, they intended to terminate the contract for services at the South Texas facility on August 9 and reprogram the savings into new capacity in existing and new contracts in key strategic locations in the United States.

Speaker 1

We're extremely proud of the South Texas Family Residential Center and thankful for the nearly 10 years it was able to serve the evolving needs of ICE. Our team at South Texas is excellent, bringing compassion and a wealth of skills and disciplines, and many of them have accepted employment opportunities we have offered them at other CoreCivic facilities. While we are winding down this contract, the longer term macro environment for our federal, state and local business remains extremely strong. The complex challenges our government partners face include existing capacity limitations, aging infrastructure, staffing challenges and populations that are increasing in numbers and involving in their needs. In particular, we remain in discussions with federal, state and local government agencies, including several agencies we do not currently serve to help address their various challenges in the near to long term.

Speaker 1

Some of these opportunities may require activations of several of our idle facilities. Demonstrating this need at the federal level, on May 30, ICE issued an RFI seeking information on facilities within 3 areas of responsibility: Chicago, Harlingen and Salt Lake City. Generally, facilities should be within a 2 hour commute from the listed ICE field or subfield office, comply with ICE performance based national detention standards, have approximately 850 to 950 detention beds and an infirmary. They prefer a dedicated facility, but will consider a shared facility. Interested parties may propose 1 or more facilities in each area of responsibility or AOR and may also support multiple AORs.

Speaker 1

The RFI is for informational purposes only and does not constitute an RFP or a commitment to issue an RFP. Responses to the RFI were due June 23, 2024. We have responded with multiple facility options, including our idled 1033 Bed Midwest Regional Reception Center in Kansas. This is the largest advertisement for potential new detention capacity by ICE in over 10 years and we believe we're the only provider with available capacity in all three locations. Further demonstrating growing needs at the federal level, on June 26, ICE issued an RFP for up to 600 detention beds in the State of New Jersey, which would expand their capacity in that state.

Speaker 1

Initial responses were due on July 17. Demonstrating the growing need at the state level, as mentioned in our earnings press release yesterday, on July 25, 2024, we received a notice of intent to award a new management contract from the State of Montana. We are pleased to extend our relationship with the State of Montana. During the current quarter, we anticipate receiving 120 residents at our 18 96 Bed Saguaro Correctional Facility in Eloy, Arizona, where we already managed 120 residents for the State of Montana. Upon receiving these additional residents, the Zorro facility will be near full capacity.

Speaker 1

Under the new contract, Montana may also utilize additional facilities we operate subject to availability should they have the need. We also manage the company owned and fully occupied Crossroads Correctional Center in Shelby, Montana pursuant to a separate management contract with the State of Montana. In addition to Montana, as I briefly mentioned, we are in discussions with several other existing state partners as well as new state that could result in the activation of 1 or more idle facilities. We believe these opportunities could manifest in both the short term as well as in the long term. So in conclusion, our operating costs continue to improve and the agencies we serve continue to demonstrate a growing need for our solutions.

Speaker 1

Our financial results for the Q2 and first half of twenty twenty four reflect the value of our solutions and also the ongoing hard work and improved decisions made by our focused team here at CoreCivic. Our readily available bed capacity in key locations in key locations position us well to serve the growing needs of our government partners. As Dave will explain in further detail, we are updating our financial guidance for 2024 based on our strong financial performance in the second quarter, but also reflecting the termination of the South Texas Family Residential Facility Management contract effective on August 9. Now, I will turn the call over to Dave, who will provide a detailed look at our Q2 financial results, our capital market activities and assumptions included in our newly updated financial guidance. Over to you, Dave.

Speaker 1

Thank you, Damon, and good morning, everyone. In the Q2 of 2024, we reported GAAP net income of $0.17 per share compared with $0.13 per share in the prior year quarter. Excluding special items, adjusted EPS during the 2nd quarter was $0.20 compared with $0.12 per share in the prior year quarter, exceeding average analyst estimates as well as our internal forecast by $0.05 per share. Special items in the current year quarter include $4,100,000 of expenses associated with debt repayments and refinancing transactions. Normalized FFO per share was $0.42 during the Q2 of 2024 compared with $0.33 in the prior year quarter, an increase of 27%.

