CoreCivic Inc (CXW) 2012 Q4 法說會逐字稿

Good morning, everyone, and welcome to CCA's fourth quarter 2012 earnings conference call. If you need a copy of our press release or supplemental financial data, those 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 discussions 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. Just a reminder that today's call is being recorded.

And joining us today will be our President and CEO, Damon Hininger, and Chief Financial Officer, Todd Mullenger. I'd now like to turn the conference over to Mr. Hininger. Please go ahead, sir.

Thank you, Lori. And good morning, everyone, and thank you for joining our call today. In addition to Todd and I being on the call, we also have our Chairman, John Ferguson; our Vice President of Finance, David Garfinkle; and board member Bill Andrews joining us on the call. Before I turn it over to Todd, I want to give you a few highlights for both the quarter and for the year ending 2012. And the first of which is just to note that we are very excited about two new facilities being in the portfolio that came online last year. And that's our Ohio facility, and also our recently constructed Jenkins facility down in Georgia. Two new facilities on the state side of the book of business.

And also to note that we've had three new contracts with state partners taking advantage of existing capacity in our portfolio. And those are the states of Idaho and Oklahoma, and also the Commonwealth of Puerto Rico. So these are great new contracts utilizing existing capacity within our system. And it just again shows the power of existing capacity, being in the right location at the right price, married up with a strong operational record, and how attractive these are to partners that are growing or dealing with overcrowding.

We are also very thrilled towards the end of last year getting a new contract with the state of Arizona. So this was a former partner that we've had the past. But obviously we are very excited that they're back in the state book of business. This award will take advantage of capacity that we've got at our Red Rock facility out in Arizona. And we won't see any effect of this contract in 2013, but they'll start ramping up in 2014 and they will be taking advantage of capacity that's currently used by the state of California. As it relates to some of the financials, we had strong cash flow performance for the quarter, with FFO being up over 8% to $64 million. And reported $0.44 in adjusted diluted EPS, which is just up over 7.3%. We also had strong cash flow performance for the year, with FFO up over $237 million. And a reported $1.57 in adjusted diluted EPS.

Now, 2012 marks the 12th consecutive year of EPS growth for the Company. And if you look at a compounded average growth rate of AFFO over the last seven years, that is up over near 11%. So great performance, not only for years but also the last few years. Finally, we are extremely excited about the successful work we completed during the course of 2012, leading to our announcement last week, which is the conversion to a Real Estate Investment Trust in 2013. So we're very pleased about the quarter and the full year for 2012. As always, my sincere appreciation to the CCA management team, our wardens, and really the entire team of CCA correctional professionals around the United States doing a great job for us every day.

With that, let me now turn the call over to Todd.

Thank you, Damon, and good morning, everyone.

As Damon mentioned, in the fourth quarter of 2012 we generated $0.44 of adjusted EPS, an increase of 7.3% compared to the prior year. Normalized FFO per share was $0.64, or 8.5% higher, versus the same period in 2011. EPS and FFO per share have been adjusted to remove the REIT conversion cost and the favorable impact on our Q4 tax rate resulting from a partial reduction of the deferred tax items, resulting from our corporate restructuring at the end of 2012.

Fourth-quarter EPS and FFO per share exceeded our expectations. Primarily due to lower than anticipated operating expenses. The lower than anticipated operating expenses were partially the result of a $3 million reduction in operating expenses from a settlement of a supplier dispute. This translates into a $0.02 favorable impact on Q4 EPS that won't be duplicated in Q1 of 2013. So, for 2013 financial modeling purposes, we really need to think about Q4's a $0.42 quarter for EPS and $0.62 for FFO. More on that in a minute.

Moving next to a discussion of our guidance for 2013. As indicated in the press release, Q1 2013 adjusted EPS guidance is in a range of $0.47 to $0.48. Adjusted EPS guidance for the full year is in a range of $2.05 to $2.15. Q1 FFO guidance, $0.66 to $0.68. Full-year FFO guidance, $2.80 to $2.90. First-quarter AFFO guidance, $0.64 to $0.66. Full-year AFFO guidance $2.72 to $2.87. Guidance excludes REIT conversion costs, debt refinancing costs, reversal of deferred tax items associated with the REIT conversion, as well as the impact of any shares to be issued as part of the E&P dividend. For more specifics on those items related to the REIT conversion, we would refer you to the press release and investor presentation we issued on February 7. Guidance is obviously impacted by the lower income taxes resulting from our REIT conversion. As stated last week, guidance assumes a consolidated GAAP tax rate of 8.5% to 9%.

