CoreCivic Inc (CXW) 2013 Q2 法說會逐字稿

Good morning everyone and welcome to CCA's second-quarter 2013 earnings conference call. If you need a copy of our press release or supplemental financial data, both documents are available on the investors page of our website at www.cca.com. Today's conference is being recorded.

And 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 risk and uncertainties that could cause actual results to differ materially from 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 in the SEC.

This call may include a 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.

Thank you, Lisa. Good morning and thank you to our valued shareholders and other participants for joining our call today. In addition to Todd Mullenger joining me on this call, we also have our Chairman, John Ferguson; our VP of Finance, David Garfinkle; and Board member, Bill Andrews.

I am going to give a highlight for the results of the quarter we just closed and also get a business update and then I will pass over to Todd here in a few minutes.

So let me first just make a couple of global comments about the Company. 2012 marked our 12th consecutive year of EPS growth and a CAGR of 11% over the last seven years of AFFO per share and based on our guidance last night, we are well on our way to our 13th consecutive year of positive earnings growth.

More importantly, our ten-year share price-performance inclusive of our recent E&P payment is north of 400% which shows our long-term track record of outperformance.

Now a couple of highlights for the quarter and also for the year. For the quarter first of which is FFO was $0.71 per diluted share representing a 24.6% growth from second quarter of last year but also the durable nature of our cash flow growth has enabled us to increase our dividend by 4% in the second quarter to an annual rate of $1.92. With a secure and attractive payout ratio of 77%, we are well positioned to continue our recent record of providing a dividend at above average levels, a competitive advantage in delivering superior total shareholder returns.

At the same time we are focused on delivering continued shareholder value, we were also consistent in managing our business with discipline. Earlier this year we took advantage of historically low interest rates to extend our debt maturities by raising $675 million in senior notes with seven- to 10-year maturities and a fixed rate of 4 1/8 and 4 5/8. These pricings where record lows for both the Company in the industry.

At the end of the quarter, our debt to EBITDA was just under 3 times which as you know is low compared to other REITs. Recognizing our outstanding credit metrics, scale of our real estate assets with a 75-year life, extremely durable earnings record, high barriers to entry, diverse highly rated government payers and a strong customer retention rates in excess of 90%, Moody's improved its outlook of our corporate credit to positive in April while at the same time S&P upgraded us.

As reported on Monday, we are very excited about our acquisition of acquisition of CAI. CAI has built a wonderful reputation with their operations and this acquisition allows us to expand our strong extensive relationships with the BOP and San Diego County. Further, the long-standing contracts and difficult to replace correctional assets we obtained through this acquisition aligns very well with our strategy of providing real estate to existing and potential government partners.

Now while we can never predict the timing or amount of our investment activities like this one, we are excited about continuing to expand our portfolio in a balanced forward thinking way to create value for our shareholders. But just as important, we have a tremendous opportunity to create value for our shareholders by increasing the occupancy within our existing facilities which remains our number one priority.

We are sitting here today with our occupancy percentage in the mid-80s which is similar to where we were about 10 years ago coming out of the last recession. Our occupancy peaked around 98% in 2007 which led us to build additional capacity for new or existing partners. Our CCA team is being aggressive to find existing or new partners to utilize its existing capacity as we look to the balance of 2013 and into 2014.

Now as I wrap up this section, I wanted to highlight what we announced in July which is a very positive element with our new California contract which extends the agreement with our largest state partner for more than three years. This agreement includes a provision that would allow us with mutual agreement from California to move California inmates currently housed at our Red Rock facility in Arizona to any other CCA facility.

I'm excited to report today that we have already utilized that provision. California has agreed to allow us to transfer a small portion of our Red Rock population temporarily to our Florence, Arizona facility. Although California hasn't communicated anything definitive to CCA about keeping the current population level of inmates out-of-state long-term, we are none the less encouraged by this step.

Let me now provide a few specific updates on the business and first on the state side. There's a few updates on the state portfolio since we talked in May, the first of which is the state of Oklahoma has shown a continued need for additional beds in state. We have been able to meet their needs by providing additional beds at our Cimmaron facility. This takes another facility within the CCA portfolio that averaged 66% occupancy in 2012 to nearly 100%. But this action shows the tremendous value of our real estate.

The state of Oklahoma called us over the summer requesting more beds at this facility and we were able to provide space to them within a matter of days.

We also are very excited about our new Arizona contract in Arizona utilizing capacity currently used by California at our Red Rock facility. Retrofits are underway and we are still targeting a January 1, 2014 start date.