Speaker 1

Adjusted EBITDA was $83,900,000 compared with $72,100,000 in the prior year quarter, an increase of $11,800,000 or 16%. The increase in adjusted EBITDA resulted from higher occupancy from federal, state and local populations and the continued normalization of our operating expense structure. These factors also contributed to the increase in adjusted EPS and normalized FFO per share. These increases were net of a reduction in facility net operating income of $7,300,000 or $0.05 per share, resulting from the previously disclosed lease termination with the State of California effective March 31, 2024 at our California City Correctional Center reported in our Property segment. Federal revenue in our Safety and Community segments increased $16,100,000 or 6.6 percent from the Q2 of 2023 to the Q2 of 2024.

Speaker 1

State revenue in these segments increased $9,500,000 or 5.3 percent from the Q2 of 2023 to the Q2 of 2024, which included revenue from 2 new contracts with the states of Montana and Wyoming awarded in the Q4 of 2023. The increase in state revenue is net of a reduction of $7,500,000 resulting from the transition of our Allen Gamble Correctional Center in Oklahoma from a facility we previously operated in our Safety segment to a facility we now leased to the State of Oklahoma in our Property segment effective October 1, 2023. This facility generated $1,900,000 of revenue in our Property segment during the Q2 of 20 24, but was nonetheless more profitable in our Property segment than it was in our Safety segment. Local revenue in our Safety and Community segments increased $4,100,000 or 49% from to the Q2 of 2024, primarily resulting from new contracts with Hines County, Mississippi awarded in the Q3 of 2023 and Harris County, Texas awarded in the Q4 of 2023. Finally, revenue in our Property segment declined primarily due to the aforementioned expiration of the lease at our California City facility, which resulted in a reduction of $7,800,000 from the Q2 of 2023 to the Q2 of 2024.

Speaker 1

Operating margin on our Safety and Community Facilities combined improved to 23.7% in the Q2 of 2024 compared to 20.6% in the prior year quarter. The increase in our operating margin was due to the increase in occupancy from 70.3% to 74.3% for our Safety and Community segments combined, an increase in our average per diem rate by 4.8% over the prior year quarter and the normalization of operating expense trends we have experienced over the past several quarters continuing into the Q2 of 2024. During the Q2, we were able to continue reducing certain operating expenses such as registry nursing, temporary wage incentives and travel, all related to labor market pressures that have been steadily easing over the past several quarters. These three expense categories declined by $7,400,000 from the Q2 of 2023. Turning next to the balance sheet.

Speaker 1

During the Q2, we redeemed the remaining $98,800,000 outstanding balance on our old 8.25 percent senior unsecured notes that were scheduled to mature April 15, 2026 at a redemption price of 104.125 percent of the principal amount resulting in the aforementioned $4,100,000 charge. This redemption completed the refinancing transactions begun during the Q1 with the issuance of $500,000,000 of new senior unsecured notes at an interest rate of 8.25%. The proceeds of these notes, which have a maturity date of April 15, 2029, were used to tender for the then outstanding $593,100,000 principal balance of our old 8.25 percent notes. In addition to the net proceeds received from the issuance of the new 8.25 percent notes, we used borrowings under our revolving credit facility and cash on hand to fund the tender and redemption of the old 8.25 percent notes. Following the completion of the tender offer of $494,300,000 of the old 8.25 percent notes during the Q1 and the redemption of the remaining $98,800,000 principal balance in the 2nd quarter, we have no debt maturities until 2027 when $243,100,000 of senior unsecured notes at a rate of 4.75 percent mature.

Speaker 1

During the Q2, we also repurchased 1,300,000 shares of our common stock at an aggregate purchase price of $20,100,000 increasing the total share repurchases during 2024 to 4,000,000 shares at an aggregate purchase price of $59,500,000 On May 16, 2024, our Board of Directors authorized an increase to the share repurchase program up to an additional $125,000,000 increasing the total authorization to 350,000,000 dollars Since our share repurchase program was announced in May 2022 through June 30, we have repurchased 14,100,000 shares of our stock at a total cost of $172,100,000 or an average price of $12.20 per share, leaving $177,900,000 available under the Board authorization. As of June 30, we had $60,000,000 of cash on hand and additional $232,000,000 of borrowing capacity on our revolving credit facility, providing us with total liquidity of $292,000,000 Our leverage measured by net debt to adjusted EBITDA was 2.5 times using the trailing 12 months ended June 30, 2024, down from 3.1 times at June 30, 2023 and within our targeted leverage of between 2.25 times and 2.75 times. Moving lastly to a discussion of our 2024 financial guidance. We expect to generate adjusted EPS of $0.58 to $0.66 and normalized FFO per share of $1.48 to $1.56 We expect federal populations to remain within a stable range for the remainder of 2024.

