CoreCivic Inc (CXW) 2013 Q4 法說會逐字稿

Good morning, everyone, and welcome to the CCA's fourth-quarter 2013 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 statements made today. Factors that could cause operating and financial results to differ are described in the press release as well as our form 10K and other documents filed with the SEC.

This call may include discussions of non-GAAP measures. The reconciliation of the most comparable GAAP measures 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 any 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, Tricia. Good morning and thank you to our valued shareholders, analysts and other participants for joining our call today. Joining me in addition to Todd Mullenger, is David Garfinkle who is our Vice President of Finance. What I would like to do this morning is start with the highlights for the fourth quarter in 2013 and then give a business update, and then I will hand the call over to Todd.

First, a couple of global comments for new investors. 2013 marked our 12th consecutive year of EPS growth and a CAGR of 12.3% over the last 8 years of AFFO per share, and based on our guidance that we gave last night, we are well on our way to our 14th consecutive year. More importantly, our 10-year share price performance is north of 300%, showing our long-term track record of outperformance. With CCA, you have the clear market leader with the Company owning and controlling 60% of the privately owned beds in the US marketplace and with that, 90% of our NOI is generated from our own beds and we enjoy a modest real estate maintenance CapEx of 5% of NOI.

As for the market, we are experiencing extremely limited public sector investment on new government-owned capacity to deal with growth and overcrowding, which, this lack of development is unprecedented in the last few decades within our industry, and with less than 10% penetration by the private sector, we have meaningful opportunities in the US market place that are starting to materialize in a meaningful way.

So now on to the highlights for the quarter and for the year, first of which was normalized FFO, was nearly $73 million, representing a 13% growth in the fourth quarter of 2012. For the year, normalized FFO was nearly $295 million, a 24% increase over 2012. Also of note, the endurable nature of our cash flow growth has enabled us to pay a $0.48 dividend and work towards an annual rate of $1.92 per share. With a secure and attractive dividend payout ratio of three-fourths, we are well-positioned to continue our recent record providing dividend at superior levels, a competitive advantage in delivering superior total shareholder return.

At the same time, as we are focused on delivering continued shareholder value, we have also consistently managed our business with discipline. At the end of the quarter, our debt to EBITDA was 3.3 times, which, as you know, is low compared to other REITs. Our outstanding credit metrics, scale of our real estate assets with a 75-year life, extremely durable earnings record with high barriers to entry, diverse highly-rated government payors, strong customer retention rates in excess of 90%, and longer contract terms have allowed us to enjoy industry record low pricing in the debt markets this last year.

As reported in October, we are extremely pleased about our new lease agreement with California at our 2,300-bed California City facility. This is a great solution for California in providing in-state capacity at a critical juncture in their federal court overcrowding case. We were successful on completing all necessary improvements at the facility, and I'm proud to report that California has successfully activated the facility. Now because we know we have a tremendous opportunity to create value for our shareholders by offering our partner solutions that optimize occupancy within our existing owned facilities, this continues to be our number-one priority, and we're sitting here today with our occupancy percentage in the 80%s, which is similar to where we were 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. We've made great progress against this goal during the last half of 2013, with us having both our 2,400-bed North Fork and 1,700-bed Cimarron, Oklahoma, facilities being ramped up so they will be fully utilized as we go into 2014, along with the entire capacity at our 2,300-bed California City facility being absorbed now by California, and the entire Red Rock capacity of 1,500 beds is dedicated to Arizona. Even with this progress, our CCA team continues to actively identify ways to meet the significant needs of existing or new partners to utilize the existing capacity as we look to the balance of 2014.

Another thing to note is CAI, the acquisition we did last August. Six months have passed since this acquisition and we are thrilled by both the financial and operational performance of these facilities. Also to note is Trousdale. We are very excited about this new facility, which will have 2,500 new beds. Negotiations are nearly finalized between the state of Tennessee and Trousdale County, and this new facility will begin activation in the last half of 2015.

As I wrap up this section, I also want to highlight our population levels with California. We announced last July, which was a noted positive development with California regarding our out-of-state contract, that we extended the agreement with our largest state partner for three more years. In the last half of 2013, our populations increased steadily to the current level of approximately 8,800, which has been our average over the last 60-plus days.

Let me now provide a few specific updates on the business, first of which is on the state side, and a couple of update of note since we spoke in November. First is that we are very thankful for our new Arizona contract in Arizona, utilizing capacity that was formerly used by California at our Red Rock facility. Retrofits are completed and we started taking inmates in January. Currently, our population is nearly at 500 at this facility. As I said earlier, we are extremely excited about our new Trousdale County prison here in Tennessee, which will help the state address overcrowding. This new contract will be our first one in nearly 10 years here within the state of Tennessee.

