CoreCivic Inc (CXW) 2020 Q2 法說會逐字稿

Good morning. My name is Casey, and I will be your operator for today's call. As a reminder, this call is being recorded. At this time, I would like to welcome you to CoreCivic's Second Quarter 2020 Earnings Call. (Operator Instructions)

I would now like to turn the call over to Cameron Hopewell, CoreCivic's Managing Director of Investor Relations. Mr. Hopewell, you may begin.

Thanks, Casey. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds.

The call today -- on the call today, we'll focus on our financial results for the second quarter, yesterday's announcement of our intentions to change our corporate structure and institute a new capital allocation strategy, and an overview of the evolving impacts of the COVID-19 pandemic.

During today's call, our remarks, including our answers to your questions, will include forward-looking statements pursuant to the safe harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our second quarter 2020 earnings release issued after market yesterday and in our Securities and Exchange Commission's filings, including Forms 10-K, 10-Q and 8-K reports. You are also cautioned that any forward-looking statements reflect management's current views only and that the company undertakes no obligation to revise or update such statements in the future.

On this call, we will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data on the Investors page of our website, corecivic.com.

With that, it's my pleasure to turn the call over to our President and CEO, Damon Hininger. Damon?

Thank you, Cameron. Good morning, everyone, and thank you for joining our second quarter 2020 conference call today but also joining us on a day of great historical significance for our company.

With last night's announcement, noting our plan to convert to a taxable C corporation, we are putting our company in a better position over time to improve our already strong financial position and ultimately move our share price back to levels that reflect our strong fundamental business. By doing so, we will be able to build on our unprecedented leadership of supporting life-changing reentry programs, policies and services that address America's recidivism crisis and help those in our care succeed with their next step in life.

So for today's call, Dave and I will provide an overview of our second quarter financial performance; yesterday's announcement of our intention to revoke our REIT election and become a taxable C corporation in 2021, including its implications on our forward-looking business and capital allocation strategy; and our ongoing response to evolving developments resulting from the COVID-19 pandemic.

First, I will briefly touch on our second quarter financial performance. On the top line, our revenue in the second quarter was $472.6 million, which was a decline of 3.6% over the prior year quarter. The majority of this decline was experienced in our CoreCivic Safety segment. Normalized funds from operations, or FFO, was $0.56 per share in the second quarter, which represented a 19% decrease from the prior year quarter. The largest impact on our revenue and normalized FFO in 2020 has been due to lower utilization levels from our largest government partner, Immigration and Customs Enforcement, primarily due to the COVID-19 pandemic. While current utilization levels by ICE are well below historic averages, the second and third quarters of 2019 were already going to present a difficult comparison because in those periods last year, ICE reached historically high utilization levels. If you look at our financial performance sequentially, compared with the first quarter of 2020, our normalized FFO per share increased by 4% in the second quarter of 2020.

Dave will discuss our financial results in greater detail after I wrap up my comments, but before I turn things over to him, let me make a -- take a moment to appreciate our tremendous CoreCivic professionals. I have dedicated nearly 3 decades of my career to our company, starting as a frontline correctional officer in Kansas at the Leavenworth Detention Center in 1992. I won't say I've seen it all but I've seen a lot. COVID-19 is unprecedented in every way. For settings like correctional facilities, the pandemic puts forward a unique set of challenges. Fortunately, at CoreCivic, we prepare for these type of situations all the time and we acted early. But none of that matters without our people in the field. They have a tough but rewarding job that has been made even more demanding. I've had the opportunity to get out into our facilities to see how they're doing and how we can help. Let me tell you that our CoreCivic professionals are an inspiration to me every day but never more so than now.

During our first quarter earnings report, I talked about the Hero Bonus and extra paid day off that we provided to say thanks to our people in the field. But as we all know, COVID-19 has required the same level of vigilance in recent weeks as it did in the beginning. That's why last month, we were pleased to again show our gratitude to our field employees with midyear raises. These base salary adjustments, which nearly match what we did in the first half of the year, will bring our full year additional investment in our people to $15 million. The Board and the management team know that this is the right thing to do to take care of our people right now and to retain them over the long term.

Now I would like to spend a little time discussing our announcement from yesterday, which is the conclusion of our process to evaluate corporate structure and capital allocation alternatives. Our Board of Directors unanimously approved a plan to revoke our election as a real estate investment trust, or REIT, and convert to a taxable C corporation. This election will be effective January 1 in 2021, as we are confident our year-to-date dividend distributions are already sufficient to ensure we qualify as a REIT for the 2020 tax year.

To be abundantly clear, we have not been satisfied with the trading multiple of our stock. For the past several years, our trading multiple, whatever metric used to measure it, has steadily declined even as our earnings have grown like they did in 2019. Continuing to pay a dividend yield in excess of 15% is simply not sustainable, and recent trading multiples below 10x, and certainly the current multiple of 5x, is not acceptable. It translates to a higher cost of capital, inhibiting our ability to execute our business plan. As a REIT, because we are required to distribute a substantial portion of our cash flows as dividends, we need to have continuous access to capital at reasonable prices to make investments at higher returns than our cost of capital.

With many investors incorrectly categorizing CoreCivic as a non-ESG investment and despite unprecedented leadership in support of reentry programs and public policies designed to keep people out of prison for good, the cost of our capital has increased. Revoking our REIT election will provide us more flexibility in how we allocate our substantial free cash flow. We believe the change in corporate structure will improve our overall credit profile, in turn lowering our cost of capital. This change in corporate structure will also give us with significantly more liquidity, which will enable us to reduce our reliance on the capital markets and reduce the size of our bank credit facility.