Speaker 1

If national detention populations increase and are sustained at higher levels, there could be upside to our guidance. Our guidance includes the impact from the previously disclosed termination of the contract at the South Texas Family Residential Center effective August 9, 2024. This facility is expected to contribute $0.08 of normalized earnings per share in the 3rd quarter, its final quarter of operations, compared with $0.11 in the 2nd quarter. These normalized amounts do not include an impairment charge of approximately $0.02 per share anticipated in the Q3 for the write off of certain remaining assets at the facility. Because the operating margin at this facility exceeded the average operating margin of our Safety and Community segments due to its size and scalability of expenses and due to the unique design and specialized services provided at the facility, all else equal, we expect our operating margin to decline by approximately 150 to 200 basis points for a full quarter.

Speaker 1

Our forecast does not include an increase in populations that could result from the reallocation of federal budget dollars from our South Texas contract to other detention beds, which could provide upside to our guidance. Our guidance also includes additional residents from the State of Montana based on the notice of intent to award a new management contract we just received July 25. We currently expect to receive approximately 120 residents during the current quarter at our 1896 Bed Saguaro Correctional Facility in Arizona, doubling the current population from the State of Montana at this facility, which was 91% occupied during the Q2. We also care for approximately 1,000 residents from Hawaii and 600 residents from the state of Idaho at this facility. Under the new award, Montana may also approve the utilization of any other facility we own or operate should the state need additional capacity.

Speaker 1

Our guidance does not include any additional share repurchases. Although our leverage at June 30 is squarely within our targeted range, leverage, which is calculated using EBITDA for the trailing 12 months, will mathematically increase as a result of the termination of the contract at the South Texas facility beginning August 10. Accordingly, in order to minimize the impact on leverage, we intend to prioritize the use of our free cash flow to further reduce our debt ahead of stock repurchases, although we may exercise discretion in repurchasing additional shares of our common stock, taking into consideration our leverage, earnings trajectory, stock price, liquidity and alternative opportunities to deploy capital. Our balance sheet and cash flows remain strong with no near term debt maturities and readily available bed capacity positioning us well to take advantage of opportunities in the marketplace. We expect adjusted funds from operations or AFFO, which we consider a proxy for our cash flow available for capital allocation decisions to range from $162,400,000 to $172,400,000 or $1.45 to $1.54 per share for 20.24.

Speaker 1

We expect our normalized effective tax rate to be approximately 30% for the remainder of the year, which after considering the lower effective tax rate for the Q1 equates to an annual effective tax rate of approximately 27.5%. The full year EBITDA guidance in our press release provides you with 2024 to be slightly higher than 2023. We plan to spend $62,000,000 to $66,000,000 on maintenance capital expenditures during 2024, unchanged from our previous guidance and $8,000,000 to $10,000,000 for other capital investments, also unchanged from our previous guidance. I will now turn the call back to the operator to open up the lines for questions.

Operator

Thank you. At this time, we will conduct the question and answer session. Our first question comes from Joe Gomez from NOBLE Capital. Your line is now open.

Speaker 2

Good morning. Thanks for taking the questions. Hey,

Speaker 1

good morning, Joe.

Speaker 2

So I wanted to start on the South Texas. Obviously, it ends contract ends tomorrow. You've provided the owner facility with your lease termination notice. But given the environment

Speaker 1

of where we are so close

Speaker 2

a new election here, the potential for a change in administration, Is there a way that you guys can kind of keep that facility your options for that facility open at least through the to see what happens here at the in the election?

Speaker 1

Yes, sir. This is Damon. And short answer is yes. So we've got a great relationship with the owner of the assets down there, Target, who has been, again, a great partner here in the last 10 years. And I think just generally, I think you know this history a little bit, Joe.

Speaker 1

But we got our first family detention contract with ICE back in 2,006. They wound down that contract in 2,009. That was at another property. It was actually at our Taylor, Texas facility. And then they came back to us in 2014.

Speaker 1

So history indicates that there is a chance, maybe a good chance that depending on the needs on the Southwest border, they come back to us for a solution. So that's a long way of saying absolutely we're keeping all our options open for sure. I don't know if anything you could add to that Dave? We do have a 90 day marketing period with them that begins on Friday, where we work together to try to come up with a replacement customer. So that would take us through the middle of November.

Speaker 1

So I'm sure they'll be looking for other customers as well. But as Damon mentioned, they're a really good partner and we continue to have dialogue about exactly what you just described.