Now a couple of specific observations about the current landscape and how state partners will be looking at CCA to help them address their challenges. First of which is that we have got nine existing state customers that have grown in the past 12 months at a combined total of about 4100 inmates. Looking forward, our 12 state customers where we provide owned and managed solutions and this is excluding California, they are expecting a bed shortfall of nearly 17,000 beds over the next five years.

We are also pursuing six new state prospects and this group of six is projecting their overcrowding in the next five years to be over 8000 inmates.

Now California I will discuss in detail -- in greater detail in a few minutes I should say, but as for state customer budgets, state economies continue to improve and many states are exceeding their revenue forecast. With this we continue to be cautiously optimistic that this will manifest itself into pricing improvement going forward but in the near-term, we are also encouraged that this improved budget environment has led to recent actions taken by Idaho, Oklahoma and Arizona in moving forward and using the private sector to manage the very real challenges of growth and overcrowding.

Last year as you know, we closed the first of its kind transaction within our industry by buying government owned prisons. This type of solution which is monetized in a government owned asset with a fixed income stream provided through a long-term management contract, we know in this budget environment is attractive to other state and local governments.

As state budgets and requested capacity, we continue to observe minimal new appropriations for construction of new government owned capacity to address overcrowding and population growth. This is really the third consecutive year where we've [used] limited funding for new capacity.

Now on the Federal side of business just a couple of comments as it relates to their current year funding but also next year's budget. So for current year funding in late March, Congress passed a full-year continued resolution or CR to fund the Federal Government through the end of the fiscal year which ends on September 30, 2013.

As it relates to BOP, ICE and the United States Marshals Service, the funding bill provides a full appropriation for our contracts with those three respective agencies.

For the President's proposed budget in 2014, he released that on April 10 of this year and our review of the budget proposal shows appropriate funding levels for the United States Marshals Service, BOP and ICE but also shows increased funding for the BOP for an additional 1000 contract confinement beds.

Now I will note for ICE, we continue to believe that ICE budget will be somewhat in flux until efforts on achieving immigration reform are completed.

I also while we are talking on the Federal side, talk about a current BOP procurement and on August 1 of last year, the BOP released a procurement for a contractor owned and operated up to 600 bed facility that must be ready to accept inmates within 150 days of award or no later of September 1 of this year. Now proposals were due on September 18 of last year and based on the timeline, we think award will be later this year or early next year.

So let me now get towards the end of my comments and just talk about California. And as I mentioned earlier, we extended our contract with California to June 30 of 2016 but also want to note that the state filed in May a state request with the Supreme Court and specifically with Supreme Court Justice Kennedy to delay the December 2013 compliance date for implementation of the three-judge panel's order requiring the state to operate at 137.5% of design capacity. To achieve compliance by December of this year, the state would have to reduce their population within their 33 facilities by approximately 9000 inmates.

It was widely reported last Friday that a stay would not be granted by the Supreme Court. Prior to the action by the Court, the state has indicated publicly that they plan to delay the return of inmates housed out-of-state as well as seek additional capacity.

As for funding of our contract, the budget passed by the legislature this summer reduced funding for the out-of-state program to approximately 5000 inmates at our facilities. Now the administration has proposed draft legislation which includes an additional $150 million to fully fund the out-of-state inmate placement program as well as allow the state to acquire additional capacity in order to achieve compliance with the three-judge panel order.

It is also important to note that the Court has waived all laws to allow the state to comply with the order which includes allowing inmates to involuntarily be housed out-of-state even when the Governor's Executive Order expires.

So the state is reacting to this news of the Supreme Court denying them a stay which happened again last Friday and with that we are in close contact with them of providing options that we think could be helpful to achieve compliance with the Federal Court.

We are very pleased about the quarter and full-year and I want to say a sincere appreciation to the CCA management team, wardens, and our entire team of CCA correctional professionals here in Nashville but also nationwide. I appreciate their work and support of the Company.

With that, I will now hand the call over to Todd.

Thank you, Damon, and good morning everyone. In the second quarter 2013, we generated $0.52 of adjusted EPS compared to our May guidance range of $0.49 to $0.50.

Normalized FFO totaled $0.71 per share as did AFFO per share. These numbers have been adjusted to exclude debt refinancing costs, reconversion costs and non-cash asset impairment charges.