Following our first priority on debt reduction with a target total leverage of 2.25x to 2.75x, we expect to allocate a substantial portion of our free cash flow to returning capital to shareholders, which could include share repurchases and future payments of dividends. As detailed in our press release, we will also have more flexibility to pursue attractive growth opportunities, not at all which will require capital deployment.

We are also evaluating the sale of lower-yielding noncore real estate properties outside our corrections portfolio. These mission-critical, primarily single-tenant, government-leased properties were built to suit according to stringent government requirements. The quality of these properties, combined with long-term in-place leases and top-notch credit quality of our government tenants, is a clear difference among other REIT classes, particularly in the current environment, which is frothy for government-leased assets. So it has resulted in significant inbound interest in this portfolio.

Selling these properties, which are more appropriately owned by nontaxpaying entities, could enable us to delever accretively while accelerating our capital allocation strategy.

With our 2013 conversion, the restructure was the right structure at the right time for CoreCivic; and it remains a great structure for many companies. But we have to recognize the limitations the structure imposes on CoreCivic in this economic and political environment but also recognize opportunities being a C-corp affords us and with that, adapt to the most appropriate structure that enables us to execute our business plan, further derisk the balance sheet and create the most long-term value.

Finally, as many of you know, we were a C-corp for about 12 years prior to our REIT election in 2013. So we know this structure will work extremely well with our mission and business growth strategy.

Now on our last conference call in May, we spent a majority of our time detailing our response to the COVID-19 pandemic. I'd like to provide you with an update on our operational response, particularly highlighting developments that have occurred throughout the second quarter.

Since the beginning of the pandemic, we have been working closely with our government partners to develop and implement facility-specific COVID-19 medical action plans. Our operational plans follow guidelines by leading health experts from the CDC and the World Health Organization as well as those guidelines have been updated too. And we've also incorporated those into our medical plans.

During the second quarter, we saw an increase in positive cases across a number of our facilities, consistent with the general public and across nearly every correction system in the United States. Our protocols and procedures for addressing positive cases or suspected cases is well established for both our employees and individuals entrusted to our care. However, positive tests for employees can present operational challenges from a staffing perspective. We have successfully navigated these challenges by utilizing available staff from other nearby facilities without positive cases, when necessary.

In coordination with our government partners, our facilities continue to manage inmate movement, in-person visitation and other interactions in order to reduce the spread of COVID-19.

During the second quarter, many of our government partners have expanded testing of inmate and detainee populations beyond its testing guidance from the CDC. This more broad-based testing has varying results in terms of the rate of positive cases but the overall performance of our facilities has been admirable. Also consistent with broad-based testing performed at government-operated facilities is a high rate of asymptomatic positive test results.

Many health experts have highlighted the challenges presented by asymptomatic positive individuals because they have the potential for spreading the virus without knowledge. This was particularly relevant before businesses and governments implemented hygiene, social distancing and PPE protocols in March and April. The broad-based testing being performed across inmate and detainee populations has been a helpful tool to potentially reduce the spread of the virus, but testing does have its limitations and cannot replace the need to follow proper hygiene, distancing and PPE protocols.

We will continue to be responsive to the COVID-19 pandemic and we'll work closely with our government partners to implement best practices as they evolve. COVID-19 is certainly on the top of everyone's mind, but our government partners continue to face challenge that predates the pandemic that have presented us with new opportunities to serve their needs. For example, in July, we commenced the lease of our previously idle 656-bed Southeast correctional complex with the Commonwealth of Kentucky Department of Corrections. We originally entered into this lease agreement in December of 2019, which has an initial lease term of 10 years and includes 5 2-year renewal options. This is a great solution for the Commonwealth, which has had a significant need for additional correctional capacity, and we are pleased we could quickly deliver a solution in-state with our idle capacity.

Many states are facing budgetary challenges from lost tax revenues due to business closures in response to COVID-19. It is still too early to tell what the full economic impact of the pandemic will be and how quickly the U.S. economy can recover. This is also still the potential -- there is also still the potential for federal aid to provide assistance to help state and local economies facing challenges as a result of the pandemic.

These matters will take time to develop, but we have already seen a number of states looking to trim their budgets, including corrections budgets.

In July, we agreed with the state of Oklahoma to close our 1,692-bed Cimarron correctional facility in order to generate budget savings. While we were disappointed for our dedicated staff members at Cimarron, all of whom have been provided opportunities to stay with the company at other facilities, we recognize that tough budget-driven decisions have to be made when facing a significant budget shortfall.

Although Oklahoma's prison population has declined as a result of COVID-19, the state continues to face challenges in their corrections infrastructure and could very well utilize Cimarron -- the Cimarron facility once their budget challenges subside.

We have had discussions with a number of other state partners about ways to potentially generate taxpayer savings in response to budget challenges, and we are sure those discussions will continue. The COVID-19 pandemic has changed the typical playbook for corrections departments to respond to budget challenges because of the need for more physical space to ensure social distancing.

There also remains a number of market opportunities as correction systems look to address their infrastructure challenges. The state of Alabama is continuing its RFP process to partner with the private sector to build 3 modern, large-scale correction facilities to modernize its system and close approximately 15 outdated facilities. An initial award of the first facility for this procurement is expected in the next few months with subsequent awards being announced next year.

And the state of Nebraska is actively pursuing a similar path for a new correctional facility, but they are not as far along in the procurement process.

