CoreCivic Inc (CXW) 2012 Q1 法說會逐字稿

Good morning, everyone, and welcome to CCA's first quarter 2012 earnings conference call. If you need a copy of our press release or supplemental financial data, both documents are available on the investor page of our website at www.cca.com. Before we begin, let me remind today's listeners that this call contains forward-looking statements pursuant to the Safe Harbor provisions of the Securities and Litigation Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made today. Factors that could cause operating and financial results to differ are described in the press release as well as our Form 10-K and other documents filed with the SEC.

This call may include discussion of non-GAAP measures. The reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data on our website. We are under no obligation to update or revise any forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events. Participating on today's call will be our President and CEO, Damon Hininger; and Chief Financial Officer, Todd Mullenger. I would now like to turn the call over to Mr. Hininger. Please go ahead, sir.

Thank you, Peter. Good morning, and thank you for joining our call today. With me today is our Chairman, John Ferguson; and our CFO, Todd Mullenger. Also joining us is our Chief Corrections Officer, Harley Lappin; and VP of Finance, David Garfinkle. In a few minutes, Todd will take you through the numbers for the quarter, then I will discuss the marketplace and strategic alternatives, after which we look forward to taking your questions. First, though, I'd like to make a couple comments on the past quarter. For the quarter, we had strong cash flow performance with FFO being north of $82 million and also a reported $0.33 for EPS for the quarter.

We also for the quarter had a very exciting announcement with our new dividend, which we announced in late February, and that announcement indicated that we intend to do on an annual basis about $0.80 per share and also $0.20 per quarter, and we intend to declare our first dividend here later this month and then have our very first payment through this new policy in next month in June. We see this as a very good next step after a successful share repurchase program to create more shareholder value that is more predictable for investors. And with this feature, we now see us as even a more attractive investment. We've demonstrated extremely durable cash flows over the last three years with us buying over $500 million in shares at less than $18, but also during the period of time we added 6,400 new beds, we added no new debt to the balance sheet and we saw no top or bottom line deterioration. And we have a very unique permanent feature of the business with the delta between our maintenance CapEx and depreciation and amortization. And with such, we intend to allocate a third of our AFFO towards the dividend and two-thirds, or said another way, 100% of our net income, towards new growth going forward. And we think this puts us in a very unique category for investment.

Also for the quarter, we had some very exciting either start-ups or transitions during the quarter. Most notably, in January we transitioned to our new Lake Erie facility up in Ohio. Later in the quarter, we started our new contract with Puerto Rico by ramping up their inmate population in our Cimarron, Oklahoma facility. And most recently, we opened our new Jenkins County facility in Georgia for the State of Georgia to house inmates there. We also for the quarter closed on our new bank facility in January and also very excited about the terms and conditions of this new facility, but also allowing us to have more flexibility as we think about our debt strategy going forward.

At the United States Marshals Service, we had challenges, obviously, with their population and that was the biggest factor as we thought about our guidance and forecast for the rest of this 2012. And really the headline here is that the BOP added capacity in California and Texas but also a change in sentencing for crack and powder cocaine. New capacity equaled about 4,000 beds and about 1,700 individuals were released early by the BOP in the fourth quarter of last year and the first quarter of this year due to this sentencing change. These two events allowed the Marshals Service to achieve a lower average daily population nationwide and achieve a lower level in January than they forecasted in their 2012 projections. And in a few minutes I will provide a little more detail around this event with the Marshals Service.

We continued our focus on costs and efficiencies, yet as announced in the press release we had some noise in the quarter with the activation of Jenkins, the ramp-up of Puerto Rico, and the transition of Lake Erie. But we also for the quarter had announcement of the closure of two financially unproductive facilities totaling about 1,600 beds. And obviously, this will affect the top line but it will be positive to the bottom line long term.

Later in the call, I will also comment on our work on the TRS, or taxable REIT subsidiary, structure and also our plan of action. I'll turn the call over to Todd here in a minute, but before I do, I'd like to thank all of our fellow CCA colleagues for their achievements and efforts during the course of this year. And as always, I'm eternally grateful to all of them. So with that, I will turn the call over to Todd.

Thank you, Damon, and good morning, everyone. In the first quarter of 2012, we generated $0.33 of adjusted EPS which excludes the costs associated with our recent debt refinancing. Funds From Operations, or FFO, totaled $0.82 per share while Adjusted Funds From Operations, or AFFO, totaled $0.69 per share. Year-over-year in the quarter we saw revenues increase by $10 million, driven largely by the assumption of operations at our Lake Erie, Ohio facility and per diem increases. While revenues increased $10 million, we experienced a $14 million decline in operating income. The decline in operating income was largely the result of several items including $4 million of start-up costs at Jenkins and Cimarron, a decline in EBITDA associated with a year-over-year reduction in US Marshal populations at certain of our facilities, an increase in employee medical and workers compensation claims, and an increase in depreciation and amortization expense.

Moving next to a discussion of our guidance, as indicated in the press release, we have revised full year EPS guidance to a range of $1.53 to $1.61. The guidance for Q2 is in a range of $0.36 to $0.37. Full year FFO guidance per share is in a range of $2.82 to $2.91, while AFFO guidance for the full year is in a range of $2.28 to $2.42. Our guidance has been impacted by several key items which I'd like to outline. First, the primary driver of the guidance revision is related to changes in our forecasted US Marshal populations. You may remember from the February earnings call our discussion regarding the decline in US Marshal populations we experienced beginning late in Q4 2011. At that time, we were expecting a rebound in those populations by Q2. While we have seen some increases in those populations from the lows we experienced, we now believe they are not likely to increase as quickly as previously anticipated when preparing our February guidance. While the difference in populations is relatively small, the impact on EBITDA is material as these populations are largely at facilities that are operating at full capacity where the incremental margins are very high. As result, a relatively small change in populations has a meaningful impact on earnings, and I'd say US Marshal populations are probably the key flex point in our guidance, as the movement up or down from the range of populations assumed could have a meaningful impact on our actual earnings.