Now to a couple of specific observations about the current landscape and how our state partners will be looking at CCA to help them address their challenges. Of note, six existing state customers that we currently do business with have seen increases in the last 12 months at a combined total of 4,200 inmates. Looking forward, our 11 state customers where we provide owned and managed solutions, and this is excluding California, are expecting a bed shortfall of more than 12,000 beds over the next five years, which can create overcrowded situation for these states. An example of this is Tennessee. Tennessee has seen an increase by nearly 1,900 inmates over the last three years, and even with our new Trousdale facility coming online in 2015, they will be meaningful overcrowded over the next few years.

Oklahoma is another one of those states. Oklahoma has increased their utilization of our in-state capacity by 800 inmates over the last 18 months, and they currently have an RFP on the street for up to another 2,000 beds. Colorado will be the last state partner I highlight here. Colorado populations have increased in our system by 15% over the last six months.

Now, we have been reporting for several quarters about possible new state prospects with significant projected overcrowding in the next five years and West Virginia has been one of those states. They have a procurement active right now for 400 beds and we submitted our proposal to them in late November, which we understand, based on media reports, that our proposal was the only one submitted. We think our available capacity in Kentucky will be very attractive to them, and on the procurement, we expect a decision on the award in the coming weeks.

Now California, I want to discuss in a few minutes in greater detail, but I'd also, in this section, like to comment on our Diamondback activation, which was previously a dormant facility. As mentioned in the press release, we have a potential need by Oklahoma, based on their correct procurements to secure more in-state beds, and we think our Diamondback facility would be ideal. This 2,000 bed facility is near Oklahoma City and is in close proximity to our other Oklahoma facilities. As we said in the press release, we intend to keep Diamondback activated in the near-term as we continue to evaluate and monitor this opportunity and we will continue to incur staffing and training cost associated with the activation. The RFP requires the beds to be operational by May 1 so we think we could hear a decision in the coming weeks.

As for state customer budgets, we are in the early innings of the legislative season for many of our state partners and their budget development for 2015. We will give a good overview of the funding levels during our May call, but a higher level, we have seen state economies continue to improve and many states are exceeding their revenue forecasts. 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 Tennessee, West Virginia, Oklahoma and other states like Arizona in moving forward and using the private sector to manage the very real challenges of growth and overcrowding.

Now, in 2012, we closed the first-of -its kind transaction within our industry by buying a government-owned prison. 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 can be very attractive. Similarly, providing just the real estate solution, like we have done here recently at our California City facility, we think could be a viable solution for many other partners. As an example, the state of Utah is currently in the planning and analysis phase of looking at several solutions for their correctional system, with one option being for a real estate partner like CCA to design, build, and own correctional facilities that could accommodate over 5,000 inmates.

As for requested new public sector capacity, we have observed minimal new appropriation for construction of new government-owned capacity to address overcrowding and population growth over the last few years. This limited amount of public sector investment in prison capacity is unprecedented. As I said earlier, we are in the beginning of the legislative season for many of our state partners, but it appears in early reviews of their budgets, that we will see another year of very limited public investment.

Now switching gears and moving over to the federal book of business, a couple of comments on their budgets -- first of which, the current year funding. As you know, Congress and the Administration approved a full funding bill for 2014 last month. The funding for our federal partners were at the levels we expected to fully fund all of our current contracts. Two other items to point out though, first of which is sequestration, will not have an impact on 2014 or 2015 appropriation bills. Second is ISIS funding for nationwide detention beds remains at the same level as it has been over the last four years. Now, the President's proposed budget will be -- for 2015, excuse me, is planned to be released on March 4, so in our May meeting we'll give a comment on the President's proposal as it relates to our partners' budgets.

Let me now go to California and a comment on the latest. First of which is, a three-judge panel in California issued a ruling on Monday. The court granted the defendant's, in this case the state, request for an extension through February of 2016. They are also interim benchmarks the state must meet. Specifically, they have to reach 143% of capacity by June of this year, 141.5% of capacity by February of 2015, and then to the final benchmark of 137.5% of capacity by February of 2016. Now as mentioned earlier, Cal City lease has gone extremely well, and CDCR took operational control of the facility in December.

Another item to note is Governor Brown released his budget last month for FY15 and all 9,000 of our beds have been funded, as well as our Cal City lease agreement in this budget proposal. This is the first time as governor that his initial proposal is to fully fund our out-of-state beds.

So if you look at the events over the last eight months, we are in the best position now than we have ever been in many years with the state of California. Those events are first, the state extended our out-of-state contract for three years last July. Next, the governor asked and had approved through the legislator last August supplemental funding to ensure old utilization of our out-of-state contracts, and our population levels are consistent with that funding. Next, we executed the lease with California at our 2,300 bed facility in California City, and finally, as mentioned earlier, the governor for the very first time during this term has proposed fully funding the out-of-state program for the coming fiscal year. With a nearly eight-year relationship with California, we have now become a fundamental part of the solution for California, both now and in the future.