There are a number of other items to consider for purposes of financial modeling. With regards to the first-quarter guidance, as mentioned earlier, Q4 included a one-time reduction of operating expenses associated with the settlement of a supplier dispute, which favorably impacted Q4 EPS by $0.02, which will not be duplicated in Q1. As you may recall from prior years, Q1 EPS is always weaker compared to Q4 due to our large increase in unemployment taxes. Generally speaking, we pay over two-thirds of our annual unemployment taxes in Q1 because of how the taxes are calculated, and when they are paid. As a result, unemployment taxes will be over $5 million higher in Q1 versus Q4. That translates into a $0.05 negative impact on Q1 EPS and FFO versus Q4. However in Q2, unemployment taxes will decline by around $4 million versus Q1. Q3 unemployment taxes will decline by another $1 million versus Q2. After which unemployment taxes will stabilize for the balance of the year.

In addition, there are two fewer calendar days in Q1 versus Q4, which is important to consider when forecasting EPS and FFO, as we are paid by the day. The difference in days translates to a $0.025 negative impact on Q1 versus Q4. The Q1 guidance range also assumes a slight seasonal reduction in ICE populations from Q4, which we have historically experienced from time to time. Q1 and full-year G&A expense are expected to approximate 5.25% of total revenues. Which includes the increase associated with ongoing re-compliance costs. There can be some variability in G&A expense between quarters, but again it should average 5.25% of total revenues.

Full-year guidance assumes flat facility level EBITDA, or net operating income year over year, as guidance was developed using the assumption that no new contracts are awarded to CCA in 2013. We will certainly be working diligently to beat this assumption. Guidance also reflects a slight increase in depreciation expense. With regards to California inmates, our guidance assumes all 1 500 inmates at our Red Rock facility are returned to California between July and December of 2013, in order to make space available for the state of Arizona beginning in 2014 under our previously-announced new contract with Arizona. We will not be accepting any Arizona inmates into Red Rock until all California inmates have been removed. However, we will maintain the appropriate staffing levels through the transition period, in preparation for receiving Arizona inmates in 2014.

The impact of the removal of California inmates at Red Rock is $5 million to $6 million of net operating income, with that impact occurring in the second half of 2013. That impact is estimated under the assumption that the approximately 1,500 inmates are removed ratably from July through December. That said, we have not determined a definitive removal timeline, or the process for the potential return of the inmates to the state of California. To the extent California needs replacement capacity for the inmates being displaced at our Red Rock facility, we have the flexibility to offer other vacant beds within our system to California.

As we have mentioned previously, we expect diluted shares outstanding to average between 102 million and 103 million shares, excluding the impact of any shares to be issued under the E&P dividend. The full-year AFFO guidance range is further impacted by a small increase in projected maintenance CapEx for real estate assets. Full-year guidance also reflects a range of impacts on interest expense related to the occurrence of additional debt to fund the REIT conversion. The ultimate impact on interest expense will be a function of a number of variables, in addition to the interest rate on any new indebtedness that may be issued as part of the refinancing. While we've given a great deal of thought to our capital structure, and evaluated the various alternatives available to us, we will continue to evaluate the optimal capital structure based on changes in market conditions up through completing any refinancing. Which is why we are not able to provide more specific guidance on interest expense. Other than to say we believe our earnings guidance factors in the likely range of potential outcomes.

With regards to our potential inclusion in REIT indices, our financial advisors have researched the decision-making processes used by the various REIT indices in selecting companies for inclusion in their indexes. Based on that research, our advisors believe CCA will be a candidate for inclusion in one or more of the REIT indices. Our advisors have also had direct conversations with representatives from the firms who manage the various REIT indices. Those managers are generally not willing to comment on whether a particular company will or will not be included in their index. Nor comment on the specific time frame by which they will make a decision on inclusion.

We know the indices are typically rebalanced on a quarterly basis. However, our advisors believe, given the timing of when rebalancing decisions are made and communicated to index subscribers each quarter, and given the timing of our private letter ruling and conversion announcement, it is questionable whether CCA would be considered for inclusion in the first quarter changes to the REIT indices in 2013. We know, for example, that we have not been included in the first quarter changes to the MSCI REIT index released yesterday. However, given that GEO was included in the first-quarter rebalancing of that index, we are confident we will ultimately be included, as well. Inclusion in the REIT indices is an important objective of the Company. As such, we will continue to work with our advisors, as well as directly with the index managers to ensure we are permanently considered for inclusion at the earliest possible date.

I will now turn it back over to Damon.