Speaker 2

Okay. Thanks for that. And then I know typically in July is when the state budgets all come in and you start to see some per deem potential per deem increases for the year forward. I'm just trying to get an idea how that kind of played out this year for some of your state contracts?

Speaker 1

Yes. Dave maybe can give you a number or 2. But overall we had a good spring. So again we work closely with our partners and in turn with their engagement with legislators around the country and the dozen or so states that we have direct contracts with. So I'd say generally we had an overall good year.

Speaker 1

As you know, last couple of years we got some pretty outsized, pretty increases where a big chunk of that would go to sour increases to deal with all the challenges in the labor market because of the pandemic. So I'd say this spring felt a little more kind of a normal spring, kind of pre COVID where you'd see increases in kind of the range of 2% to 4% depending on the jurisdiction. But I think you'd add to that. Yes. I was looking at the number, it's exactly right.

Speaker 1

It was low single digits, a little bit higher than CPI. So a pretty normal year as it was with our wage increases this year as well.

Speaker 2

Okay. Thanks for that. And one more if I may. So, obviously, listen to the GEO call yesterday, and if you're looking at the ICE numbers, David, you did talk about them that mid June, they hit about 38,500 to come back down, as you said to 37,000 level authorizations for 41,500. One of the things that GEO mentioned is they felt that ICE's budget constrained for moving much past that $37,000 number.

Speaker 2

I want to try to get your guys' thoughts on that topic. Do you think they are constrained and the fact that South Texas is now gone that does give them the flexibility to in other area or other facilities to increase populations there?

Speaker 1

Yes. I think that's a good question. And I think that's right. Again, they said when they took the action on South Texas, it was budget related, but also they wanted to get to capacity in

Speaker 3

some other locations around the country, especially capacity that

Speaker 1

maybe was able to take higher custody. Won't be impacted until after tomorrow because obviously that's when the contract is won't be impacted until after tomorrow because obviously that's when the contract expires. So from kind of now until end of September, I think there is a chance we'll see a little higher utilization. Not necessarily brand new contracts, but I think it's just probably existing contracts with the increased utilization a little bit. As I said in my script too, they do try to keep some beds kind of on reserve throughout the system.

Speaker 1

So I don't know if they get to exactly that 41,500 number before the end of the fiscal year, but I don't know if you can add to that Dave. I think you covered everything I was going to say.

Speaker 2

Great. Nice quarter. Thanks for taking my questions.

Speaker 1

Thank you, Jeff.

Operator

Thank you. Our next question comes from Jason Weaver from Jones Trading. Your line is open.

Speaker 1

Hey, good morning.

Speaker 4

Thanks for taking my question. Along the same lines, just quickly on the guidance for the second half, is any amount of that variation due to the uncertainty around the ICE appropriations process, where the budget will start on October 1?

Speaker 1

Yes. Let me maybe tag team with Dave on this, Give you a little just how we're thinking about next year for the fiscal year starting October 1. And so we think there's a pretty good chance that the federal government will be funded through a continued resolution. Again, kind of have to look in a crystal ball on timing on how long that goes, but I think it's probably a pretty good guess it goes past the election and probably even past the beginning of the 1st of the year. So basically that resets the budget amount specific for ICE at that $41,500 number.

Speaker 1

But I guess the other thing I'd point to is that we do know that the House has released their funding proposal for ICE which would take it up to 50,000 I don't believe as of today Senate has released their funding number, but just a reminder, they did do a funding number in that by partisan immigration bill back in I think February or March of this year. Ultimately that didn't get passed. But of note that was also at $50,000 so we don't think that's a coincidence that they're thinking kind of that number for next year. And again, that bill on the Senate side was bipartisan. So, we'll have to wait and see.

Speaker 1

Again, got to get through the election, get through the end of the year. And as it relates to, total funding levels, that will get enacted, we think, probably 1st of next year. So going back to your question around guidance, I mean we're seeing kind of rest of the year kind of stable populations within our system. So even though there could be a pretty significant increase next fiscal year at the moment, we're not making that into guidance. But anything to add to that Dave?

Speaker 1

Yes. As Damon said, our forecast contemplates pretty stable federal populations for the rest of the year and populations can fluctuate. I mean, here we are in the peak summer months, which is typically the time when you see lower migration to the U. S. Because of the heat.

Speaker 1

And then there's other factors that Damon mentioned in his prepared remarks that can influence populations. I think when October 1 hits, the federal budget will refresh. So there's always a chance that they feel more comfortable spending more dollars earlier in the year. And then finally, my last point would be they did indicate ICE did indicate that they have the flexibility to reallocate the South Texas contract dollars to 1600 additional detention beds. So in theory, I think that would increase the funded level from $41,500 But again, not in our forecast.