We are also experiencing a small reduction in Georgia inmate populations at our Coffee and Wheeler facilities during the ramp of our new Jenkins County facility, which is also housing State of Georgia populations. So as Jenkins County populations ramp up, we are experiencing some transitional impacts in populations at Coffee and Wheeler which we believe will be partially corrected once Jenkins is fully occupied. Also during February and March, we experienced increases in claims under our self-insured employee medical and workers comp programs. As result, we've incorporated an increase in these expenses for the balance of the year but at a lower rate than we experienced the first quarter.

The increase in EPS from $0.33 in Q1 to a range of $0.36 to $0.37 in Q2 is related to a $3.5 million reduction in unemployment taxes, increases in earnings from the continued ramp of populations at Jenkins and Cimarron, offset somewhat by the declines in Georgia populations at Coffee and Wheeler related to the ramp-up of Jenkins. Our guidance assumes no material changes in our State of California inmate populations. Additionally, our guidance does not incorporate any expenses that will be incurred to assess the feasibility of a REIT conversion. General and administrative expenses for 2012 should approximate 5% of revenues. Depreciation and amortization expense is forecast at approximately $115 million for the full year. Finally, the adjustment to our guidance has not affected our decision to initiate an $0.80 annual dividend payable in quarterly installments beginning in June. The amount of the dividend we expect to pay is still roughly equal to one-third of our AFFO. We anticipate a formal declaration of that dividend will be made at the upcoming Board meeting next week. I will now turn it back to Damon.

Thanks so much, Todd. Now for our market assessment and strategic alternatives update. Let me first just give an update on the state book of business, first of which, as best we can tell there's no new capacity being appropriated in respective state legislatures around the country, except for maybe some activity in Arizona and California for the coming fiscal year starting on July 1. This would be the third consecutive year where we are not seeing any meaningful appropriations being done at the state level in any of the 50 states, I should say, for additional bed capacity to deal with growth and/or overcrowding.

We've also seen 11 of our existing state partners grow over the last 12 months a combined total of about 5,400 inmates. And we are also pursuing eight undisclosed state prospects with their projected overcrowding in the next five years to be about 15,000 inmates. Now in a few minutes, I'll talk about California and provide some greater detail on what we see out there, but as for our remaining state partners and their budgets, 11 of our partners have completed and passed their respective budgets, and we are seeing about a half-dozen of those budgets include increases to CCA under our current contracts and we have not incurred or not experienced any request for per diem reduction requests this spring.

On the federal side, the federal budget was released by the President in February and as we reviewed the funding request for our three federal partners it appears that they are largely in line with the fiscal year 2012 enacted levels. But I think it is safe to say that the final budget likely will not be completed until after the national election in November, so, obviously, we will be monitoring closely. But also to note that in the federal budget under the BOP section there is no funding request for new capacity, for federal capacity, I should say, for the Bureau of Prisons and the BOP is requesting 1,000 beds in new contract, in their contract confinement account.

Now as relates to funding for new prison capacity for the BOP, we think it is likely going forward that no new capacity will be appropriated. To put some context on this significant event, over the last 10 years the BOP has received about $3.5 billion in appropriations to build new BOP capacity, yet we don't foresee any funding for the next five to eight years for the BOP. Now just as a reminder, this is the largest system in the country with about 218,000 inmates in their system and they are growing at a rate of about 5,000 a year, and a forecast of an unmet bed demand in the next five years of about 26,000.

Now as relates to the Marshals Service and their population and forecast for the rest of this year, as I mentioned earlier, new capacity in California and Texas, plus the change in sentencing for crack and powder cocaine drove the nationwide number for the United States Marshals Service to hit a lower bottom than expected in January. New capacity equaled about 4,000 beds and about 1,700 individuals were released by the BOP in the fourth quarter of last year and first quarter of this year due to this sentencing change. In talking to the Marshals Service, the rate of growth is expected to be the same in 2012 as initially forecasted. It is just the case that the Marshals Service is starting at a lower base number as they began this year, which is approximately about 58,000 prisoners nationwide starting in January versus their forecast of about 60,000. I would note, though, that Marshals Service growth within the CCA system has grown significantly since January of 2010 and that growth is equal to about 3,300 prisoners. I'd also note that in late 2010 we started the ramp of our new contract with the Marshals at Cal City and also had the ramp-up of our beds in Florence last summer. So we've seen meaningful growth over the last couple of years with the Marshals Service.

So now to pending procurements, and the first if which is Arizona, and the requirement for 2,000 new beds owned and operated in-state. Arizona released a procurement last quarter for a contractor-owned, contractor-operated up to 2,000-bed in-state facility. Proposals were due March 6 and we anticipate a third quarter award. We also anticipate a start date in early 2014. New Hampshire released a series of procurements late last year, the primary one being for a new 1,550 bed in-state facility. Proposals were due February 24 and we anticipate an award no sooner than the third quarter of this year and we also anticipate a start date in 2014. Our existing partner, the State of Idaho, has recently released a procurement requesting up to 800 beds out-of-state with 250 beds to start at the beginning of the contract. Proposals are due June 7 and we think could see an award in the third quarter of this year.

With ICE, in 2011, our locations were selected as preferred sites and we are working with Immigration and Customs Enforcement on new facilities in Florida and Illinois. Now we are still actively talking with ICE on agreements for both facilities. These new facilities would require that we build approximately 1,500 beds in Florida and 750 beds in Illinois with an anticipated opening of each facility in early 2014.