Second-quarter EPS and FFO per share exceeded our expectations primarily due to lower than anticipated operating expenses and a spike in ICE populations. The lower than anticipated operating expenses were partially the result of a favorable settlement of a litigation matter which won't be duplicated in Q3 of 2013. Q2 was also unfavorably impacted by approximately $2 million of facility ramp down and closure costs at Wilkinson and Mineral Wells.

In Q2, we also realized an unforecasted $5 million tax benefit as a result of tax planning strategies completed in Q2. That tax benefit allowed us to record a one-time bonus in the same amount that will be paid primarily to nonexempt hourly employees in lieu of a merit increase this year. No executives or other key management personnel will be included in that special bonus payout.

Also during the second quarter, we completed the distribution of the $675 million special dividend as required in connection with our reconversion. This distribution consisted of approximately $135 million of cash and 13.9 million shares of common stock. This was the final transaction necessary to complete our reconvert.

Moving next to a discussion of our guidance, as indicated in the press release, adjusted EPS for the full-year is now a range of $1.95 to $1.99 while Q3 adjusted EPS guidance is a range of $0.45 to $0.47 and Q4 is a range of $0.48 to $0.50. Full-year FFO guidance is a range of $2.65 to $2.69 and full-year AFFO guidance is in the range of $2.58 to $2.66.

Guidance excludes reconversion costs, refinancing costs, CAI acquisition costs and any other special items.

There are a number of items to consider for purposes of financial modeling. With regards to third quarter guidance, the impact from the issuance of the 13.9 million shares as part of a special reconversion dividend was not fully reflected in Q2 shares outstanding as the shares were issued midway through Q2 on May 20. As a result, weighted average shares outstanding will increase from 109 million in Q2 to approximately 117 million in Q3. This increase in weighted average shares outstanding has a $0.035 negative impact on earnings per share sequentially from Q2 to Q3.

We also expect to experience a decline in ICE populations from the spike we saw in Q2 which accounts for about $0.01 to $0.02 a share of the decline from Q2 to Q3. And then as mentioned earlier, Q2 included a reduction of operating expenses associated with the settlement of a litigation matter which will not be duplicated in Q3, call that another penny reduction from Q2 to Q3.

We also expect to incur approximately $2 million of additional closure and ramp down costs in Q3 associated with Mineral Wells Dawson and (inaudible) adjustment, an amount similar to that incurred in Q2. However, we don't expect any ramp down enclosure costs in Q4.

Regarding our recently announced acquisition of Correctional Alternatives, Inc., as stated in Monday's press release, the acquisition is expected to increase our revenues by approximately $14 million and EBITDA by approximately $5 million on a fully annualized basis excluding transaction-related expenses and transitional costs.

After considering ongoing depreciation and amortization expenses, we expect the acquisition will be approximately $0.03 accretive to fully annualized pro forma 2014 earnings with a neutral impact on 2013 earnings due to transition costs.

As mentioned in the press release, our guidance continues to assume all of the approximately 1500 California inmates who are housed in our Red Rock facility at the end of Q2 will be returned to the custody of California by the end of the year in order to make space available for inmates under our new contract with the state of Arizona. Even though California is considering alternatives that could result in CCA retaining some or all of the inmates in Red Rock past December 31, we have left this assumption in place as California has not yet finalized its plans for these inmates.

However as Damon mentioned, we are discussing with California the beds available in our system that we can make available to replace the capacity they are losing at Red Rock and to otherwise assist them with any additional needs. If we were to keep some or all of the Red Rock inmates, the cost incurred related to the relocation of these inmates would likely result in a relatively neutral impact on 2013 earnings guidance due to transportation costs and start up costs associated with activating vacant housing units at partially occupied facilities or activating a completely vacant facility.

As a result of the special REIT-related stock dividend, weighted average shares outstanding for each of Q3 and Q4 is expected to approximate 117 million shares while full-year weighted average shares outstanding is estimated at 112 million.

Finally, some investors have requested we provide pro forma 2012 per share amounts adjusted for the stock dividend since the data services don't adjust for stock dividends. So assuming the 13.9 million shares from our May stock dividend have been issued on January 1, 2012, full-year pro forma 2012 adjusted EPS is $1.38 while normalized 2012 full-year FFO per share is $2.06 and 2012 pro forma normalized AFFO per share is $2.05.

I will now turn it back over to Damon.

Thank you, Todd. Let me bring to a close our comments and make these final points. So we have completed the last hurdle early this year for the reconversion and for any new REIT investors on the call, I wanted to point out that we are a Company that one, has had 12 consecutive years of EPS growth and a CAGR of 11% over the last seven years for AFFO per share. And as I mentioned earlier, we are well on our way to our 13th consecutive year of positive growth. But also again shows us to be very strong and durable from an earnings perspective.