We anticipate similar opportunities will continue to come to market because nearly every state has a significant portion of their correctional infrastructure that has reached the end of its useful life. Modern facilities provide significant operational cost savings due to thoughtful, efficient design that cannot be retrofitted for older prison facilities. This is particularly relevant today with the threat of budget cuts forcing government agents to become more efficient.

Also relevant today is the limitation older facilities have presented to systems responding to the COVID-19 pandemic, including limited medical facilities, concentrated housing areas, and centralized HVAC systems hampering the ability to prevent the spread of airborne illnesses. We expect that there will be growing appreciation for the need to modernize correction systems especially after the COVID-19 pandemic subsides.

Let me also make a comment on the federal side of the safety segment. We were just awarded this week a new 10-year contract with ICE at our T. Don Hutto Residential Center in Taylor, Texas. This is a renewal of a contract we have had in place for many years with ICE at this facility. We also expect in the next few days a similar award from ICE for our Houston Processing Center, which will also be a new 10-year contract and again, a renewal of a long-held contract we have had with ICE at this facility. And we -- and ICE is expected to make millions of dollars in investments in renovating the physical plant of each facility, which reinforces their intention to use the facilities over the long term.

I'd now like to pass the call over to Dave to provide a more detailed look at our financial results in the second quarter and other recent trends. Dave?

Thank you, Damon, and good morning, everyone. In the second quarter, we generated $0.18 of EPS or $0.33 of adjusted EPS, $0.56 of normalized FFO per share and $0.57 of AFFO per share. Adjusted EBITDA was $101.1 million for the quarter. Adjusted amounts exclude $8.2 million of incremental expenses associated with COVID-19, noncash impairments of $11.7 million, $0.3 million of expenses associated with our valuation of corporate structure alternatives and a $2.8 million gain on the sale of a real estate property. Of the $8.2 million of COVID-19 expenses, $6.3 million represented Hero bonuses paid to facility line staff.

Compared with the prior year quarter, adjusted EPS decreased $0.14, normalized FFO per share decreased $0.13 and AFFO per share decreased $0.10.

As mentioned in our previous 2 quarterly earnings calls, we do not expect the elevated federal populations experienced in 2019 to be sustainable in 2020, and lowered our initial 2020 guidance from 2019 per-share levels to reflect lower federal populations. The decision by the federal government effective March 20, 2020, to deny entry at the Southern border to asylum seekers and anyone crossing the Southern border without proper documentation or authority in an effort to contain the spread of COVID-19, has amplified the reduction in people being apprehended and detained by ICE. Declines in state populations in our safety segment and in resident populations and case management services in our community segment, largely driven by COVID-19, also contributed to declines in per share results. Partially offsetting these reductions were new contracts signed with the U.S. Marshals Service and ICE in the prior year and with Mississippi in the first quarter of this year.

Finally, a reduction in G&A expenses partly due to lower incentive compensation and partly due to a reduction of certain other expenses, such as travel, due to restrictions imposed by COVID-19 resulted in savings relative to the prior year quarter. I normally don't review financial results compared to the previous quarter, but I do think this comparison is particularly relevant this quarter since we did not begin to see the impact of COVID-19 until the end of March.

During the second quarter, adjusted EPS increased by $0.03, and normalized FFO per share increased $0.02 from the first quarter. Although no doubt COVID-19 has had an impact on our business, occupancy at our safety and community facilities declined from 79% in the first quarter to 75% in the second quarter, translating into a decrease of 3,337 average daily resident populations. Occupancy in our Properties segment remained at 97.3% both quarters. Total revenue declined $18.5 million or 3.8% from the first quarter to the second quarter. However, we were able to adjust our expense structure to align with the reduction in occupancy.

As a reminder, our first quarter always includes higher unemployment taxes when base wage rates reset, resulting in a per share increase of $0.02 from Q1 to Q2. A new contract with Mississippi signed in the first quarter, combined with lower interest and G&A expenses collectively accounting for about $0.03 per share, were offset by lower populations in our safety and community segments. As a result of these factors, adjusted EPS and normalized FFO in the second quarter outperformed the first quarter.

Although we've excluded the impact of COVID-19 expenses on our adjusted per share results, they are included in the operating margins and per mandate statistics presented in our supplemental disclosure report. Our total facility operating margin would have been 25.3% for the second quarter, excluding COVID-19 expenses, slightly higher than the 24.6% in the first quarter.

Our cash flow was strong during the second quarter. AFFO, which we use as a proxy for cash flow after maintenance CapEx but before debt repayments, was $69.3 million compared with $70.3 million during the first quarter. Net cash provided by operating activities, as presented in our statement of cash flows, was $98.9 million during the second quarter compared with $75.4 million in the first quarter, with this increase including positive fluctuations in working capital balances. The resiliency in the business is due to the essential nature of our facilities and services in our safety and community segments, further enhanced by the diversification and stability of our property segment, with all 3 segments supported by the strong credit of our government customers.

As of June 30, we had $364 million of cash on hand after paying $51 million in dividends during the second quarter compared with $335 million as of March 31, 2020. At June 30, we also had $154 million of availability on our revolving credit facility, which matures in 2023. Our cash balance reflects a partial draw we made on our credit facility at the end of March out of an abundance of caution due to uncertainties associated with COVID-19 and to maintain maximum balance sheet and operating flexibility. We repaid $50 million of this draw in July and expect to continue to pay down the balance.