Finally, Harris County, Texas issued an RFP in June of last year under which the County is seeking proposals for the management of the entire Harris County jail system which is approximately 9,000 beds, and this is in metropolitan Houston, Texas. We understand it currently costs the County more than $200 million a year to operate their jail system. We were asked to submit a best and final offer in April and we think the County could act on this proposal sometime this summer. So the total number of publicly announced new business opportunities in the owned and management segment is nearly 7,000 beds, and about 9,000 beds in the managed-only segment.

Let me now provide a brief update on a couple topics relative to California. And most notable, the state and CDCR released a report titled "The Future of California Corrections" last week. This is a proposal that will have many stakeholders that will weigh in -- the Legislature, the plaintiffs counsel on the federal court case, the court appointed federal medical receiver, and, of course, the federal court. As like previous calls in California, what actually gets implemented is likely to be very different than what is proposed. There are several key provisions in the plan. The state's realignment plan secures long-term funding for the counties and it works long term. Second, inmate population projections declined during the period of time as outlined in the plan which is through 2016. Third, the state funds and builds nearly 5,000 new beds and, finally, but I'd say most notable, the assumption that the state is successful in convincing the federal court to raise the capacity limit of their 33 facilities from 137.5% to 145%. This is a cap that just 12 short months ago was affirmed by the US Supreme Court as being an appropriate cap for the California prison system. The plan noted that if the court did not raise the cap, that, quote, alternatives such as continue to house inmates out of state will have to be considered.

So, obviously, the key question is what's next? The key milestones that we see in front of us obviously need to be monitored closely. The first one of which is the governor's May revised budget which we think will be out in the next couple of weeks. I think this will likely be consistent with what the recent plan said for the coming year but, obviously, this is only a document that provides a 12-month view. So after that, obviously, is the enacted budget, so this has got to work its way through the Legislature, and then ultimately get enacted and get signed by the governor. There is a chance this gets done by June, which they did last year, but many of you may know that two years ago and three years ago they didn't pass the budget until third quarter of those respective years, so it could be later. But obviously it has got to work its way through the process and get enacted. The third item to watch is action for the courts. The court may not do any action on their own, but we suspect that the plaintiffs, who are representing the inmates in this longtime case, may push the court for some type of action. Timing of that is uncertain, could be the summer, it could be later this year, but we suspect the plantiffs will take some type of action with the court to have them weigh in on this plan.

Finally, the Schools and Local Public Safety Act of 2012 tax increase that will be on the ballot in November. This is the long-term funding vehicle for realignment. It is currently polling with just over 50% support statewide. The counties are obviously watching this very closely, not only for funding, but also for the security that the funding will be there long term so they can possibly do jail expansions to deal with realignment. Now I would say this, I think that it is now clear with this plan that the state is saying publicly that it will not meet the court order cap by May of 2013. The LAO, or the Legislative Analysts Office, also said this in the report in late February, saying that the state likely is not going to reach the cap that they have to achieve under the federal court case in May of 2013. I really think that's the headline of this plan. And short of an adjustment of the cap, funding of new state capacity and also funding for local realignment and a reduction of state populations by 4,000 inmates, which this plan proposes that all these must be executed on, so they really have to thread of needle on all these different steps, and if not, they outlined in their plan that an out-of-state program will be needed. One final piece of data on California, our average California population for the month of April was 9,539, our highest average daily population since first quarter of 2011. Clearly, we will monitor very closely and give updates to the investment committee as appropriate as relates to California.

Now as announced this morning, we are assessing the feasibility of a Real Estate Investment Trust, or REIT conversion. The Board and management of CCA evaluate on an ongoing basis how best to allocate the Company's resources to deliver long-term value to our Company stockholders. Our commitment to doing this is demonstrated by recent actions, such as our share repurchase program and intended quarterly dividend. In the fourth quarter of 2011, following a review with the Board of various REIT structures we initiated a project to do a deeper dive into one such structure that we thought could be most appropriate for CCA. That is a conversion to a taxable REIT subsidiary, or TRS structure.

Now potential benefits for this type of structure include, obviously, increased shareholder value and an access to a larger base of investors that are attracted to companies like CCA that have a heavy real estate component. This also would provide a more tax efficient structure and also potential lower cost of capital, but also being able to do this without the need to divide the Company into an independent REIT and an independent operating Company, therefore, avoiding and minimizing the potential pitfalls of alternative REIT structures, such as tax leakage associated with the division and distribution of Company assets, the ability to maintain strategic alignment of our key operating divisions, avoiding the need to reconfigure our management contracts, and providing greater flexibility to pursue growth opportunities following conversion. This is a very complex project, obviously, with issues in tax, legal, financial and business. We want to make sure that it doesn't affect our ability to grow long term, the way we manage the business or cede any competitive advantages.

Recognizing the complexities of the project, we have assembled the best team in the REIT realm to support the Company in this assessment. They are Latham & Watkins, Ernst & Young and JPMorgan, in addition to our corporate counsel of Bass, Berry. We are not in a position to reasonably assess the feasibility of the TRS structure at this time, and we are not able today to reasonably estimate the date by which we will finalize our assessment. However, we will likely need a private letter ruling, or PLR, from the IRS and I can tell you that we have not requested one at this stage in the project. But clearly, we understand the benefits of completing the project in a timely manner. But we also want to make sure that we get it right and we think our approach and the quality of our team speaks to that point. So I know that you'll have many questions about this issue, and with that, try to have us provide additional details. That's going to be difficult to do today for many reasons. Additionally, we do not anticipate giving another update on this topic to our shareholder community until our second quarter earnings call which will be in early August.