Speaker 1

We're contemplating stable throughout the rest of the year, but we'll just have to wait and see.

Speaker 4

Got it. That's helpful. Thank you. And then dovetailing into that, I believe the House Appropriations still also seemingly expands the ISAP program to cover the entire non detained docket, whether that gets done is anybody's guess. But if it becomes significantly larger, can you see that contract being opened up to more than just a single vendor?

Speaker 4

And how would your offering fit into that program?

Speaker 1

Yes. So you're exactly right on the funding level. So we've been watching that closely. And I think it's absolutely the case. I think if they have to go up to several million participants in that program, then I think they'll have to open it up for multiple vendors to provide that type of scale and flexibility for that size of program.

Speaker 1

So, we've been doing a lot of work up. So, we've got within our community segment a lot of monitoring and what the right devices are if it's ankle bracelet or if it's a risk worn device or whatnot. So we've been doing a lot of work and testing and getting ourselves prepared. But yes, I think if there's a significant increase in that program, they'll have to look at multiple providers to provide solutions, not just on the technology side, but I think also on the counseling and case management. Anything you can add to that David?

Speaker 1

Yes. I just our approach is a little different when it comes to that contract with respect to the technology. We're kind of technology agnostic and would look to other technology providers to team with us so that obviously avoids the capital expenditures that are necessary to constantly invest into the technology different solutions that ICE may request. Obviously, that comes at the downside of a little bit of margin that goes to those providers, but it relieves us of that capital obligation, probably the main difference. But again, we do have when it comes to the case management services, we provide a lot of those services, particularly in our residential reentry centers today.

Speaker 1

But if they are going to expand it to the $7,000,000 non detained docket that is they've discussed, I think you're going to see multiple providers involved in that type of a solution. Got it. Thank you for that color and congrats on the quarter. Thank you. Thank you, sir.

Operator

Thank you. Our next question comes from Brian Violino from Wedbush. Your line is open.

Speaker 5

Great. Thanks for taking my questions. Just wanted to touch on the NOI margins. I heard in the comments that that's actually probably going to have 150 basis point to 200 basis point negative impact, which we put the Safety segment margin just under 22% pro form a. But it sounds like the expense environment is improving.

Speaker 5

I guess, can you just talk about the potential for margin expansion above that pro form a level looking out into the back half of the year?

Speaker 1

Yes, I'll take that one. Thanks, Brian. Yes, and similar to what we have seen in increases in occupancy from, say, the Q2 of last year to the Q2 of this year, it's a very leveraged model such that those margins do increase the higher occupancy goes. So we're still 6, 7 percentage points away from pre pandemic occupancy. So if occupancy continues to increase, we would expect those margins to offset at least partially offset that reduction that we will see from the South Texas contract.

Speaker 1

Per diem increases as we mentioned, we got a little bit better than CPI, I think, during the July 1 time frame, which is when state government budgets reset. So, that will help margin improvement as well. That would again be offset a little bit by the wage increases that we also provide at our state facilities effective July 1. So certainly, increased opportunity with occupancy. That's going to be the biggest driver.

Speaker 5

Got it. Makes sense.

Operator

And just

Speaker 5

one more. On the reallocation of funds from South Texas, I guess, could you talk about if you think and it sounds like the answer may be yes, but if you think that this really increases the likelihood of new facilities opening just with all the RFIs and RFPs coming out? And then just your thoughts on the timeline of when we could start to hear awards being given out related to those RFPs and later on RFI coverage?

Speaker 1

Yes, great question. And I think you're spot on with kind of your comment there. Think it's no coincidence on the timing of that contract and the action they took on terminating it with the RFI they released. So again, looking for 3 different locations in different parts of the country for up to 1,000 beds. Again, that kind of our advertising came out right around the time we got the notes from South Texas.

Speaker 1

So I think they're thinking about that way, to get not only increase utilization in existing contracts, but also this gives them the comfort to go ahead and at least move forward on RFI. Obviously, they haven't done RFP yet, so obviously got to see that next. But I think it's a good indication by them taking that initial step with the advertisements for these 3 facilities that now with these budget savings they can kind of redeploy that in new capacity around the country. But anything you'd add to that Dave? Yes.