Our leverage, measured by net debt-to-EBITDA, is 3.9x using the trailing 12 months, and we have no debt maturities until October 2022 and no material capital commitments. Therefore, we have no need and do not anticipate accessing the capital markets in the short term. We are on track to achieve the 10% reduction in our maintenance capital expenditures mentioned on our last call, which we expect to total $54 million split evenly between real estate and non-real estate assets.

Our 2020 capital expenditure forecast also includes approximately $7 million of tenant improvements and leasing commissions associated with new lease agreements, unchanged from our estimates at the beginning of the year.

Although we continue to perform well and generate significant cash flows, risks and uncertainties associated with COVID-19 remain. Operations in the criminal justice system have not yet normalized, the Southern border remains effectively closed, and many state budgets will have significant holes to fill. As Damon mentioned, during the third quarter of 2020, largely due to a lower number of inmate populations in the state of Oklahoma resulting from COVID-19, combined with the consequential impact of COVID-19 on the state's budget, we agreed with the state to idle our 1,692-bed Cimarron correctional facility later this quarter. Prior to the pandemic, we were negotiating with the state to provide them with additional bed capacity in the state at our Diamondback facility.

We also closed the 200-bed Oklahoma City transitional center during the second quarter, and during the third quarter consolidated the remaining resident populations at our 390-bed Tulsa transitional center to Oklahoma system, idling the Tulsa facility.

Other states could face similar challenges. During 2019, these 3 facilities generated net operating income of $2.8 million, so the closures won't have a material impact on our financial results.

Although a much smaller segment at 3% of total NOI for the quarter, our community segment has been impacted by a larger percentage than the safety segment, as the disruption in court hearings as well as an overall desire to minimize movement within the system have resulted in a reduction in the number of referrals to our community facilities. This resident population is considered lower risk, so governments have acted faster to transfer certain residents assigned to our reentry facilities to nonresidential statuses, such as furloughs, home confinement or early releases, to create additional space for enhanced social distancing within our reentry facilities.

We cannot predict how long asylum seekers and anyone attempting to cross the Southern border without proper documentation or authority will be denied entry. Therefore, it is difficult to quantify the impact of our more transient federal offender populations. It is also difficult to predict the actions of our state partners in response to any outbreaks in public or private correctional facilities. And we cannot predict how long the criminal justice system will be impacted or how long inmate population levels will remain below their pre-COVID-19 levels.

Because of all the uncertainties associated with our safety and community segments, we are continuing to suspend our financial guidance until we can produce more reliable estimates. However, we can provide some direction, having gone through a full quarter under COVID-19.

Offender populations continued to decline mostly due to a reduction in new intakes rather than early releases. Without the court system functioning normally and with the Southwest border still effectively closed, we expect to continue to experience declines in offender populations in our safety and community segments. Although we are somewhat able to rightsize staffing levels, we believe it is important, especially at this moment, to provide well-deserved wage increases to our frontline facility staff who continue to deliver critical services to the people entrusted to our care. Most of our facilities received wage increases July 1. We are projecting margin compression for wage increases in an environment where it will be difficult to obtain offsetting per diem increases. It is difficult to predict when, but service levels will eventually normalize, adding to our salaries expense.

As previously mentioned, during the third quarter we will ramp down our Cimarron facility, and we estimate operating losses of $2.1 million of this facility during the quarter because of the transition. Our operating margins will also be impacted by incremental expenses to procure personal protective equipment and other miscellaneous supplies related to COVID-19, which we estimate to be $3.5 million to $4.5 million during the second half of the year, albeit at lower expense levels than reported during the first half of the year.

Our G&A expenses will be negatively impacted by expenses associated with the evaluation and implementation of our corporate structure conversion from a REIT to a taxable C corporation, which we estimate to be $5 million to $6 million. Note that we will exclude these expenses, along with the COVID-19 expenses, from our calculations of adjusted EPS, adjusted EBITDA and normalized FFO and AFFO as we did in the second quarter.

Despite the pandemic, we continue to make progress on a number of business opportunities that will favorably impact the second half of 2020. On July 1, 2020, a new lease with the Commonwealth of Kentucky commenced at our 656-bed Southeast correctional complex. Kentucky will operate the facility in our property segment under a 10-year lease agreement that contains 5 2-year renewal options. This facility had been idle since 2012.

Last month, the state of Mississippi exercised their second extension option through October 4, 2020, of their management contracts in our safety segment after expanding the contract from 375 inmates to 1,000 during the first quarter of 2020. Last month, the Idaho Board of Correction authorized the Idaho Department of Corrections to enter into a contract with CoreCivic to care for Idaho offenders at our facilities in Arizona. Although we have not yet executed a contract, we are optimistic that a final contract will be executed in the coming weeks with an expectation of receiving offenders at our Saguaro correctional facility shortly thereafter.

The states of Kansas and Nevada, which were both expected to return their inmate populations to their respective states upon expiration of their management contracts this year, both extended them for another year to avail themselves of our capacity during the pandemic. Although not incremental to the second half of the year, Damon mentioned the renewal of a contract with ICE at our T. Don Hutto facility in Texas for up to an additional 10 years, and we expect a similar renewal of a contract at our Houston processing center under the same procurement in the coming weeks, both demonstrating the continued bed demand.

Finally, we continue to pursue a longer-term opportunity in Alabama to design, build and finance construction for up to 3 new correctional facilities for the state, which the state would operate. We are pleased with the progress on this opportunity for our property segment. We are 1 of 2 remaining bidders and remain optimistic in a contract award by the end of the year.