All right, thanks very much, Todd. Now for our market assessment and also outlook for the business. Let me first just make a global comment. I'm reading all the same headlines as you all. There's a lot of mixed messages out there right now as it relates to the economy and the national environment. So we continue to obviously monitor that very closely, and have concerns, like many people, about a potential slowdown or other challenges, potentially leading into a recession. So we continue to be very cautious in the near term about the business and looking at this national environment.

But let me just give you a little bit of observations, both on the state side of business and also on the federal side of business. And for, first, the state side, a few updates since we talked last November. The first of which is just to restate what I said earlier. We're very excited about our new Arizona contract. Again, this is going to be utilizing existing capacity at our Red Rock facility that's currently being occupied by the state of California. And one thing I will note is that we are working through the course of the year doing some upgrades for this facility to meet all the requirements of this new Arizona contract. So this will be an ongoing priority for the Company during the course of 2013.

But also let me provide a few global comments on the state side. First of which is to say that for the new fiscal year that started this past July, there has been no new meaningful new capacity being funded, except for Arizona and California. And this is the third consecutive year of minimal appropriations for new state capacity. Now, we're expecting the same environment in this legislative season, which just started here in the last few weeks. And that means that we think there is going to be a meaningful, or very small amount of money being appropriated for new capacity for this upcoming fiscal year. So we think this environment where limited funds are being appropriated for new capacity is going to continue here for the near-term.

Now, I can't underscore how significant a dynamic this is for the industry. The partnership corrections industry makes up about 10% of the total prison capacity in the United States, with the public facilities encompassing the other 90%. As the public sector -- which, again, is 90% of the marketplace -- continues to defer cost associated with growth, overcrowding, or dealing with old, dilapidated facilities, the partnership corrections industry is well-positioned to fill that void. At the same time, delivering cost savings and capital voidance to state budgets. Given CCA's existing capacity, plus our strong balance sheet, we are extremely well-positioned to help states deal with their correctional challenges for many years to come.

But also one other global observation that relates to the state book of business. We're observing a very much enhanced appreciation to the significant operational cost savings we can provide our partners at the state level. Examples of this are recent actions taken by Ohio and Puerto Rico, and their individual initiatives to use CCA to deal with their issues within their, not only respective states, but also dealing with issues within respective budgets. So I would say that states and other stakeholders are looking at more closely their actual cost of corrections. And I want to give you a very specific example.

This past year, the Vera Institute of Justice released a report, what they titled, The Price of Prisons. In it, it reports that 40 states that the Vera Institute surveyed, the total taxpayer cost of prisons for those 40 states was, on average, 14% higher than the costs represented in their combined corrections budgets. Now, this is because of what I've been trying to highlight for several years. Which is that state DOC budgets typically do not fully embed the cost of pensions, healthcare cost, and capital outlays as it relates to the corrections departments. With all these costs factored in, which clearly has not bee the case in the past, when cost comparisons are done between us and the public sector, our value proposition grows even further.

Now, let me go to a couple of very specific observations for the state book of business. And the first of which, 11 of our existing state customers have grown by all almost 5,000 inmates this past year. And two examples of that is Idaho, which has grown by over 300 inmates this past year. And, as reported, they did a recent procurement and contract with us to deal with that growth. And are currently now using capacity that we have available in one of our Colorado facilities. The other example is Oklahoma. Oklahoma has grown by 900 inmates this past year, and has expanded our contract to allow us to house another 350 inmates for them. So again, great value of having existing capacity at the right time at the right price, to deal with these states as the grow.

Now, looking forward, we have 10 state customers who we provide owned and managed solutions -- and this is excluding California -- that they're expecting to grow by 10,000 inmates over the next five years. And have no capacity to deal with that growth. I also want to note that we're pursuing six new state prospects. And these six states are projected to overcrowd within their respective systems over the next five years by about 8,000 inmates. I know there's been some questions about California, so I'll provide a much more detailed report on them here in a few minutes.

But let me just make a comment as it relates to state budgets -- budget's at the state level, I should say. And the first of which is, the state economies continue to improve. We are seeing some signs that state budgets, and revenues coming into state budgets, are improving. But they're still not above pre-recession revenue levels. So we're still seeing an environment where it's very tight at the state level. Plus, states -- and this is kind of an obvious point -- but states are watching very closely what's happening at the federal level, and what potential negative impact that has on state governments. But I will note, of our 17 state partners, 16 of them have released budgets for consideration within their respective legislatures for the coming fiscal year starting July 1. And 7 of those 16 states are proposing funding increases to our per-day rate. So we are seeing a little bit of improvement there also.