Speaker 1

I think in the short term, it would be allocated more toward existing facilities with existing contracts. I mean, here we are August 8, I guess it is. It'd be tough to get them done before the end of the fiscal year, given the state that they're only in an RFI stage, as Damon mentioned. But the South Texas contract does free up permanent dollars even beyond the end of this fiscal year. So still think that they'll act on that RFI.

Speaker 1

Timing is always difficult to predict with any government agency, but the average time frame from beginning RFI to award is 6 months ish. So that could give some idea. Now it's an election year, so don't know if that's going to factor into the timing of an award or not. But we do know that they have historically said that they have a need. And as we proposed our facility in Kansas, we've had a lot of conversations with ICE about that facility in the past.

Speaker 1

So still think they could act on that one.

Speaker 5

Great. Thank you very much.

Operator

Thank you. Thank you. Our next question comes from Ben Briggs from Stonex Financial. Your line is open.

Speaker 5

Hey guys, good morning and thank you for taking the questions and also congratulations on the quarter. So the vast majority of mine got asked and answered here. So thank you. But last one I had was I believe the answer is no. But can you just clarify for me, does this share buyback authorization expire or would it have to be basically terminated for it to expire?

Speaker 1

Correct. No, it does not expire. It's open ended. I think we gave the $177,000,000 remaining under that authorization. And we have not suspended it.

Speaker 1

What I said in my prepared remarks is we'll kind of slow down the share repurchase until we get better visibility because of the increase in leverage that will come from South Texas. But it is certainly open. We have no restrictions on our ability to buy back stock. Our covenants are well within cushion on our covenants. So if there's opportunities, we could act on those opportunities.

Speaker 1

But short answer to your question is no expiration on that authorization.

Speaker 5

Okay, got it. And I do see in your release here that you state you and I think you stated during the scripted portion that you intend to prioritize the use of free cash flow to reduce debt. Is there any authorization that's necessary for you guys to buy back debt or is that you can kind of do that at your option?

Speaker 1

Yes, we've had that conversation with our Board previously. So we have that option. We speak to them about capital allocation strategies every quarterly Board meeting and we'll be having that discussion in the coming weeks with them again, but I wouldn't expect any restrictions there.

Speaker 5

Great. That's very helpful. Thank you.

Operator

Thank you. Thank you. Our next question comes from Edwin Groschamps at Compass Point. Your line is open.

Speaker 6

Good morning and thank you for taking my questions. You mentioned, I think you said RFI with New Jersey and I guess there is some state laws there about not having or sponsoring private prisons. So could you just talk about that a little bit? It seems unusual that ICE knowing this would go out and put out a request for that state?

Speaker 1

Yes. Good question. So yes, let me distinguish here a little bit. So they did ICE did an RFI earlier this spring for 3 locations in kind of the mid to middle part of the country and the western part of the country, Salt Lake, Chicago and then South Texas. And so we've participated in an RFI and submitted proposals under that RFI.

Speaker 1

On a parallel path, ICE is also taking steps to basically do the recompete of a contract that we've already actually have in place with ICE in Elizabeth, New Jersey. This is an operation that we've had for almost 30 years. So we've gone through a couple of cycles on the recompete of this contract. And I have to say we're really, really proud of this operation. We've got great performance record there and great working relationship with the local folks there in the ICE office.

Speaker 1

And so it is recompeted that contract. There has been obviously some legal action by the State of New Jersey here in the last couple of years, challenging the authority of ICE doing direct contract with private providers like us. We have prevailed in those cases most recently. It is still pending litigation, but we do feel like with other legal challenges we've seen, during the history of our company around the country that will prevail ultimately. So ICE knowing all that in the background, they still felt comfortable to go ahead and do the RFP.

Speaker 1

And again, we'll compete in it. And again, we feel really good with our chance of being a 30 year operator there. But I don't know if you can add to that Dave. No, I think you covered it there too, Damon.

Speaker 6

All right. Thank you, Damon. And thank you for the clarification on that. I did have a question on the RFI. I think you answered part of it, saying that they put out the RFA right after the announcement they told you that you were closing the South Texas facility.

Speaker 6

But it also seems a little bit unusual. I was wondering, is there anything to read in relative to the increase in beds to 415 1,000? Or do you anticipate or hear that ICE may be looking to alter some of its detention policies maybe in response to Biden's June 4 proclamation or anything along those lines?

Speaker 1

Yes. Good question. Yes, I wouldn't say, generally, we're not hearing anything kind of relative to change in policy on detention capacity and kind of what the requirements should be or standards. Those have been pretty consistent here last couple of years. So we're not hearing or seeing anything relative to kind of change our view or policy.