Damon covered in detail our decision to become a taxable C corporation starting in 2021. So I will conclude my remarks by pointing you to an investor presentation on our website that further describes the strategy. In it you will see, among other things, our historical ability to repurchase $500 million of stock in the 3 years preceding our conversion to a REIT in 2013 because of our durable cash flows. We are confident the C-corp structure will open new pathways to build shareholder value, including strengthening our balance sheet and improving our credit profile, returning capital to investors and investing in growth opportunities. We look forward to the potential to sell lower-yielding noncore real estate outside of our correctional portfolio, possibly at levels accretive to FFO per share, which would accelerate the implementation of our revised capital allocation strategy.

As we're seeing in this volatile time, CoreCivic has a durable business model and financial strength thanks to the essential nature of our services and facilities and the embedded and long-standing culture of service excellence of our professionals.

I will now turn the call back to the operator, Casey, to open up the lines for questions.

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

A lot to digest here, but let's start with the operating results, and then we can -- maybe we'll switch gears to the conversion.

On the operating results -- and looking forward, I know the crystal ball is very cloudy today. But do you guys -- when you're looking at it, do you think that there -- we're getting near a bottom on the ICE and U.S. Marshal-type populations? They've declined. I think the last time I've looked, ICE was now below 22,000 on a daily pop versus in the 40s and as high as in the 50s last year. But to just kind of get a little bit of your guys' view on where those -- we might be seeing a bottom on those?

Yes. This -- Joe, thank you so much for your question. And you nailed it and kind of framed it, saying it's looking into a crystal ball because that's exactly what we would be doing if we answered this. Kind of an obvious point, but all of this is going to be -- obviously what happens nationally, internationally as related to COVID-19, and then obviously, the direction that changes relative to CDC guidance and federal, state and local partners and then turn our government partners is this one B&I. So it would be pure speculation and looking into a crystal ball to give any kind of view on that at the moment. But I'd say what we are doing in things that we can control is continue to kind of recalibrate our resources, our staffing and our services within these facilities as appropriate based on direction from ICE. It's very clear, and I think it's getting reinforced with this announcement in this last couple of days with ICE on Hutto for a 10-year contract, that our solutions, our capacity and the locations of these facilities and also the additional services that we can help them provide like courts and space for attorneys and case managers, that this solution continues to resonate. And with that, they want to sign long-term agreements.

So hard to give at the moment any kind of forecast on populations. I mean you can look at -- I guess one thing I'd say kind of looking at the trajectory, it has narrowed or, I guess, flattened a tad but again continue to see kind of a decline based on all the reports, but I'll let Dave tag team with me on this answer.

Yes, it does seem the pace of declines is slowing a little bit. And Joe, as a reminder, we discussed last quarter about 2/3 of our federal contracts have guarantees, if you will, or fixed monthly payments. So we're protected on the downside somewhat. And that's really to provide the capacity to the federal government in the event that they see a surge or an increase in populations. And I'd say based on the conversations we've had with our federal government partners, they are expecting increases in federal populations eventually. The crystal ball and the challenge is predicting when that will occur.

And have any of the ICE or U.S. Marshals -- as you said, you have the guarantee, minimum guarantees. But with the significant drop and decline, have any of them come back to you yet to say, hey, we want to renegotiate?

No. So it's the contrary. To kind of Dave's point, we've had some conversations with folks in leadership, and they're always obviously preparing potentially what happens in the coming days, weeks and months with not only the pandemic but also going into 2021 and maybe some outcomes in Congress and the White House. So they're preparing and with that working with us to prepare. The other thing I would say, again, just to kind of reinforce again the attractiveness of our solutions, the announcement this week of our contract at Hutto. Again, we think we're probably a day or 2 away to get a similar 10-year extension on our ICE contract at Houston. And then you probably saw, too, GEO had an announcement this week with South Texas. So 2 announcements already, one -- a third one about to come, again, I think just reinforces the fact that ICE really wants to maintain the capacity they've got nationally for their detention system.

Okay. And on the -- switching gears over to the community segment, as you guys mentioned, you've seen a larger impact there. I noticed in the quarter, you did take some impairment charges. If we start to see the community segment continue to see this bigger impact, are we at risk of seeing more impairment charges going forward there?

Yes, great question. This is Damon. I would again tag team with Dave on this a little bit. But I would say the value and the desire by government to invest in these facilities with this mission is really, really strong. I think you probably heard me say, being with the company almost 30 years, the last 10 years has been very encouraging to me because governors, legislators, folks at the federal level have said we want to put more investment on in-prison programs but also reentry facilities. And that message continues to be very strong. But we do appreciate, obviously in a very tough fiscal environment, some of these jurisdictions have to make really, really tough decisions because obviously, state-level they've got to close the deficit. They can't go year-over-year with a deficit.

So I don't see it as a widespread kind of potential action, but obviously something we're very sensitive and keep a close eye on in obviously the coming days and weeks. But what would you add to that, David?

Yes, pretty -- the only thing I'd add, I think as I mentioned in my script, this -- the governments in the community segment have acted faster, it's a lower risk population. So I think they're more comfortable putting them on home confinement things. So we see it as a short-term drop in the community facility, and it can happen fast because I think our total NOI for the quarter was $3.8 million. So for the company, it's not a significant number, but to the segment, as I mentioned, they're significant percentages. But eventually, we expect those populations to come back, again, eventually, putting a definition on when is very difficult.

But as Damon mentioned, we continue to see, nationwide, the dialogue about helping people in prison transition to society and to be able to reduce recidivism rates is still a very important part of the dialogue. So I think they'll continue to make investments in those facilities, and we could see a resumption or populations returning to pre-pandemic levels faster in that community segment even than in the safety segment.