Let me now move to the federal book of business and just first make a comment about the federal budget. Both Congress and the President passed a six-month continuing resolution for the current fiscal year, and that takes us through the end of Mark. With us being a few weeks away from the end of the continuing resolution, we may see some clarity on how Congress and the White House will address the fiscal year '13 budget, and the looming sequestration cuts. Also, February is typically when the President proposes a budget for the coming fiscal year 2014. But as we understand it now, the President's budget will not be released until early March. So the potential sequestration scheduled for March of 2013 is creating some uncertainty for the government. While many believe that Congress will find a way to stop or delay sequestration in advance of April, we will continue to obviously monitor it very closely.

Let me now move to the significant pending procurements that are going on right now within the marketplace. And the first of which is New Hampshire. New Hampshire released a series of procurements last year, the primary one being for a new 1,550 bed in-state facility. Proposals are currently being reviewed by an outside consultant. And we anticipate a decision on how they move forward no sooner than this first quarter of 2013. The next one to note is the Bureau of Prisons. On August 1 of last year, the BOP released a procurement for a contractor owned and operated facility for up to 1,600 beds, that must be ready to accept inmates within 150 days of award, or no later than September 1 of this year. Proposals were due on September 18 of last year. And based on their timeline, we think an award will be likely later this year.

Next of which is Harris County, Texas, which is Houston. They issued a request for proposal in June of last year, which the county is seeking proposal for the management of the entire Harris County jail system of approximately 9,000 beds. We submitted a best and final offer in August of last year. And we think the County could act on this sometime late this year if they decide to move forward. The last one to highlight is Michigan. The state has recently issued an RFP for an in-state management of up to 960 inmates. Offerer's can propose a privately-owned in-state facility or use a recently closed state-owned facility. Proposals are due on April 2, with an anticipated contract start date of July 9 of 2013.

Let me now go and give a brief update to a couple topics relative to California. As a reminder, the state and CDCR released a report titled, The Future of California Corrections, in April of last year. And this is also known as the Blueprint. The plan's effectiveness and impact on CCA's California population is contingent on several key provisions. First, the State's realignment of plans secures continued declines in the state inmate population. Second, the State completes in-state construction projects. And, finally, but most notable, the assumption that the State is successful in convincing the federal court to raise the capacity limit of their 33 facilities.

As it relates to the last part of their plan, the population cap, several points to report. Through the end of 2012 and early this year, the State and the plaintiffs litigated the State's plan request and the three-judge panel court raised the court order for final population cap. A couple of other items to note here in the last few months. The first of which is, in the State's November and December status reports, the State acknowledged that it would fail to meet the December 2012 population reduction benchmark. On January 7 of this your, the State responded to the court's earlier order that it provide plans for complying with the population reduction order by June of 2013 and by December 2013. The State provided a statement listing steps it could take, and legal obstacles they would have in carrying out those steps. But, the State also moved that the court terminate the capacity order in its entirety, arguing that the medical care system in California exceeds constitutional requirements, and no further population reduction is needed.

Later in January, the healthcare receiver filed a regular report indicating that he was not prepared to support the State's assertion that prisoner healthcare in California was fully constitutional, finding a lack of, quote, persuasive evidence that the appropriate results have been fully achieved. On January 29, 2013, the court set a February 12 due date for the State to furnish additional filings in support of its motion to terminate the population reduction order. At the same time, the court extended the compliance deadline for the population reduction order to December 2013, six months after its original deadline. On February 6, in one of the underlining cases in response to an earlier order, the State reported its plan timeline for returning out-of-state inmates to California, which is a restatement of the State's outline they provided in last year's Blueprint. Now, this is an important point, and I want to mention this specifically. Because there was a note that came out in the past week that mentioned this response by the State. And someone indicating that this was a new development with the State.

The State's response on this February 6 filing was a restatement of what the State had within their Blueprint from last year. Which was over five years they would reduce the population in the out-of-state program through 2016. So this is not any late-breaking news or new information. This is basically a restatement of what the State put out there about a year ago. On February 12, the State filed a response to the court's January 29 order saying that the State cannot meet the population benchmark by the new deadline of December 2013 and it never represented that it could. Finally, also on February 12, the plaintiffs -- and the plaintiffs represented the inmates in this case -- submitted a filing with the court, opposing the State's motion to vacate the prisoner population reduction order. They expressed in their filing that the California prison system remains in a state of emergency, and inadequate care continues, due to over-crowding. A lot of developments here in the last 60, 90 days, so let me summarize.