With regards to our near-term capital strategy, as you know, the Company in the past has deployed cash primarily on speculative capacity, build to suit opportunities, facility acquisitions, and the share repurchase program. We are still holding off on new spec capacity and aggressively pursuing build to suit and facility acquisition opportunities like New Hampshire and Ohio. But now with the dividend and termination of our share repurchase program, as mentioned earlier, we will now allocate a third of our FFO towards a dividend and the remaining towards organic growth.

So let me make my closing comments here and make a couple final points, one of which is the new business opportunities and global dynamics we think is very favorable for the Company and for the industry, both on the state portfolio and also in the federal book of business. We are very excited about the steps we've taken to create more shareholder value, most recently initiating a dividend which will be declared this month and the first payment in June of this year. Finally, we are also taking another step to evaluating how we create even more shareholder value with this project to assess the TRS structure. This now concludes my prepared remarks. Thank you, again, for calling today's conference. Now let me now turn it over to the operator for Q&A.

Ladies and gentlemen, our question-and-answer session will be conducted electronically. (Operator Instructions) Our first question today comes from Todd Van Fleet with First Analysis.

Oh, I didn't think I'd be first. Good morning, guys.

Good morning, Todd.

I think you're doing the right thing on the disclosure here with the REIT conversion and all the work you're doing; I think that's the right thing to do, so I applaud you on that. I have a pretty limited knowledge of REIT law, I guess, and I was just hoping you can tell me what you found, given it sounds like you started a lot of your research in the fourth quarter of 2011. The one issue surrounding the REIT conversion that I'm having difficulty with, and understanding how this is feasible is, maybe you can help us understand, in the work that you've done, the background work, is it possible -- why is it possible for the Company to have the taxing authorities look at a REIT structure, excluding the management revenue that comes in?

So, you take a look at the totality of the revenue stream for the Company, my understanding is that in order for the REIT structure to work the taxing authorities have to view the rental income stand-alone and separate from the management income. And I'm just wondering how you guys have gotten comfortable if that's a possibility, given the fact that you're going to be pursuing this, I guess, and spending probably a reasonable amount of money on this. You must have at least gotten comfortable that is possible, and I'm just hoping you can tell us how you've gotten comfortable?

Todd, this is Damon. I would say that we are still well underway on the analysis and review and the feasibility of this type of structure. But as I mentioned earlier, as we looked at this, what we want to do is make sure that it doesn't affect any of the day-to-day ability to manage the business, or affect our ability to provide services under our existing contracts, but also ability to grow and cede any competitive advantages.

As such, we are looking at -- is there a way to do this where the management contracts don't have to be adjusted or changed or reconfigured, a little bit to your question, on the analysis. It is still underway. I can't provide any commentary of listing of all the various issues, and what can and cannot be done. But as we've expressed, not only today but I think in previously, is there a way to do this where you don't have any adjustments or changes to our manager contracts? That could be a potential benefit for this type of structure.

Okay. Let me ask then, Damon, so apparently the work began in the fourth quarter of last year, according to the release, following a review of various REIT structures. What was it that prompted the Company to take a look at and evaluate the REIT structures that were -- what prompted the review, I guess, back in the fourth quarter of 2011, is what I'm wondering?

Yes, good question. One thing that I think we've demonstrated a pretty good track record on is always looking at the alternatives that create shareholder value. Obviously, those fall in different categories, obviously with restructuring, with dividend, with share repurchase, with M&A, with new business lines, with carve-outs to provide expertise to an area that we think we are really good at, like designing and operating correctional facilities. That is a constant process.

It is a very robust process with the management team and the Board. So, this is just one of those things that was on a list that we evaluated, and really just saw what was going out in the larger investment universe with taxable REIT subsidiaries, and again, just undertook a step to say -- okay, what is going on out there, and then with the Board's okay, then put forth some resources to do a deeper dive in this type of structure. So, I think it is just part of our usual analysis on looking at alternatives to create more shareholder value.

Okay. I will just ask one more along these lines then. So, since you're not going to share with us, I guess, your expectation in terms of how quickly you think this process is going to run, do you feel like you and the folks who are really pushing for the change in the conversion -- I'm assuming you have had your meetings with them and you've had your discussions about the general approach leading into this news release today. So, I'm wondering, do you feel comfortable and good about the timelines matching up from the Company side versus the shareholder side?

Well, I can't speak for the shareholder side, but I would say that the quality of our team, and this is a little bit to your question, the quality of the team, I think, speaks to our efforts to do a really thorough analysis on this type of structure, so I guess I'd make that point. But the other is that we see that the analysis, again, kind of being an offshoot of our bigger analysis on creating more shareholder value. So, I think, I can't speak from a shareholder perspective on the timeline, but we, obviously, want to make sure that we are doing a thorough analysis. We think we've got the right team that are doing this quality review. But we also appreciate that we want to make sure that we get it right, and we don't miss anything, and that we move forward at a prudent pace, but also making sure we've got high quality in our review.

All right, thanks, guys.

Thanks, Todd.

Moving on to ManAv Patnaik with Barclays.

Hello, good morning, guys. A couple of quick operational questions first. So, on the owned and managed side, the fixed costs for (inaudible) jumped up from the [$32 million] level that it is been at for a long time into the [$34 million] range. Is that going to -- just trying to see sequentially, is that going to come back to that [$32 million] level, or what's going on there?

Manav, this is Todd. On the cost per day increase you saw, first we had start-up costs of around $4 million impacting the quarter. About $2 million of that was variable; $2 million of that was fixed. The variable expenses include a transportation cost for the Puerto Rico inmates. Then we have the merit increase we implemented in July last year. And then finally, we have the increase in employee medical and workers' compensation costs. On the employee medical and workers' compensation costs, there's some indication that some of that might be timing, so we saw an increase in the severity of the claims.

Okay.