Okay. And on the cash flow, I think you said you generated roughly $100 million from operations in the quarter. Are you kind of anticipating a similar level for each of the next 2 quarters?

I'd say -- well, the -- I said our AFFO was pretty much flat with what it was in the first quarter. The $98.9 million is what you're going to see in the statement of cash flows for Q2. It's not year-to-date for June 30. But if you back out the first quarter, that's the number you'd get, close to $100 million. That did include some positive working capital fluctuations. So we collected on some receivables. Our receivables actually very low at the end of the second quarter. So I'd say going into the next 2 quarters, I wouldn't expect to see that level of cash flow in the statement of cash flows. Again, we don't have guidance out there. But as I alluded to in our remarks, occupancies, populations continue to decline. So it would be tough to say that we'd achieve the same level of AFFO in Q3 as we did in Q2, but that's -- that's a little bit of crystal ball, and that's why we don't have guidance out there. It's tough to predict.

Right. Okay. And guys, being cautious, took down the liquidity earlier this year. You recently paid back $50 million, you said. But you still have a significant amount of cash on the balance sheet if you look at it prior to the drawdown. Why just pay back $50 million? Why not a bigger number? Is there something else out there that is keeping you wanting to have a large cash balance?

Yes, great question, Joe. As I mentioned, that was a drawdown in the first quarter on an abundance of caution. Then we launched the evaluation of the corporate structure and what we're going to do with the dividend. And so it's something we've been thinking about. And I totally expect in the second half of the year, we'll continue to take that cash and pay down the revolver.

Okay. And let's switch gears kind of to the conversion. Maybe you could just kind of walk us through a little bit more on the thought process and what other alternatives your financial adviser here brought to the table to you guys to look at. When you make the conversion, is there either a positive or a negative from the cost perspective of being a C-corp versus a REIT? Maybe you can talk a little bit about those, about some of the new programs and services that you talked about maybe being able to grow into, and your confidence in your ability to do those and who you'd be going up against to access those services?

Absolutely. So this is Damon again. I'll tag team with Dave on this, but -- to answer a couple of parts of your question there. So Joe, that -- if you've heard me say and we've talked about this quite a bit, obviously, but -- and I reinforced it in my script. But I mean, this multiple for our stock is just not appropriate. I mean you look at our underlying real estate and you look at the replacement cost, is what it would take for government to replace that real estate, I mean we're talking conservatively, maybe $3 billion, maybe $6 billion, maybe up to $12 billion our real estate is valued if you look at replacement costs. And so we're just not getting credit for our real estate but also the services especially in this environment of COVID-19 that we provide to our government partners.

And so it was with that -- kind of with that context, talking about with the Board of maybe there's other alternatives to where we could kind of reallocate our cash flow and our capital in a more effective way to not only meet the needs of the business but also think of some ways that we could potentially return capital to shareholders in different ways, like share repurchase being an obvious example. And so Moelis has been great. We've been working with them along with Latham & Watkins and Bass, Berry & Sims on this analysis. They've done a very thoughtful work alongside our team process to evaluate this and work with the Board. This has been about -- it's been probably a multiyear discussion, but I'd say probably in earnest it's been probably the last 6, 7 months, where we really have in earnest talked about this alternative going into a C-corp and it's probably through, gosh, probably 8, 9 meetings we had with the Board. So it was a very, very detailed discussion and good analysis.

Other alternatives, you probably heard, talked about in kind of equity circles within our universe, opco propco, potentially going private. Those are alternatives. But we felt like this was one that just made the most sense. We've got the Board, the management team and all the kind of key functions under one roof as a C-corp. Second, it's a structure we're familiar with. So we did, 12 years before the reelection in 2013, we were a C-corp. So we know from a business perspective, and this is part of your question, it will -- we won't miss a beat. So operations, responsibilities of all of our employees serving our government partners and people entrusted to our care, it will be -- we'll do this, and it won't impact them at all. They won't see any change in kind of operation as it relates to kind of day-to-day business activities.

I guess the other thing that I would say is that you look at this debt market. I mean, look at interest rates and holy cow, I mean it is a lot of people with this lower rate in the interest environment are taking advantage of that and obviously doing debt deals at kind of historic low levels, and getting a lot of debt that they're able to address kind of the needs for their respective organizations. But we're not seeing that. And then we're seeing that in a backdrop where we had a very meaningful increase in earnings and performance in 2019. And you look at just kind of the outstanding debt that's in the industry, I mean you're seeing kind of current yield out there, 11%, 12%, and that's just crazy.

And so we thought golly, if we're not going to get any credit for a dividend yield, and we're also seeing just the bond market just not being kind of appropriately calibrated from a risk perspective of our underlying real estate and the essential nature of our business that our government partners really require of us, C-corp potentially could be a way where we can kind of control our destiny and kind of pay our way all the needs we have and also pay down debt appropriately.

So I think there were several parts of your question there. I think I've addressed most of it, but let me turn it over to my colleague here and add to that, David.

Yes. I'd add 2 things. So on G&A, labor efforts and things like that, the cost structure going forward, it's not material. In fact, it's probably nothing. It's really just different, I would say. Our finance department has to deal with the operating requirements as a REIT. So there's some back office things that we have to deal with in order to comply with the REIT requirements. As Damon mentioned, it has no impact whatsoever on facility staff, facility operations. They wouldn't even know the difference between what we're doing as a REIT or as a regular taxable C-corp.