More importantly, our 10-year share price performance inclusive of E&P is north of 400% showing our long-standing record of outperformance. We have an above average dividend payout ratio but also historical customer retention rates in excess of 90%. Combined with a strong balance sheet and debt to EBITDA of just under three times which you know is very low compared to other REITs, we also combine that with a strong operational record, very valuable real estate assets with a 75-year life, high barriers to entry and diverse highly rated government payers.

As for the business outlook in summary, we are encouraged by some of the modest (inaudible) increases we have seen this year. We are also encouraged by the improved budget environment we are seeing on the state side but we are also seeing extremely limited public sector investment on new government owned capacity to deal with growth and overcrowding and our recent increase in population in Oklahoma is a great example of this.

We are also currently in the United States marketplace at less than 10% penetration in the corrections industry but we see meaningful opportunities for us going forward over the next three to five years.

That concludes our prepared remarks. Thank you again for calling in today's conference and let me now turn it back over to Lisa for Q&A.

(Operator Instructions). Manav Patnaik, Barclays.

Thank you. Could you guys just elaborate a little bit more on the CAI acquisition and the strategic rationale behind getting that and what sort of the outlook is in terms of more such diversification type of deals?

Absolutely. Good morning. This is Damon. I would say we looked at CAI as a standalone transaction. It met our threshold and saw the good opportunity to obviously add value to the Company and long-term to our shareholders.

But a couple of key things that were very interesting and attractive on this transaction, one of which is there were two partners under contract with CAI that we had a lot of familiarity with and that is Federal Bureau of Prisons and San Diego County. We have got a facility as you know in San Diego County that we have been operating since the mid-90s so we know both folks on the county side of government but also in the sheriff's department very well so that was attractive to us because we had those relationships and know how they think relative to these types of operations.

But also BOP has again been a long-term partner for CCA so we saw that as an attractive feature of this transaction but we also saw it as an opportunity to have a little bit of more of a footprint in California as they deal with overcrowding and realignment and potentially how that creates a little more stress and burden for counties. And again, being in San Diego County where we know all of the players and having this facility we thought that would be also good strategic fit because of not only of the needs in California but also the relationship that we have globally with the state of California.

The last thing I would just mention about this transaction as we thought through this is that we have -- if you think about it, really two links of the kind of three links of the chain relative to Federal prisoners or inmates. So we have been working long-term with the Marshal Service going back to the 1980s and these are individuals that are arrested by Federal law enforcement, put in Marshal Service custody and ultimately they go through the court process and if they are ultimately convicted as (inaudible) of their crime, then they are handed over to the BOP.

So we have worked with the Marshals on king of the front end when someone goes into the Federal system. We have been working with the BOP which is kind of the midpoint where they serve their sentence and their Federal crime, and really see this type of facility being kind of on the back end or towards the end of their sentence and ultimately get released into the community.

So really getting another link in the chain with a system where these individuals go through for serving federal crimes we thought was a good fit. So that gives you a pretty good flavor of everything that kind of went through our mind as it relates to this transaction and this BOP contract I should note with CAI is the third largest in the country.

All right. I guess that makes sense. Just two follow ups. One, can you -- I guess the existing footprint in California and the [customers] obviously makes sense. Like how do you guys anticipate on leveraging your footprint with their services? I mean they are clearly a much smaller company so I get the aspect of adding the third leg to the services you provide. But would that entail in order to grow that entail making more such acquisitions in different regions?

Possibly. It is a very fragmented industry and in round numbers, I think there was about 9000 individuals under these contracts nationwide. So long-term is good, could make sense something we will be taking a look at. Another thing that was interesting to us is that as you know, we have got several facilities currently in the portfolio that are vacant that we think could be a good solution for other BOP residential community centers.

One example as you know that is on our inventory list that has been vacant several years is our Shelby Training Center down in Memphis, Tennessee. And we think that could be a good solution like the CAI facilities are in San Diego. So that is something that is kind of going through our mind too where we have got some existing capacity that may be a good fit for these requirements.

And I guess to the first part of your question, the CAI being in close proximity to our existing San Diego facility we do think there is some leverage there to where we could use our existing operations to help support the other facility. So those are all kind of key things that went through our mind.

Just two more quick things for me. One, just housekeeping. What should we estimate for total D&A for the year? I guess I think last time it was 116. I just wondered if that changes with CAI?