Not a great deal of clarity exactly what's driving that increase. We saw the increase in February and March, (inaudible), again, another indication it might be temporary, but not knowing whether it is temporary. As part of our revised guidance, we've increased some of those costs for the balance of the year.

Okay. Fair enough.

Those are the primary drivers of the cost per day increases you saw.

Okay, that's what I thought. And then, I guess, similarly on the managed-only side, I'm guessing, the margin drop was mainly because of maybe some timing around the Mississippi cancellation, how strongly should that rebound next quarter?

Well, I'd say on the managed-only margins, it is a combination of flattish per diems, the merit increases, the increases in the benefits, and then you also saw a concentration of our legal settlement expenses primarily in the managed-only facilities.

Okay, fair enough. All right, and then I have a couple of questions on the REITs and stuff, too. So firstly, just to clarify, so you said you won't give an update until the next quarter, early August, and, two, the current process that you are doing with all the advisors, is that the [480 due] test that you have to do, or is that something more than that?

We are not going to disclose any great detail of the analysis we are undertaking, ManAv, but that's our anticipation to your first part of your question is that next update would be during the second quarter earnings call.

Okay. And then the bigger picture question, there's no doubt you guys have done an amazing job trying to look for shareholder value, and disclosing what you're doing now is also a great thing and I applaud you for that, as well. My question is -- you began this in the fourth quarter of last year, and throughout the course of the year, the question when it is been asked in terms of the REIT conversion, you guys have typically been more along the side of it looks increasingly challenging. Just trying to understand the thought process around why at that point you just hadn't disclosed that you were going through this?

A couple of answers there. When we looked at and reviewed alternatives with the REIT structure in the past, again, some of the challenges and issues were, as I mentioned earlier, the separation of the Company's moving into an operating Company, moving to a Company that owns the assets and the challenges with that, with a separate Board, a separate management team, and maybe not being aligned relative to strategic vision as an organization or two separate organizations. But also maybe you have to reconfigure the contracts, restructure contracts, renegotiate contracts. There are several different issues that I think we've outlined in the past that we look at those structures.

Correct.

But as we think about the taxable REIT subsidiary, as we started this review and this analysis, the question was -- can you clear some of those hurdles? So, can you do this in a way to where you have strategic alignment to all the important divisions, which would be like operations and our government relations folks and our real estate folks. And can you also do it in a way to where you have, basically, a non-event for our customers where there would be no adjustments or changes or renegotiated contracts expected from our customers. So, that is, as we kind of review this, the questions we're asking and doing the analysis to see if we can clear those hurdles that are somewhat there with different REIT structures.

So, I guess another way to put it then, is it fair to say that you guys hadn't really looked at the TRS structure until now, and the REIT project looked at most of the other structures before that?

I would say it's a little bit all of the above. I would say in the last couple of years, obviously, there's been some other things going on in the larger investment community with TRS structure, so I think there's other companies that have undertaken or have completed a similar structure. So, obviously there's some precedents that are out there that are relatively recent. And I think that is helpful, too. And, again, it's something we're always looking at, when we're thinking about ways to create shareholder value at a lower level, what are those alternatives, and at the lower level, is there an opportunity to restructure the Company. Again, part of that analysis is looking at any kind of recent history, recent events with other companies of either similar in nature or maybe in other industries.

Yes, I'd also add to that, Manav, whenever we initiate a project like this, our plan was always to be remain quiet until such time as we've determined the feasibility of a project of this nature. And if it is in the best interest to shareholders, customers, employees, et cetera. If it didn't make sense -- it never makes sense creating a big stir until you have answers to a lot of these questions, and can provide some clarity around the feasibility of a project like this. However, we now find ourselves in the situation where there is a great deal of interest in the idea. It has generated a great deal of speculation around the idea, so it made a lot of sense disclosing what we are doing.

Okay. And one last question -- were the advisors hired in the fourth quarter of '11, or were they more recent as part of the REIT project?

The advisors have been advising us on these REIT structures for some period of time.

Okay. All right, thanks a lot, guys.

Moving on to Kevin McVeigh with Macquarie.

Great, thank you. Damon, I wonder if you could give us a sense of the growth prospects of the business as you think about it over the next three to five years, and how that lays in with the thought process around the REIT, and just thoughts on CapEx levels around that, as well?

Good morning, Kevin, this is Damon. Let me answer, I think, the first couple parts of your question. So, as we look at the marketplace, which is right now, we and the competitors in the industry have about 9% of the total private marketplace, or total I should say, facilities in the US marketplace, and we see these dynamics playing out on the state side where no one is taking steps because of the challenging fiscal environment, but also us getting traction on providing a good solution and no one is appropriating dollars for new prison capacity. We think that's a favorable dynamic as more and more states deal with growth and overcrowding, that they'll be working with us to provide those solutions.

And then on the federal side, with the Marshals Service continuing to rely more and more on the private sector, obviously we are the biggest service provider to the Marshals Service. We continue to see demand from them going forward, and us being there to provide the solutions. And then with the Bureau of Prisons, as I mentioned earlier, our largest system in the country, nearly 220,000 inmates in their system. They are running at about 140% capacity right now, and growing at a rate to where they will have an unmet bed demand of about 26,000 in the next five years. We see opportunities to provide solutions for them as they grow, and deal with overcrowding. So, we don't see any changes in the marketplace as it relates to the first part of your question.

The last part of your question you were asking about kind of CapEx needs going forward?

Yes.

So, in the near term, as I mentioned earlier, obviously, it is got the dividend policy, we've disclosed kind of our maintenance CapEx and growth CapEx for the year, which I think is close to $90 million for the rest of this year. But as it relates to outgoing years, obviously, that will be driven by the demand and timing of projects. So, it is one thing I said earlier, as it relates to speculative capacity, we're taking our foot off the pedal on any new beds until we get some meaningful absorption from either existing or new partners that we are pursuing right now. But we will continue to be very, very aggressive on the build to suit, and the opportunities for facility acquisitions like Ohio going forward. It is a little hard to give any definitive guidance going forward, but obviously, we will continue to be very aggressive on those two fronts, in addition to servicing the dividend policy.