We'll have different issues as a C corporation -- a taxable C corporation. There are tax consulting engagements to try to tax plan. So there's -- I'd say it's really just a difference. So I don't see it any different really in terms of what G&A expenses we would be projecting under a taxable C-corp structure compared with a REIT structure.

And then going back to the cost of debt that Damon was talking about, under a C-corp structure, we can self-fund the business. We can retain our cash flows. As we mentioned, the prioritization would be -- priority would be on paying down debt, but you get to 2.25 to 2.75x leverage, which is a very comfortable leverage, very low leverage, we could potentially see improved credit ratings from the rating agencies. But it will -- it should improve -- it will definitely improve our overall credit profile and should reduce our overall cost of capital then.

So we like the ability to take control of our destiny rather than having to rely on the capital markets, which have become increasingly expensive. But if the capital markets are there for us, like Damon mentioned, if we're able to go out and issue debt at reasonable or very low, opportunistic rates, we'll take advantage of that, push out maturities and deal with the balance sheet like that. But under a taxable C-corp structure, the important thing is we don't have to. We don't have to rely on the capital markets for those things.

One thing I'd add, Joe, too, is that this is a really significant step, but it's part of other steps we've taken to kind of derisk the business. And so as you know, over the last 4, 5, 6 years, we've really taken some steps, I think, as we go into 2021, that really has lowered the risk profile even more so with the company. Notably, in the last 10 years, we have continued to kind of shy away from our managed-only business. So the last 10 years, about basically the time I've been CEO, we have lowered our exposure on the managed-only business. So this is again a business that government owns the real estate, we provide the service. We've lowered that by about 16 facilities, about 20,000 beds. It's hit the top line. So it obviously hits revenues. It's about $240 million in annual revenues with those 19 facilities that we've transitioned back to government. But this was single-digit margin business. And with that, it had about 4,000 employees and about $1 million to $2 million in kind of annual CapEx for these facilities.

So we've obviously put aside now with this completely kind of narrowing to the managed-only business not only the CapEx needs of the business, again, small but significant, but also the risk with that business being kind of single-digit margin.

So that's one step. And then also, I think as you and I talked about, the Bureau of Prisons and the state of California with the out-of-state program, both those partners individually are about 15% of our revenue in 2010 or combined about 25% to 30% of our revenue. Today, the out-of-state program of California is 0, and BOP is now only 2% of our revenue. So we've taken it again for about 25%, 30% of revenue down to 2%. So we've -- the volatility with that -- those partners obviously has been taken down dramatically from a risk perspective.

So those steps, along with the one that we announced yesterday, we just think we've really positioned the company going to 2021 to be really a lower risk and being able to control our own destiny in a very meaningful way.

(Operator Instructions) We will take our next question from [Ken Rivlin] of Rubicon Partners.

Just as a quick question about -- a couple of quick questions about the debt levels that you're targeting. Based on what I'm seeing and maybe -- I'm obviously working based on the numbers that I can glean here -- what's the level of debt reduction you're targeting? Is that -- if you're looking at the current numbers, at the trailing 12 months, is that around -- we're looking at $800 million, $830 million?

Over -- I'm not sure which period of time you're talking about, but I'd say this. In 2019, we generated over $300 million of AFFO, which as I mentioned in my comments, we use as a proxy for cash flow after maintenance CapEx but before debt repayments. Our pre-pandemic guidance included AFFO of, say, $283.5 million at the midpoint for 2020. Now we'll incur taxes. So if you apply a 28% tax rate, say, on 2019 pretax income, we would have paid an additional $50 million in annual taxes, and $43 million if you applied it to the pre-pandemic guidance for 2020. So that would translate into slightly over $200 million of annual paydowns of debt.

And let me add a little bit to that question and the previous question, too. I mentioned earlier about kind of what we're seeing within the industry on kind of yields for our outstanding bond maturities. I will tell you, and virtually I bet everybody on the call knows us already, but if you watch our bond prices right now in the last -- especially in the last 30 to 45 days, we are trading much tighter than others in the industry with this announcement. So the bond market, I think, has answered pretty loudly that they like this idea of going back to a C-corp and be able to control our density. So I think that's, again, virtually I bet everybody on the call knows that already. But if you follow the movement in the last 30, 45 days, there is a delta of 500, call it, 600 basis points of our maturities versus others in the industry. And so that's, again, I think just saying -- the bond market is saying this is a really good step and kind of cheering us on.

Yes. And one more comment of mine, that didn't take into consideration the property sales. So we've identified what we call lower-yielding, GSA-type government leased properties outside the corrections portfolio. That would only accelerate the capital allocation strategy. And we could even do those potentially accretively. So it's not like we're going to be killing the earnings by disposing of those properties because they're just lower cap rates. And so we think we could potentially sell those, potentially accretively but certainly not significantly dilutive, while delevering the business at the same time, like I said, accelerating the capital allocation strategy, getting to our target leverage ratio sooner and being able to, at that point, then do other things like buy back stock and pay dividends.

I was referring to I guess the amount -- the total amount that you need to reduce the debt by.

Oh, I'm sorry.

So to get to the target of 2.25, so is that -- just if you look at, for instance, at the guidance you guys gave pre-COVID, what's -- and you applied those numbers and the 2.25, 2.75, what level of -- I mean, how much in debt are we looking at like that would be required to be paid down over the next couple of years?