So with that, we're very pleased about the quarter and full year. I am grateful and very appreciative of the CCA management team, wardens and our entire team of CCA correction professionals, here in Nashville and nationwide, for all the work they do every day. With that, let me now turn the call over to Todd.

Thank you, Damon, and good morning, everyone.

In the fourth quarter of 2013, we generated $0.44 of adjusted EPS, while normalized FFO totaled $0.62 per share. Full-year adjusted EPS totaled $1.92, while full-year normalized FFO per share totaled $2.65. One important note to keep in mind when comparing 2013 per-share amounts to 2012 and 2014, our share amounts were impacted by the issuance of 14 million shares made as part of the special reconversion dividend in mid-2013. However, the per-share amounts, as reported in the GAAP financial statements, have not been restated to fully reflect shares issued as part of that stock dividend. Therefore, for your convenience, pro forma per-share amounts for 2013 and 2012 calculated assuming those shares had been outstanding for all of 2013 and 2012 are presented in both the press release and supplemental.

Fourth-quarter earnings exceeded our expectations, primarily due to lower-than-expected costs incurred in transitioning our California City facility to a lease-only structure, as well as lower-than-anticipated income tax expense, which resulted from the deductibility of the non-cash impairment charges recorded in the fourth quarter.

The sequential decline in EPS from the third quarter was due to several key items. We've completed the removal of California populations at our Red Rock, Arizona, facility during the fourth quarter to make the facility available under new contract with the state of Arizona by the first of this year. The emptying of the Red Rock facility negatively impacted fourth-quarter EPS by approximately $0.03 compared to Q3. Next, the activation of our Diamondback correctional facility, which included hiring staff and purchasing supplies, negatively impacted Q4 EPS by approximately $0.02 compared to Q3, as new inmates were housed at the facility during the fourth quarter. Finally, these negative items were partially offset by the lower-than-expected income taxes I discussed earlier.

As indicated in the press release, adjusted EPS guidance for the full year is a range of $1.84 to $1.92, while Q1 2014 adjusted EPS guidance is a range of $0.42 to $0.44. Full-year FFO per share guidance is a range of $2.56 to $2.64.

I would like to spend a few minutes walking through the primary issues affecting guidance. As you may recall from prior years, Q1 EPS is always seasonally weaker compared to Q4, due to a large increase in unemployment taxes. Generally speaking, we paid over two-thirds of our annual unemployment taxes in Q1. As a result, unemployment taxes will be approximately $4 million higher in Q1 versus Q4. That translates into a $0.03 negative impact on Q1 EPS and FFO versus Q4. However, in Q2, unemployment taxes will decline by around $3 million versus Q1. In addition, there are two fewer calendar days in Q1 versus Q4, which is important to consider when forecasted EPS and FFO, as we are paid by the day. We are also assuming an increase in income taxes in Q1 versus Q4.

These negative impacts were offset by the improvement in earnings at Cal City under our new lease agreement, an improvement in earnings at Red Rock, resulting from our new Arizona contract, and an increase in average populations housed under our California out-of-state contracts, as well as small population increases under several other contracts.

Q1 and full-year G&A expenses are expected to approximate 6% of total revenues. Depreciation expense for the full year 2014 is estimated at $115 million to $117 million. We are assuming a consolidate GAAP income tax rate of approximately 6% in Q1, but an average of 8% to 8.5% for the full year. Weighted average diluted shares outstanding for Q1 is estimated at 117.5 million, while full-year weighted average shares outstanding is estimated at 118 million.

Finally, with regard to our cash dividend, dividend and our dividend policy are reviewed by the Board each quarter as part of the quarterly dividend declaration process. The next Board meeting is scheduled for February 20. A press release is expected to be released shortly after that meeting announcing the amount of the next quarterly dividend that will be paid in April. 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. Very excited about the reconversion being finalized this past year. And for new REIT investors on the call, we are company that one, has had 13 consecutive years of EPS growth and a CAGR of 12.3% over the last eight years of AFFO per share, and we are well on our way to our 14th consecutive year, so we've had a very strong and durable earnings performance record. More importantly, our 10-year share price performance is north of 300%, showing our long-term track record of outperformance. We're the clear market leader, with the company owning and controlling 60% of the privately-owned correctional beds in the US marketplace.

With that, 90% of our NOI is generated from our own beds and we have a very modest real estate maintenance CapEx of 5% of NOI, strong dividend payout ratio, and also historical customer retention rates in excess of 90%. Strong balance sheet, with debt to EBITDA of 3.3 times, which as you know is very low compared to other REITs, but also a very strong operational record, very viable real estate assets with a 75-year life, high barriers to entry, and a diversed highly-rated government payors.