That's helpful. And then, Damon, I know it's probably hard to quantify, but with California, it seems like every year they create some noise out there in the market. In terms of probability that they don't fund this year, as you think about 2016, how do you think about that process this year versus last year, and the ultimate resolution of it?

That's a great question, Kevin, and I wish I could give you a definitive answer. One thing that we've learned on working with California since 2006 is you've got to have a really strong stomach to work with them because, obviously, they've got a lot of different issues and a lot of stakeholders that affect their forecast and their plan, and obviously, the fiscal environment is layered on top of that. The only clarity I can give is that we have seen plans in the past from California, somewhat similar to what they've put out recently. Obviously, we saw what they proposed last year during the spring legislative session for funding of beds for the coming year, which was going to be a reduction.

Ultimately, what got enacted was a full funding for us for the coming year, and then also, obviously, the Supreme Court weighed in and said that they had to reduce their system capacity by 33,000 inmates within two years. So, as we look at this plan, obviously a lot of moving parts, a lot of different stakeholders have to weigh in. As I said earlier, the court is going to have to weigh in, and with them just affirming last June, just less than a year ago, saying that 137.5 was the right capacity level for the State of California prison system, that is just going to have to be very interesting to see how that kind of plays out.

So, the best I can do is kind of go through the different milestones, obviously painting a little bit of a picture of what those milestones look like, and the timing of such. But also point back to the history, which is, they have been challenged on trying to achieve some success on some of these other fronts. The reliable and the really good solution that we've been able to provide, that has really been a relief valve, has been the out-of-state program, and we continue to see that as a good solution. That, in this fiscal environment, is providing great value.

Super. Thank you.

Thank you, Kevin.

Now on to Kevin Campbell, Avondale Partners.

Good morning, thanks for taking my questions. I just want to be clear -- have you guys looked at a TRS structure before?

We've looked at REIT structures in the past, again, as part of our analysis. And as we looked into the review of these different structures with the Board, TRS has been one of those alternatives. But, again, recently, and I'd say recently in the last couple of years, there has been some activity with other companies and other industries where they have set some precedents and at least we've gotten to learn a little bit of what those restructurings have done or what they've undertaken. So, it has been part of the analysis, and again, as part of our bigger strategy of looking at alternatives to create shareholder value.

Is there anything, at the time, if you recall back when you looked at it before, what was the reason for not moving forward or along the line with the TRS back then? And is there anything that has materially changed with, say, interpretations of laws that helps you overcome the prior reasons why you didn't necessarily move forward with it before?

Kevin, this is Todd. Just to clarify, we've looked at other REIT structures in the past. We have not taken a serious look at the TRS structure in the past.

Yes, the effort here is to really just to do a deeper dive, and try to understand it with more clarity and try to just understand it. It's been out there, but we are now taking steps with our team to do a deeper dive in this type of structure.

Okay. That's very helpful. Then just moving on to other things. Damon, I just want to make sure I heard you say correctly, when you're talking about the states, did you say there are eight state projects, undisclosed state projects, and that, A, was that the right number?

Yes.

Okay. And those are none of the existing RFPs that presumably that's what you mean by undisclosed, and does that include the ICE opportunities that are not formal RFPs, or is this just states, so it is eight new opportunities?

Yes, it is just states, and it does not include ICE.

Can you give us a sense -- I know you can't disclose the states, but can you give us a sense of number of beds that are, in total, owned and managed versus managed-only, whether or not these are existing or new customers, if we should see these come in the forms of formal RFPs, or if it's more likely to be something like Puerto Rico where it is just a straight award?

They are not existing partners. And it could be a combination of procurements or direct negotiation, and I would say a good example of this, this is -- this recent contract with Puerto Rico was kind of in that category that we have been mentioning in the last year or so, where we are pursuing an opportunity for a partner to use existing capacity within the CCA system. So, the kind of Puerto Rico contract, which was a direct negotiation with the Commonwealth that we started early this year, would be kind of the same category. So, it could be similar to Puerto Rico where we do a direct negotiation, or it could be the result of an open bid.

And can you give us a sense in terms of the number of beds owned and managed versus managed-only?

I would say that what we are pursuing is more on the owned side, and obviously, a very high priority to use existing CCA capacity. So, trying to provide solutions to these respective states utilizing existing CCA capacity. The only number I can give you right now is just to give you a forecast that these combined eight states are looking to be [over-crowded by about 15,000 inmates by 2015.

Great. That's helpful. And Todd, I was wondering if you could just give us a sense -- back on the managed-only margins, what a more normalized rate should be going forward? The last two quarters it has been a little bit lower than prior rates. So, is 10% the number, or is it going to come back up to the 12% type of range?

Kevin, as you know, we don't provide guidance on margin rates.

Okay, anything on Colorado then, sort of the last question there? Obviously, the populations have been coming down. Is that consistent with your guidance that they will continue to come down, or do you think they will stay at stable levels? Can you give us a sense for those populations?

We're getting indication that the populations are going to stabilize. It is, obviously, something we've been monitoring very closely -- I guess, probably going back 36 months. So, we have had some fluctuations, but they have been, as you mentioned earlier, down late last year going into this year. We are monitoring very closely. One thing that we're always working on, especially in this case of Colorado, is always to optimize our facilities as appropriate when we have these fluctuations, and so that's a continuing part of our dialogue, but also part of our execution plan with our operations folks in Colorado. So, we are looking at stabilization right now, but obviously keep a close eye on it.

Okay, great, thanks for taking my questions.