The State has requested that the cap be waved, with their position being that the 33 state facilities are operating at a level higher than the constitutional requirements. The plaintiffs have recently submitted filings refuting that position, and opposing a lifting of the cap. That federal medical receiver submitted also a filing indicating that it is not prepared to support a lifting of the cap, nor that the State has reached full constitutional compliance in its healthcare system. So it is now in the hands of the three-judge panel. And the three-judge panel has not set a date by which they plan to rule on the State's request for waving the population cap.

Now, let me talk a minute about California and their budget. As it relates to the proposed budget that was released earlier this year by the Governor, and as expected, the Governor is proposing funding consistent with their Blueprint from last year. So, again, the budget proposal is consistent with what they had in their Blueprint from the spring of 2012. I should also note that as a result of the tax increase that was enacted late last year, the State is estimating a balanced budget for the first time in many years.

Let me also make a comment on their populations. Inmate population reductions due to realignment has slowed in the second half of 2012. In the spring of 2012, as a part of their Blueprint, they were projecting their 2017 total inmate population being just under 124,000. Versus now they are projecting to be closer to 130,000. Now, this is another very important point. There's a lot of references over the last few months about the Blueprint by many different stakeholders. That Blueprint -- which, again, came out in the spring of 2012 -- estimated that the State's population would be close to 124,000 in 2016, 2017. They have now revised those estimates, and it's up 6,000 inmates higher at that same period to 130,000. So again, another important development as it relates to the state of California. So obviously we'll be monitoring very closely all of these developments. And stand ready to serve the State as they consider alternatives in a reaction to any likely court ruling or orders.

So let me now bring a close to my comments and make these final points. The first of which, new business opportunities I highlighted. We're very excited about not only what new development opportunities are, but also working very hard to trying to find partners to use existing capacity within our system. And the success we've had this past year with Puerto Rico, with Oklahoma and Idaho shows our success in finding partners utilizing existing capacity. Also, in our steps to create more shareholder value, we were successful in our goal to convert to a Real Estate Investment Trust, which will be a perfect new platform for us, as we reach a larger group of investors. But also enhance our competitive advantage in the marketplace, and also our value proposition to our partners.

At this point, this concludes my prepared remarks. Thank you again for calling in to today's conference. And let me now turn it over to the operator for Q&A.

(Operator Instructions)

Manav Patnaik.

Thank you so much for the color, just clarifying all the stuff going on in California. It's been a little confusing. But just related to that, and what's baked in your guidance, I think last week you talked about the assumption is basically one that you made because either way you have to move those inmates out to vacate for Arizona. I was wondering, have you notified California of your intent to do this? And have they in any way responded saying -- okay, we'll take it back, or just move it to your other facilities?

Good couple questions, Manav. So let me answer that. This is Damon. We have made California aware all along the way, as we went forward on pursuing the Arizona contract. So from day one, when we submitted a proposal -- in advance of submitting a proposal, I should say -- we made California aware. And they're well aware that, with that type of opportunity, where you had a contract potentially with Arizona for a 20-year term and guarantees, that would be very attractive for us since we had this uncertainty going on with California. So every step of the way we've made them aware. And they know about the Arizona contract award. And they know that we will start taking inmates the first of next year.

The second point I would say is that they have not formally given us indication that they're going to take all 1,500 inmates back into the state. We've got that in the plan just because we have to get the inmates out by the end of this year, because Arizona will not let any kind of cross mixing of populations. So that is in the guidance. We have to get the population out by the end of the year. But we haven't received anything formally from the state of California. So there will be ongoing discussion as we go into the year, and as they react to a likely order from the three-judge panel. And obviously we are well-prepared to deal with what their needs are. So, if they have a need for those 1,500 inmates to remain out of state, we obviously have capacity in our system that we can provide to them, and stand ready to do that. So, again, we'll get more clarity, I think, as we go into the spring and into the early summer.

One other thing I would note is that we've got a contract for about 9,000 beds for the state of California. And we've been right at about 99% for quite some time. So they've been utilizing all of our capacity here in the near term, even with all this stuff circling with the three-judge panel and the actions by the court.

Got it. And can you remind us, on the Arizona schedule, if I remember correctly, it was a 1,000-bed contract, but 500 starts Jan. 1 of '14, and then another 500 another year later. Is that what you still expect?

That's correct.

Okay. And then just on the sequestration stuff, you made some comments this time, and you talked about it before, as well, do you guys have any idea or guidance around if anything in there could directly or maybe indirectly impact your customers, and maybe some of your contracts? Just curious if there's any way to read through that at all.

Good question. So a couple of observations there. One of which is, that we had, as you know, a dry run through this potential threat here late last year. So as sequestration was supposed to go in effect on January 1, and in the days, weeks leading up to that date before the compromise was worked out between the Administration and Congress, we didn't see any notable changes with our customers, how they were doing business. In fact, we were observing basically they were looking to just a status quo.