And then just from a pipeline perspective just around more specifically the asset purchases or facility purchases from states, any sense of what that pipeline looks like? Should we expect one a year, could it accelerate, how does that look?

Your first question, depreciation and amortization around guidance $115 million to $116 million full-year.

Okay.

The second part of the question I will let Damon address on CAI initiatives.

No, just wanted the facility purchase initiative just how many other states out there are looking to sell facilities like Ohio?

We haven't put a precise number to it. We have had discussions with I would say several states on this type of transaction but they are not publicly discussed. And on the local side, we also think there is several local jurisdictions that could be a good fit relative to this type of transaction.

As I mentioned I think in the May call, we were complementary of GEO and the recent transaction they did in Texas at a local site. So now you have got both us and them have completed two transactions here in the last 12, 18 months one at the state side, local side.

So yes, I say several on the state, several on the several on the local side.

Thanks a lot, guys.

Tobey Sommer, SunTrust.

Thank you. Damon, from a broad perspective, your conversations about new opportunities whether it is deploying capital and buying a facility from a customer or perspective customer or talking about new facilities, would you describe the tone of those conversations as any different than they were six or 12 months ago?

Yes, Tobey, I would say it is modestly better and it is better than it was a year ago and last year was better than two years ago. So yes, I would say it is on a trend where it is getting modestly better. Not only in the tone but I guess I would also point to the actions.

As I think about specifically Oklahoma and Arizona, Oklahoma has increased their contract with us, Arizona had awarded a contract to us. Those were two states like other states that were dealing with a very challenging fiscal environment here in the last three to four years and our sense was that they were waiting it out and trying to truly appreciate have they reached the bottom relative to the decrease in revenues they were seeing from a budget perspective and deferring some decisions.

So I would say not only the tone is improving but I would say these recent actions also are indicative of states doing a little better about now is the time to make some decisions, deal with growth and overcrowding as it relates to corrections.

So if I were to apply that to some of the RFPs that have been in the market over the last several years that have kind of lingered, have been pushed out in terms of decision-making and this kind of goes to what you just said. Going forward in this kind of climate, should we expect an emerging RFP to therefore go to its conclusion in a more timely fashion?

Yes, I would say there's kind of two answers to that question. I would say going back to Arizona, I think that is another great example to part of your question which is here is a state that I think from the time they awarded going back to when they did their first advertisement I think was about three years which was pretty long compared to historical kind of time frames for awarding on procurements. So I do think that is going to be better again in this environment where again, states are feeling a little bit better about their revenues and going ahead and pull the trigger once they announced a procurement.

Every state as you know, is a little different on kind of timing and when they will do a procurement and how quickly they award. But I would say, yes, I think generally it is going to be better. As I said earlier, these actions -- these REITs actions I think are indicative of states feeling generally better.

Damon, what would a normalized cycle time be?

Well, I would say if you go on the state side, I will give you -- again every state is a little different in their process and some states do it directly from the Department of Corrections, when they do a procurement sometimes they have to go through another agency like administrative services or some type of procurement agency.

But you have seen some states move as quickly as six months but you've seen some states that may take two years. So to give you a range, I couldn't give a precise. But the other thing I would say is that it depends on their situation too with California going back I guess now six, seven years when they were in this merging situation and dealing with overcrowding, I think they acted fairly quickly when they got to a point where they realized they had to reduce the overcrowding.

So if there is something really compelling going on in the state then it could be a little sooner but if it is a state where they are looking over the next three to five years projecting growth and are not making a capital investment to deal with that growth, then they could be a little more orderly and little more thoughtful on how long they take on the procurement.

One other point I would add to that. Much of our historical growth in the past has come under existing contracts. I think Oklahoma is a perfect example of that where they do send us incremental populations as their populations grow under existing contracts. And you don't see them going out and issuing RFPs to procure those beds. They just expand populations under existing contracts.

That is a very good point. Yes, you look back over the last 10 years, that is where a lot of that has come from is just existing contracts where we have done amendments and change in scope.

That is helpful. Then Todd, I just have one last question and I will get back in the queue. Is there an opportunity over the next several quarters for the rating -- the debt rating at the Company to perhaps improve?

There's an opportunity for the rating to improve over time. How quickly that transpires, it is difficult to say. But based on the recent upgrade we had from S&P and some of the comments coming from Moody's and Fitch post refinancing, I think there is an opportunity. I can't put a time frame on it.