And then, Kevin, as a follow-up to your question on margin rates, without getting into specifics on managed-only or owned and managed, or what the rate specifically will be, we should see improvement in the rates from where they were in the first quarter due to the following -- a reduction in unemployment taxes, the seasonal reduction in unemployment taxes, and then from a continued ramp of Jenkins and Puerto Rico as start-up costs or losses turn into positive contribution margin.

Okay. Actually that reminds me, on Puerto Rico, is that fully done at this point? I thought I remember, when you issued the press release, it was going to start in February, and then maybe you expect it to be fully done by the end of the first quarter or early second. So is Puerto Rico fully ramped at this point?

Pretty close. I think we have one more transport; we are very close.

I think we are at around 380 today, and we're expecting another transport of around 100 this month.

Great.

You're welcome.

At SunTrust, let's go to Frank Atkins.

Hi. Thanks for taking my question. Wanted to ask about upcoming contract renewals, anything major on the horizon? And, I guess, have you talked to states at this point in terms of their views of a REIT structure, or do you think that would impact anything, or at this time is it mostly just internal work that you're doing?

I will answer the last part of your question first. It's mostly internal work right now. Again, the one thing that we're undertaking as far as the feasibility is to see basically that this would be a non-event to customers where it wouldn't require any REIT reconfiguration of the management contracts. So, that's one thing we're investigating, so it is too early to tell. We are still going through the feasibility study right now.

But the first part of your question as it relates to contracts at risk, as we looked out to the rest of this year, obviously, we have a lot of state contracts that are tied to their fiscal year, which is July 1. So we feel good about our prospects on the renewals that we have coming this summer on the state book of business. And then on the federal book of business, no notable renewals. We do have typically anniversary dates on our federal contracts, and those are typically just administrative function between us and the customer. But no notable renewals on the federal side.

Okay, great. And you gave some good color in your prepared remarks on the state budget cycle. In terms of what you're seeing there, can you give us any more color in terms of the increase of pricing or incremental services being requested, how are things going there?

Well, let me just make a global comment on state budgets, that it is -- if you look at revenues and some of the kind of key indicators that we look at relative to tax collections and whatnot, we are seeing some improvement, but I'd say very, very modest improvement with our state partners. And as I think we talked about, really, kind of early last year, a lot of the federal funds that they were receiving through stimulus and other things coming out of Washington, has basically dried up. So, they have had some improvement, but they also have had to fill some holes from federal funding that were helping bridge the gap over the last couple of years. So, I wouldn't say the state budgets are out of the woods yet.

But we are seeing some improvements in other places. Obviously, some states that have mineral, and oil and gas, obviously seeing a little better maybe improvement versus other states, but monitoring very closely. But I would say, as I mentioned earlier, our pricing per day and our funding request for increasing the contracts, a little better this year than it was, say, two years ago or three years ago. But, again, it is been very, very modest. And I think most states would tell you that as they look at their forecast, obviously a lot of still wringing of hands and still trying to understand what the future holds, but are encouraged -- seeing a little bit of improvement, but it may be several years until they get back to the levels kind of pre-recession.

Okay, great. And finally, three quick numbers questions. What is the share count and tax rate in your year guidance? I don't know if you can, but if you could, quantify any of the impact from the medical and workers' comp increase?

So, the share count, a little over 100 million -- 100.5 million, I think. The tax rate, assume a GAAP tax rate of around 38%, and a cash tax rate very close to that. And then the impact of the employee medical benefits, is that the last part of your question? We saw about a $3 million increase year-over-year in the quarter on employee medical and workers' compensation claims. We are assuming an additional increase over and above what we had previously forecasted for the balance of the year, the remaining three quarters of around $5 million.

Great, thank you very much.

You're welcome.

Let's go to [Yegin Chen] with MetLife.

Hi. At the beginning of the call, you referenced your debt strategy, and I was wondering if you could just reiterate what that debt strategy is in terms of a targeted leverage ratio? And whether the TRS structure would change that strategy at all?

Yes, good question. The ratio right now, debt to EBITDA is about 2.7 times, and we've been kind of hovering around that number for a little while. I think we've said publicly that we are comfortable up to 4 times -- obviously, a long ways from that. And we will continue to monitor that. Obviously, if we have a lot of new business opportunities where it requires us to deploy capital, then obviously we will revisit that, but we think we've got plenty of dry powder to accommodate a lot of new growth, both with the current cash flow, but also going out to debt markets and getting favorable rates.

The other part of your question on our strategy, obviously with the new bank facility and what we've undertaken during the course of the year is obviously to retire a little bit of the debt that we had out there that were at higher rates, to get a little bit of favorable impact on interest expense. That is going to continue to be part of the playbook as we look at the business needs and business opportunities, but also if we have maybe a little bandwidth to take down some of that higher-cost debt. So that will be something we continue to look at and evaluate, on top of the overarching goal of always looking at liquidity and business needs.

So, to the last part of your question, as we think about the business, the ability to grow, the ability to provide services, to making sure we don't give up any competitive advantages, making sure that we have a very comfortable leverage ratio and other kind of financial metrics relative to our balance sheet, would be definitely something as we take this feasibility -- or do the feasibility to make sure that obviously we can continue to perform and operate at a level consistent today. And, again, don't cede any competitive advantages, and don't make it an event to allow us to provide high-quality services to our customers.

And one follow-on comment to the leverage ratio. So we're around 3 times, a little less than 3 times debt to EBITDA leverage ratio. To get to 4 times leverage, we throw off a tremendous amount of free cash flow that is available, in addition to funding the dividend available to fund new growth. So, we'd need explosive growth before we'd ever have to get anything close to 4 times debt to EBITDA leverage.

Okay, thank you very much.