I think one key reminder on sequestration is that the cuts have to be effected some time during the fiscal year. It's not necessarily the case that on March 1 all these cuts have to be put in place. So if there is a budget reduction that a customer or agency has to do, they've got the rest of the fiscal year to do that. They don't have to do that on day one. So that's one, I think, important reminder.

And then the last part of your question is, we've got two key dates. You've got sequestration, which is due to go into effect on March 1. And then you've got the continuing resolution that goes through end of March. So there is -- I think this is widely reported in the media -- there is one group of thought that sequestration comes to pass March 1. You have the Administration and Congress work through the month of March to work out some type of compromise, both as it relates to sequestration but also a funding bill for the rest of the fiscal year. And that gets worked out before the end of March continuing resolution expiring. So obviously we continue to monitor very closely. But to your first part of your question, I think that we've got a pretty good sense of how our customers reacted with the last threat of sequestration on January 1

Okay, got it. And one last, just housekeeping one for Todd. You already gave us the depreciation of real estate assets at about $77 million. Can you just help us fill the gap in between your total guidance of slightly increased, what the other depreciation number should be?

So full-year 2012 was around $114 million, and we've guided to a slight increase. So add $2 million to $4 million on top of that for total depreciation.

All right, fair enough. Thank you, guys.

Kevin McVeigh, Macquarie.

Could you remind us, if California doesn't put those 1,500 beds back to you, what would that suggest in terms of upside to current estimates?

We haven't given any estimate as it relates to what the impact would be. And, again, depends on the timing and exactly what they want to do. And it also depends on exactly what we do for them. So let me explain that specifically. If we utilize capacity at a facility that's partially utilized, so it's got some vacant capacity, and we can increase the occupancy percentage, that could be a little more of upside this year. But if we have to go to a vacant facility and start it up, then that would be potentially a little more of a drag this year, but obviously be upside for '14. So, again, depends on exactly what their need is, the timing of it, and then ultimately what we propose as a solution

Got it. And then with Arizona taking over some of those California beds, would you view that as a longer-term strategy, just given the uncertainty around California to try to proactively replace those beds? Or is it ultimately going to depend on how the realignment settles?

Little bit of both. We have been working really hard, and our partnership development folks have been working really hard on, when we look at the portfolio of beds currently utilized by the state of California, we're always looking at opportunities where we can have a solution that's a little more longer term and lowers the risk profile. And, again, Arizona is a great example of that because they're offering a 20-year contract with a 90% guarantee. And California understands that, too. Again, as I mentioned earlier to Manav, we are in constant communication with California, educating them on that point. And they understand that. They understand, obviously, with everything circling, it's hard for them to give us a lot of certainty relative to their needs out of state. So it's a very good collaborative discussion with California. And again, we're always looking at opportunities to lower that risk profile as we come out with contracts like Arizona utilizing existing capacity that California is currently in.

Got it. And then just one other one around capital structure. Obviously I know we need to do the E&P, and part of that is amending some of the debt. As you think about the capital structure going forward, have there been different conversations post a positive PLR as you're thinking about, be it terming out some debt? Or just any thoughts on capital structure relative to the PLR. And then ultimately any sense of timing on the E&P post clarity on debt.

Sure I'll take that one, Kevin. This is Todd. Obviously we've given a lot of thought to the capital structure. But we will continue to update our assessment of various issues such as the appropriate levels of liquidity, the optimal mix of variable-rate debt, fixed rate debt, optimal mix of bank debt versus bond debt, the amount of covenant flexibility we desire and are willing to pay for, and the length of the debt maturities. All of which can be influenced by potential changes in market conditions, which could have an impact on interest expense. Anyways, with regard to the E&P dividend, we would expect to make that distribution sometime after we complete the refinancing.

Okay, thank you very much.

Clara Houin, Avondale Partners.

This is actually Kevin. I had a question for you guys just on the index inclusion. Are there any requirements at this point that you guys haven't met? Do you have to make your E&P distribution beforehand? Any other requirements that still need to be made that you have to check the box on?

Kevin, this is Todd. Again, when we have spoken with the index managers, they're, I think, intentionally vague on some of the decision-making. They will typically refer you to their published methodology, which is isn't always clear, around the issues they consider when making decisions around whether or not to include a company, and when to include that company. But it is possible that one or more may want to see the distribution of the E&P dividend before they pick us up for inclusion.