Speaker 1

And again, not necessarily to your question, but relative to the size, again, they will be able to increase somewhat incrementally again with the savings with the South Texas. But if they go much bigger or larger than that, they'll have to wait until the next fiscal year and what ultimately is appropriate from Congress and signed by the President. But I don't know anything else to add to that Dave? No. Unless you were asking about the $41,500 as we've mentioned that includes some funding under fixed price contracts.

Speaker 1

So the actual people detained will be lower than the $41,500 if they're going to be spending at $41,500 And again, the South Texas should create more capacity to fund additional detention.

Speaker 6

All right. That's all the questions I have. I appreciate your time. Thank you.

Speaker 1

Thank you. Yes, sir. Thank you.

Operator

Thank you. Our next question comes from Court Mangum. Your line is now open.

Speaker 3

Hey guys, thanks for taking my question. Really most of my questions have been answered, but I just wanted to dig a bit more into just sort of what happened with South Texas. You guys have always had a really good grasp on the way that the winds are blowing regarding potential changes to facility renewals and non renewals and keeping us pretty well prepared for those changes. I get obviously what happened with South Texas, but just sort of what happened there to sort of catch us all off guard so much? And do you think is there really anything else out there that might be like this in the future that could potentially catch us off guard?

Speaker 1

Yes. I appreciate that question. The South Texas facility, again, going back to kind of history, ICE, as I understand it, up until 2006, they had never done family detention. And we were, again, the first company they called when they thought about it for the first time and we did a solution in Taylor, Texas and we did it for about 3 years. And then again it was I guess 5 years later then we got a call from the Obama Biden administration about some of the channels in South of the border and they want to revisit that policy on family detention.

Speaker 1

So I think it's been well known that the policy obviously for that type of solution is going to be driven by the administration and whoever is in the White House. And that policy may change depending on not only the needs or desires of the administration, but also what the challenges are with on the Southwest border. And that could be not only just family units, but also potentially on migration patterns, nationalities, gender and whatnot. And with that ICE has got to be very flexible based on the needs on the Southwest border at that moment. So, a long way of saying that, that's been the case working with ICE for almost 40 years.

Speaker 1

They have to be pretty nimble and flexible based on the needs on the Southwest border, but also the desires and the priorities of the administration. And with that, we've got to be there kind of locks up with them to meet those needs based on changing conditions. But anything you'd add to that, Dave? Yes. And as far as kind of taken by surprise, the facility was highly utilized right up until the date where we received that notification.

Speaker 1

So we did not see that coming. And furthermore, it is very unusual for ICE to exit contracts in the middle of their term. They always have that right. All of our government partners have cancellation for non appropriation of funds in most cases for convenience as well. But with a 95% plus renewal rate, it doesn't happen that often, let alone in the middle of a contract since this contract even had some term left on it.

Speaker 1

So it was very surprising. We understand the reasons, the budget driven and trying to reallocate those dollars, which we've always known. It's a very expensive contract because of the unique design and the unique set of services that we provide at that facility. So it drove the cost up. But so I understand the reasons, but it was unusual.

Speaker 1

And don't expect any others. I mean, like I said, they have the right to, but it's such an unusual facility that we wouldn't expect any other actions similar to this one.

Speaker 3

Okay, perfect. Yes, thanks so much for taking my question.

Speaker 1

You're welcome. Thank you. Yes, sir.

Operator

Thank you. Our next question comes from Emmett Maran from Zacks. Your line is open. Thank you. I'll be brief because we've spent a lot of time obviously talking about several topics, specifically ICE contracts.

Operator

So I'm wondering if in the past, in prior calls, you've talked about how you've had increased conversations with a number of different perspectives and existing customers across the board, including states and counties. And obviously, you just saw you sign a new state contract with the State of Montana. Are you still seeing interest at the same level from those more regional customer or prospective customers?

Speaker 1

Yes. Great question. And the short answer is absolutely. So this last year, I mean, we've seen a lot of activity at the state and local level. So Montana, we've talked about on this call.

Speaker 1

We've seen increased utilization from Idaho. We've seen increased utilization in Georgia. We've seen increased utilization in Colorado. New contract here recently with Wyoming. And then at the local level, Hinds County and Mississippi and Harris County and Texas.

Speaker 1

So a lot of activity in the last 6, 8, 10 months. And that activity has continued to be very brisk. We've got a lot of conversations going on, again, with existing partners, but also a few new ones. And a couple of conversations are actually around activating idle capacity for vacant facilities. And so we continue to see really strong interest from both existing and new partners.