Dennis Wurst, Britton Hill Capital, please go ahead.

Good morning. I want to approach -- well, do you plan to compartmentalize the expenses related to the REIT effort? In particular, I'm just saying -- I'm asking you maybe not to mix the laundry between current legal accruals and then anything associated with essentially, to me, what sounds more like a banking expense. Are you going to break those out, or are you going to throw them all in?

We'll evaluate that based on the magnitude of those expenses.

But wouldn't the benefit of that information be on our side to decide rather than -- these could be real numbers that --?

Yes, to the extent they are material, we would plan on breaking them out.

Okay. I appreciate it. How have legal accruals -- I don't see it in the press release, I might have missed it, but I was just wondering how legal accruals have trended?

Legal accruals relating to?

Life. I asked on the last conference call, and they said it's steady, it is flat. You've got -- you explained that this is part of your business. You get sued, I'm reading the tape and I see people throwing stuff at you. So, I'm just wondering if this is causing any extra time at $500 an hour with Cleary Gottlieb or White & Case?

I'd say our legal settlement expenses and legal services expenses have been pretty consistent with the past two to three years. It varies from quarter-to-quarter, but we haven't seen any material change on a full-year basis.

That's what I was asking. I appreciate that. Thanks.

You're welcome.

Thank you.

And to Barry Konig, Cumberland Associates.

Hi, thanks for taking my call. Can you hear me?

Sure, good morning.

Can I verify, please, the amount of maintenance CapEx versus total CapEx? Did you say maintenance was $90 million?

Total CapEx full year from a forecasted standpoint is around $80 million to $90 million. $30 million to $35 million of that is construction CapEx. And then $50 million to $55 million is maintenance and IT CapEx.

Okay, because I'm looking at last year, and it was, what, $143 million?

On a prior-year basis for full year?

Full-year 2010.

2010 or 2011?

Well, 2011, I'm seeing -- Bloomberg is showing $173 million for total capital expenditures.

We'll run down that number.

We will see if we can get you that number. I don't remember off the top of my head. (multiple speakers)

But here is my concern is -- when I build a pro forma P&L and cash flow statement for a REIT structure, after I subtract out tax for the TRS, because it will be a taxpayer, and the requirement under the REIT dividend, and maintenance CapEx, there is very little free cash flow left for either growth capital or if you borrow debt amortization as time goes on, because the REIT structure requires so much cash dividend. So, I'm just trying to figure out how you are going to do growth and build the Company when the REIT and the tax required on the TRS is so high?

I had said that is one of the many factors we are going to be evaluating in our assessment.

Okay, so I guess we can talk off-line about what the CapEx numbers were? Putting back to December 2011?

Well, the maintenance CapEx last year was around $50 million. The construction CapEx, again, I don't recall off the top of my head. But the maintenance CapEx has been around $50 million a year for the past several years.

We can run down that number. It probably was north of $100 million because we had the acquisition of Ohio --.

And that would be construction CapEx.

Right.

Right. Okay. I just have to do some more work on the pro forma REIT structure. Thank you for your time, and appreciate the call.

Thank you.

Appreciate your questions.

We now have a follow-up from Todd Van Fleet.

Hi, guys. Sorry, I might have missed this, but the guide down in EPS, $0.07 to $0.09, I think -- Todd, it seems like $0.03 of that is related to the healthcare claims. And then, how should we think about Jenkins and the Marshals Service populations for the residual?

I haven't provided a crosswalk for the full year. I did provide a crosswalk, a little bit of a crosswalk from Q2 -- I'm sorry, Q1 to Q2. So, you've got the unemployment taxes, about $3.5 million reduction in unemployment taxes from Q1 to Q2, increases in earnings from continued ramp of populations in Jenkins and Cimarron, offset by a reduction of the populations at Coffee and Wheeler related to the ramp-up. Q2 and Q3, haven't quantified it, but the improvement from Q2 to Q3 and really Q4 would be improvement from Jenkins and Cimarron, and an improvement from an increase in US Marshal populations.

Right. I was just thinking the composition of the guide down, though, so in terms of thinking why the guidance is reduced $0.07 to $0.09. It sounds as though $0.03 is from the healthcare, and then can we just kind of split the difference, I guess, between what's going on in Georgia and the US Marshals for the residual $0.04 to $0.06? Or is that the right way to think about it?

Yes, that's probably a reasonable way to look at it.

Okay. Thanks.

Thanks, Todd.

Question now from Clint Fendley with Davenport.

Good morning. Thanks for taking my question, guys. I know you were clear that your guidance doesn't assume any major changes to the California populations. I wondered if you could just remind us what your overall exposure is to the state, and how, if any, the longer-term plans from the state might affect your TRS analysis here?

Won't be able to provide any real clarity on the last part of your question, again, that will be just part of the feasibility review of the taxable REIT subsidiary type structure. On the first part, we have about 9,500 inmates in our system, as in the plan that was released last week anticipated a ramp down of the program through 2016. And, again, that was just one line item of other components of the plan, which assumed reduction of their top line population, 5,000 new beds in states, and an increase of the cap from 137.5 to 145. So, a lot of moving parts of the plan. Again, our component, the out-of-state program, which is one of several components that they are forecasting and trying to execute on.

Okay. Thank you, that's helpful.

And with that, we have no additional questions. I'd like to turn the conference back over to the Company for any additional or closing remarks.

All right, Peter, thank you very much. And thank you so much for everyone calling in today, and your attention to our quarterly call, but also update on strategic alternatives. But more importantly, to our investors, thank you so much for your investment in CCA, and obviously, we are focused very much on not only executing another good quarter and another good year, but also looking at our strategic alternatives. We look forward to reporting our progress during the course of the year. Thank you so much.

And once again, we conclude today's conference call. Thank you, again, for your participation.