Okay. And I don't know if these indices were even around back then, but was PZN included in any of the REIT indexes that were around in the '90s?

I believe they were. I couldn't tell you which ones, though.

I'm curious, just separately, bigger picture on ICE. Immigration reform, obviously, has been a topic that's come to the forefront here in the first part of this year. So I'm curious what you're hearing on immigration reform. And how that could look, knowing that it's obviously very early stages.

Good morning, Kevin, this is Damon. Let me tackle that one. I don't have any really new information or any additional insight than what's been reported more globally in the national media. But I will say that generally, talking with ICE, who has been a partner for us for many years, I think their just general belief is that there's always going to be a demand for beds. Now, their profile of detainees in those beds may change over time to where they focus more on what they call criminal aliens versus non-criminal aliens. So that may change over time, or from time to time, I should say, based on both the demand and maybe any policies out of the Administration.

My last point what you just said at the end. I think it's too early to tell exactly what the impact's going to be. But, again, generally ICE has always said that there's going to be a demand for bed space here in the US because of all the things they're doing, both within the interior, on the border, from the people that are released from state prisons that ultimately need to be deported. There's always going to be strong demand, regardless of what's been done at the national level relative to immigration reform. But, again, it's too early to tell and we obviously monitor it closely.

And, Todd, you mentioned last week that the investment grade ratings for your debt is important to you. Could you maybe tell us some of the steps that you're taking for that? And if you achieve it, what that means financially for the firm?

The second part first, I think it means a lower average cost of debt capital. And I think it could also favorably impact our cost of equity capital by improving our perceived financial position. In terms of the steps we need to take, we're continuing to have dialogue with the rating agencies. We've got a great group of analysts there. Very accessible, very knowledgeable around the business. And now that we've formally converted to a REIT, we'll continue to press our case with them, pointing out how we comp very well compared to the average REIT. And the average REIT, including a lot of the investment grade REITS, have leverage in excess of 5 times. We're at 3 times. And coverage ratios down around 3 times. We're approaching 7 times. So I think we've got a lot of strong arguments to make that will likely take some time. And they're independent. As you know, they've got their own perspectives and methodologies. But we'll continue to make those arguments and push that case forward.

In terms of impacting your cost of borrowing, though, wouldn't you need to get that done before you came to market for new debt?

Great follow-up question. We are not going to see any movement on the rating agencies before we go to market. It's probably at least 12 months before they would even consider making a change based on our REIT conversion. That will be a longer-term process, decision-making process with the rating agencies.

And then the benefit, then, obviously, is over the longer-term, your cost of borrowing

Yes.

Okay. I'm curious on Michigan, the RFP, how you feel about your ability to compete there. If you said this previously, sorry, I missed it. But would you be submitting it as a management contract, and you would partner with the state on an existing facility? Or would you be able to purchase one of these state's empty facilities?

Good question, Kevin. This is Damon again. The RFP just came out so we're still assessing the procurement itself and the requirements. I think the tour of the existing state facility isn't until later this month. So, as we understand it, it's really not an opportunity to acquire a facility. You really just have two ways to propose a solution to the state. One of which is to propose owned capacity in-state. And of course we don't have any capacity in Michigan so we wouldn't be able to compete on that part of the proposal. But the other possible proposal is to use an existing state-owned facility and propose management of that, and housing of about 1,000 inmates. So basically it would be a managed-only opportunity. So, again, we're still assessing it and taking a look at it. Again, I think the tour of the facility that's owned by the state is a little later this month, but we'll give updates along the way.

Okay, great. Thank you very much.

Tobey Sommer, SunTrust

A lot of my questions have been answered. And I just wanted to ask you, at this stage of the state budget cycle, with some of the healing that's gone on, how do you think about that vis-a-vis demand for your services?

Great question. A couple observations. One of which is what I said earlier, that we are seeing a play out, even though budgets are improving, we're seeing a play out to where states are appropriating very little, if any, money for new capacity. And as I mentioned earlier, we are seeing states, a double-digit number in our portfolio, that are growing by 5,000 this past year. So I think that's an encouraging sign. One of which is that we are making good progress on showing states that we can provide a solution versus them making the capital investment to deal with that growth.

The other thing I would say is that we are seeing a little bit of improvement on the budgets as it relates to going ahead and buying some beds. And I think a good example, as I think about a state portfolio, is Oklahoma. This is a state that has been dealing with a little bit of overcrowding the last couple years, but they've had a challenging fiscal environment. So them going out now and procuring some beds in our portfolio this past year, I think is an encouraging sign that they now feel like -- okay, we've overcrowded for a little bit but now we can reduce it a little bit in our system and now take advantage of some beds within CCA.