Speaker 1

But I don't know if there's anything you'd add to that, Dave. Nothing, Damon.

Operator

Well, that's always an important thing for you to consider is absorbing idle capacity. So those are good conversations, I'm thinking.

Speaker 1

Yes, ma'am. Yes. Well, I guess I would add, the capital expenditure forecast that we have does include some capital expenditures for a facility because we're running out of big blocks of space. We still have some of the facility in Mississippi that we've been using for our most recent wins. But, have to start thinking about which would be our next facility that we activate.

Speaker 1

So we've allocated some dollars there to make sure we're ready in the event the opportunity presents itself.

Operator

Okay. Thank you. And then last question, which is in terms of being ready for if and when the opportunity presents itself. You talked earlier in the I believe in your prepared remarks about staffing levels. And I'm not sure, I think what you said was you're not quite at the same level as pre COVID.

Operator

The guidance calls for some increased staffing, I believe you said, but we did see during certain parts of COVID and then even after COVID that you were seeing that you had to pay certain incentives, sign on bonuses. We're past that at this point, aren't we?

Speaker 1

Yes, yes. We're past that. You're past that. I'm sorry. Yes, I didn't hear that last part.

Speaker 1

But yes, we are past that. We're doing a lot better. I mean, again, I'd say generally the challenges we had in staffing is I talk to my peers and other companies here in the Nashville business community. I think we were pretty close on having similar challenges. But sitting here today, I mean, still got some work to do, but overall, we're in a great spot.

Speaker 1

Our labor markets and almost everywhere we operate has improved pretty dramatically. And so as we said in our prepared remarks, a lot of the special and unique incentives and programs we had to put in place with especially like temporary staff, we've been able to wind down that almost virtually down to 0. So we've had a lot of good success on that point. And again, the markets generally where we operate, the labor markets, I should say, have improved dramatically. But I don't know if anything to add to that.

Speaker 1

Just a final point. Yes, our guidance does include some increases in staffing at some facilities to make sure we're prepared for any increases in occupancy that come. But certainly, the market has kind of normalized on the labor front. But yes, guidance does contemplate some increases in staff from here.

Operator

Okay. Thank you very much.

Speaker 1

Thank you, Em.

Operator

Thank you. Our next question comes from Greg from Northland Securities. Your line is open.

Speaker 7

Hey, Damon and Dave. Thanks for taking the questions. Congrats on the results. Hey, David. Obviously, much has been answered already, but wanted to I guess ask, how much do you take out of guidance for the South Texas Family Residential Center this year?

Speaker 7

And just to get a sense of maybe how the outlook changed ex that impact and to get maybe a sense of kind of cadence in the back half?

Speaker 1

Yes. I'll say, we issued a press release giving the notice. We said, I think, it was $0.38 to $0.41 on an annual basis. And so, I think I quantified in my prepared remarks how much we had in Q2 and in Q3. So that'll be rolling off.

Speaker 1

A sequential decline from Q2 to Q3 and then no earnings per share out of that contract in Q4, but about half of it for the Q3.

Speaker 7

Yes. Got it. Got it. Great. And just to clarify a previous question.

Speaker 7

As it relates to the expense structure improvements, did it sound like you kind of characterize expense levels as no longer elevated and then pretty much fully normalized at this point?

Speaker 1

Yes, pretty darn close. I mean, like so we've got a few facilities in a couple of markets where it's still a little bit challenged from a labor perspective. But overall, I mean, much lower costs again with incentives and temporary staff and some other things. Registered nursing was another thing that we had to use during the kind of high during the pandemic and all those have come down pretty dramatically here in the last 12, 18 months. Yes.

Speaker 1

I mean, I agree with that. I think I don't know that we're all the way down yet, but it is pretty much. And the good news is a lot of the incentives that we provided to get us through were temporary. They were shift premiums or like Damon said, registry nursing, that can go away. So they weren't permanent adds to the cost structure.

Speaker 7

Got it. Thanks guys.

Speaker 1

Thank you. Thank you so much.

Operator

Thank you. This concludes our question and answer session. I would now like to turn it back to Damon for closing remarks.

Speaker 1

Well, thank you very much and thank you all for participating in our call today. And let me just say a special thank you to our investors. We're really grateful for all your support. So we'll go ahead and conclude our call. Enjoy the rest of your day.

Speaker 1

Thank you.

Operator

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

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Earnings Conference Call
CoreCivic Q2 2024
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