Yes. I'm sorry, it would be about $500 million. If you go back to our pre pandemic guidance and split the baby on the 2.25 to 2.75 leverage, that would be about $1 billion, and we have about $1.5 billion of debt that's recourse debt. So we'd be paying down $500 million to get to that level, the targeted level.

And -- great. And then so once you sell those properties, and I think those properties, if we're talking about the same properties is originally, you guys paid for them about $428 million. Are those the properties you're talking about?

Those are the properties that we're talking about, and that's probably -- I don't remember the exact number, but that's in the ballpark for sure.

And they have -- some of them have debt on them. So that's how you're getting down to a net proceeds and you're assuming the whole portfolio is sold, you pay off the nonrecourse debt, any defeasance costs and so forth. So we're comfortable putting out and we put it in our press release, net proceeds after all that of about $150 million. Could be more, could be less, but that's kind of a marker out there for us.

Okay. So the $150 million. And then this year's -- the fact that this year, the debt was suspended -- I'm sorry, the dividend was suspended, it's about $100 million as well, right? So we're looking at $250 million. So that's -- I guess even without the conversion, you guys could already, like, raise half of what the overall target is, if I understand it correctly. Is that right?

That's all right. Yes. And yes, I think we paid $100 million this year is, I think, what you were saying. So $200 million on an annual basis. So yes, I mean, it's -- we can delever pretty quickly with the cash flows the business generates.

Right. Even if you did -- I mean this is a foregone -- I mean it's a decision you guys made up and saying, even without the conversion, you could have sold the properties, get the $150 million in equity at least in them. And then -- because from a tax perspective, you don't have to pay any extra dividends even if you decide to continue with the REIT structure. Then that's another $100 million in cash. So all together, $250 million. So that's half of -- gets you halfway where you want to go. Is that right?

Well, yes. I follow you, $150 million. The dividend was $200 million -- you're saying if we reduce the dividend or maintain the dividend?

I'm saying even if you just suspend -- I mean you guys suspended it and you could have still -- you could still retain the REIT structure until next year, I guess, reinstate the dividend at whatever level the law requires...

Yes, yes. That's right. I mean it would have been this year, you could have -- so if we had suspended the dividend this year and resumed it next year, we would have saved $100 million in dividends for the second half of the year. And if we're able to generate $150 million in net proceeds from the asset sales, that would have been a total of $250 million this year whenever you conclude sales.

Okay. And then so since you guys are going to go ahead with the conversion in next year, so this -- besides this $150 million this year and the $100 million next year, we're looking at what level based on the pre-COVID estimate or guidance -- we're looking at a payout of -- or I'm sorry, David, paydown of, what, a level of $160 million a year in cash? Is that what you're looking at, after taxes?

Yes, I would say it's probably $200 million, pre-pandemic levels would have been about $200 million after taxes.

So yes, I'll say the question is what 2021 looks like with the pandemic. But yes, pre pandemic that's a pretty good number.

So we're looking at reaching that debt level target, I guess in the middle of 2022?

Again, if you get kind of back to normal levels, again, that's the crystal ball question. Do you get to normal levels in '21 or is it you kind of...

Extended.

Extended, so it could be a little longer than that.

Okay. Okay, that makes a lot of sense now. And I guess the ultimate objective here maybe is to get to investment grade just to expand the universe of creditors that can invest in the debt?

Yes. I think investment-grade, it's -- that's the -- it's been a little bit of hard nut to crack. We did have it at one-time as a REIT. But we think that the bigger goal is that this will get rewarded for investors both in the bond and the equity side, is just to lower the credit profile of the company, period. Now that leads to grade rating upgrade to investment-grade, possibly. But also the key thing we also want to do is control -- we can control and that is to lower the credit profile of the company, lower our leverage and again kind of pay our way based on the needs we have with these debt maturities but also the needs of the business.

Yes, let me be clear. I think -- we think we would be investment-grade at 2.25 to 2.75x leverage with the cash flows that we generate but that is not an end all, be all. We're not going to continue to change leverage policy. If the rating agencies say you've got to get below 1x, just as an example, that's -- we're not going to manage the business to get to investment-grade. We're going to manage the business to the leverage levels that we believe is appropriate. And we believe our credit profile will be substantially improved with this decision, because of our ability to retain our cash flows and use it to pay down debt or for other things other than dividends, the mandatory dividend.

Okay. Understood. I guess the last question is more of a housekeeping. I know there were some issues with the Elizabeth Detention Center in New Jersey. What's -- what was the -- that center's contribution to FFO in 2019?

Yes, I'll let you answer that last part first, but I guess to give a little bit of context there -- so we've got a lease with the current landlord through 2022. And then we've got the unilateral right to extend that lease through 2027. So we've got visibility on that property for the next 7 years, but I'll let Dave answer your question.

Yes. I mean we don't -- it's -- how many bed facility, 200-bed facility. So it's a relatively small facility. We don't disclose EBITDA by facility as that we -- for facilities that we continue to operate, for competitive reasons. But it would not be a material one, but it's one that we still believe that we're going to be able to retain.

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

All right. Thank you so much, Casey, and thank you so much for everybody joining on the call today. Obviously, in the coming days and weeks, feel free to reach out to Cameron Hopewell or other members of the management team with this announcement we made today, happy to answer additional questions off-line.

And also, just a reminder, what Dave said earlier, we do have an updated investor presentation on the website. So it's been uploaded and provides a little more color and context with the strategy, with the conversion.

So with that, thank you so much for your continued interest and support of CoreCivic. Have a good rest of your day.

Thank you. Ladies and gentlemen, this concludes today's presentation. You may now disconnect.