And then the third point -- a little bit to what I mentioned earlier -- is that I'm a little more encouraged. Again -- can't fight the ball yet. But I'm a little more encouraged that we're seeing state budgets coming out to where we're seeing escalators within our state contracts that are due to increase on July 1. Again, these are initial proposals. They have to work their way through the legislature. But 7 of our 16 showing per day increases, I think is an encouraging sign. Again, we have a lot of work still to do. They're still not at the levels they were a few years ago but I think it's going in the right direction.

Thank you, that's helpful. And if I think about the opportunities that you have sometimes that materialize with direct negotiations as opposed to RFP processes, in the context of where the state budgets are, how do you feel about those opportunities, and the frequency of those opportunities to increase, relative to the trend of the last couple years?

I would say slightly better. Again, slightly better. Puerto Rico is a great example. Puerto Rico, we had in that list of six prospective states that we didn't mention by name, and got across the finish line with a new contract last year. There's a couple other states that I would say are in that, not only the same category where they're growing and over-crowding, but also their budget environment is a tad better so they're maybe feeling a little better they could reduce the over-crowding in their system. So I'd say, again, it's not dramatic but it is a slight improvement.

Under a REIT structure, do you feel that the sale of an existing facility by a customer is more likely, or enhanced in some way, by the structure? Or is it a neutral impact?

I would say a neutral, maybe a tad better than that. But, as Todd mentioned earlier, as we think about our capital structure, if we get good movement on our cost of capital and see improvement in the rating agencies -- again, which that's on the to do list for the management team -- and if our cost of capital is slightly better, then that makes our buy proposition slightly better. But I would say, generally I would say neutral.

Okay, thank you very much.

Clint Fendley, Davenport

One question on California. I wondered if you think we would see the demand for beds changing in California if the population caps were placed on individual prisons rather than the reporting that is currently done on a state-wide average?

That's a great question. You may have seen in the filing by the plaintiffs a suggestion to that. So, for the rest of the audience, the cap is for their full system-wide population, which is 33 facilities. There's been some suggestion, including by the plaintiffs, that that cap is for each individual facility. So that would potentially create some more challenges for the state of California. But to answer your question, the short answer is I don't know. If they have their requirement that they have to do that by facility versus system-wide, it could create some challenges for them. And it manifests itself into an opportunity for CCA. Again, that's one of the many different outcomes. And as I said earlier, we stand ready to support the state as they see fit as they deal with this potential action by the court.

Could you maybe even help us understand, I've read some reports that have indicated that some of their individual prisons' capacity is as high as 180% currently. Does that mean that they have shifted some of these inmates over to newer facilities? Has that allowed them to maybe manage them more efficiently? Or how should we think about that?

It's probably a combination of all the above. It's probably looking at classification. So they may be willing to do a little higher percentage on lower custody populations versus higher custody populations. It could be, to your point, newer facilities versus older facilities. Newer facilities maybe with a lot more technology and secure hardware and technology could allow them to do a little higher percentage. So it's probably a combination of many different factors, both age of facilities, location of facility, from a staffing perspective, and then also the classification of inmates.

Okay, thanks. And one last question here. I wonder if you could remind us, do you have labor costs that are indexed to the minimum wage? And if so, do your contract provisions address that if it were to rise to $9, as has been proposed?

We do not have them indexed. Many of our federal contracts are driven by the Department of Labor, so those rates are determined by the Department of Labor. And then we're able to get adjustments based on any increases by the Department of Labor. But not on our state-side, they're not indexed to minimum wage.

Okay, thank you, guys.

Kevin McVeigh at Macquarie

If you get those per diem increases on the 7 to 16 states that are showing that, is that factored into the '13 guidance? Or would that be additional upside?

That would be factored in.

So it's factored in already? Or it would suggest additional upside if you were successful with those per diems?

We factor it in.

Oh, you did. Super, thank you.

That is all the time we have for questions today. Mr. Hininger, I'd like to turn the call back over to you, sir, for any additional or concluding remarks.

All right, thanks again, Lori. And appreciate everyone's participation in today's call. We are very excited about the results we had in 2012, most notably the accomplishment of our conversion to a Real Estate Investment Trust. Let me just also say, as always, very thankful for the investors on the call and your investment in CCA. As always, your management team here in the room and throughout the organization are working very hard to execute on another good quarter, another year, another good year for 2013. And we look forward to reporting progress during the course of the year. Thanks again for your participation this morning. Good-bye.

Once again, ladies and gentlemen, that does conclude our conference for today. I'd like to thank everyone for joining us.