Okay, thank you very much.

(Operator Instructions). Kevin McVeigh, Macquarie.

Great, thanks. I wondered -- this is kind of a little more longer-term, but Damon, I wondered if you could give us your thoughts on kind of industry growth rates. And just trying to understand from a secular perspective, obviously the industry has matured a little bit but it seems like budgets are kind of structurally more challenged going forward. Do you see kind of the challenge in budgets going forward offsetting some of that positive secular growth? And what I mean is do you have maybe longer-term uptick in the growth rate than what you would have expected heading into this downturn?

Good question. I guess let me give you a couple of observations. So if you go back over the last decade or the last 13 years and look at the periods of time between the recessions on the overall growth rate of all 50 states and the Federal Government, the rate has been anywhere from as high as 3% down to a low of 1%. Again those are the times between recessions and they have seen this current recession and then also the one in 2000, 2001 as you know was basically flat growth with a little bit of decline in certain jurisdictions.

As I look and think about the next five to 10 years, I think that could be possible where you see that kind of normal rate again -- again kind of the range of one to three. Could be a little lower, could be a little higher year-over-year but I would say that is probably in a normal environment where you are not in a challenged economic environment with a recession historically that has indicated you have a pretty good number for kind of forecast perspective.

What I would say is very different sitting here today versus say 13 years ago that could be a positive dynamic for the industry and for the Company is that as I mentioned over the last three fiscal years, there has been limited investment on new public capacity at the state side and at the Federal side. You have heard me say that President Obama's budget for the coming year is not proposing any new capacity for the BOP. Marshall's and ICE completely rely on either us or local sheriffs for capacity and that makes it very limited capacity on the state side versus 13 years ago you still had pretty meaningful building programs both at state government but also the Federal Government.

So as they deal with that growth and overcrowding over say the next five to 10 years, we think there is a better likelihood they are coming knocking on our door to deal with that growth.

So I would say those are some of the key characteristics again some of that is based on historical but also kind of recent events with the limited funding for new public capacity.

Another thing I would just say is that -- and this has been well discussed and talked about and debated nationally -- but the challenges for states dealing with pension and healthcare costs and some dealing with very significant unfunded pension liabilities, those continue to constrain on budget dollars and I think that again puts us in a well position to be there as they deal with these other cost line items in their budget looking at us to helping them I should say create very good solutions from a cost perspective on the correction side.

Got it. That is helpful. And then just switching gears to CAI a little bit, I just want to make sure I understand if you were to kind of sync up with California and San Diego, would those beds be to the county or to the state number one?

Number two, I just want to make sure I kind of understand is it kind of part of traditional CAI service offerings or is it more traditional incarceration in terms of what will you have in San Diego County?

So two answers there. The relationship currently between CAI is with San Diego County and again, we have had a long-term relationship with the county already. So as I think about California and their overcrowding as you know, they have gone through this huge shift here in the last two years through realignment where they are moving more individuals to the local level. And so we think San Diego County in dealing with realignment which is coming from the state level, there could be future needs there.

So again, having a footprint in that county with existing facilities we think is a good thing as they deal with realignment.

As it relates to your second question, we have operated really for a couple of decades minimum-security facilities or pre-release facilities. What is a little different with these facilities versus others we have done is just really kind of the design of the facility but also these facilities in San Diego do allow individuals during the day to do -- have employment so help them get gainfully employed locally so they have got a job prior to release.

But that is a kind of a nuance and a little different phase of the operation but we have been operating minimum-security facilities nationally for many years.

I would just add to that, CAI's excellent reputation in California could also provide opportunities to meet the needs of other counties outside San Diego within California.

Got it. So if I have it right, it is about a $14 million run rate now with upside. Does that sound fair?

Yes. Just a couple of other points of information, so that $14 million run rate is with about 400 out of 600 beds. There is about 200 vacant beds available for use by San Diego or potentially another user.

Got it. Does that fall under the TRS or the QRS?

It would be a combination of both.

Okay, super. Thanks. Nice job.

Thank you.

(Operator Instructions). We have no further questions at this time. I would like to turn the conference back over to Mr. Hininger for any further or closing remarks?

Thank you, Lisa. I want to tell everyone thank you very much for your time and participation today. More importantly, to our investors, thank you very much for your investment in CCA. Your management team is focused on executing on another good quarter and a strong ending to 2013 and we look forward to reporting on our progress during the rest of this year.

Thank you again for participating in today's call.

That concludes today's teleconference. Thank you for your participation.