As for the business outlook, population increases are starting to manifest, which indicate a need currently and future for solutions that we provide. We are encouraged by the improving budget environment on the state side, but also certainly of the budget on the federal side, as extremely limited public sector investment on new government-owned capacity to deal with growth and overcrowding, and with less than 10% penetration, meaningful opportunities in the US marketplace. And based upon my earlier report, they are starting to materialize in a meaningful way.

That concludes our prepared remarks. Thank you again for calling in to today's conference. Let me now turn the call back over to Tricia for Q&A.

Thank you.

(Operator Instructions).

Manav Patnaik, Barclays.

Hello. This is actually Greg calling on for Manav. Good morning.

Hello, Greg.

Good morning. First, looking at your FFO guide as a base, it looks like you are expecting about -- I'm missing a bit of growth for the year. Big picture, can you contextualize that around your 5% to 7% long-term growth aspirations and whether you are confident in reaching those levels in the near-term?

Yes. Let me -- a couple answers there. One of which is, we do have a couple of moving parts this year. We've got the activation in Cal City, so we will see a little bit of work on that during the course of this year, but that will be one little bit of a moving part this year. We have activated at Diamondback. We are hopeful to get the Oklahoma contract, so that could have some impact from a start up perspective during the course of the year, and then a couple of other moving parts.

But again, when we talk about that 5% to 7%, we are looking for at it more of a three- to five-year time horizon and still feel like that is a good number for investors to look at long-term.

Great. I appreciated it you're highlighting the current RFP pipeline. Maybe you can give some more thoughts on the pipeline for potential facility acquisitions or even smaller M&A.

So, couple comments there. The first of which is, facility acquisitions, as I mentioned earlier, we think that could actually manifest its way in not just acquisition but also maybe development. I mentioned the Utah opportunity earlier. That is one thing we are looking at, especially where we've got this environment where we've got over 300,000 inmates nationwide in facilities that are 50 to 100 years old. Also the local level, where you've maybe gone 30, 40, 50, 60 years with the local jail and they do not have the bandwidth from a capital perspective to build a new facility to deal with that current level of need or future need.

So we think the opportunities could be similar to what we've done in the past, like with Ohio and GEO did last year with the slowdown in Texas, were you to an acquisition and we take over the operation or we just take over as landlord and help them with being a capital partner for both maintaining and expanding the facility as needed.

But also, as I said earlier, it could be opportunities where we can go in and provide a solution for them with a new build and again just be the landlord. So for competitive reasons, I won't mention any others by name. The only one I highlighted is Utah, just because it is in the public domain.

Okay. Thank you. I guess finally from me, on the dividend, you're in the books as a REIT. I wondering if you could give your thoughts on what your thought process is potentially increasing past the 75% payout ratio and what you're looking at there.

You are exactly right. What we have been talking about in the past year is getting a year under our belt as a REIT, so we're getting pretty close to that milestone. As Todd said earlier, we've got a board meeting coming up at the end of the month. At that time, we will step back and have a sit down with the Board and talk about, with that year milestone behind us how we want to think about the dividend for the coming year.

Okay. Appreciate it, guys.

Thank you, Greg.

Kevin McVeigh, Macquarie.

Great. Thanks. Damon, as you think about potentially partnering with different states on the development side and/or acquisitions, how would that impact on the REIT structure, if at all, from a taxation perspective? And then ultimately, would the margins being similar to what you have come to enjoy more in the owned-managed or managed-only as we think about building out the model a little bit.

Let me tackle the last part first and then maybe have Todd help with the first one. On the last part, if it is a build -- design build owned, but not managed, then our ROI hurdle that we have had for many years of 12% to 15% would still apply, so we would think about it the same way. So to your question about margins then, they would be similar to the owned side that we currently enjoy. On the first part, relative to the REIT structure --

Sure. Our REIT structure provides us a flexibility to participate in all those opportunities Damon outlined.

Got it. If I heard it right, it sounded like on a six year partners have kind of upticked by about 4,500 inmates or so. How does that compare to previous cycles, and would you expect kind of an acceleration relative to past cycles or is that pretty much as expected?

I would say it is a little bit of an uptick. Trying to remember of the top of my head because I've been trying to give that number on a pretty consistent basis here in the last probably 8, 10 quarters. It is a little higher and Oklahoma has been a contributer to that. I mentioned Tennessee.

Arizona now, which is in the portfolio, they have seen an uptick. But I also noted Colorado, which Colorado has had a little bit of up and down here in the last 36 months in their population. But as I said earlier, they're op 15% in utilization within our system out there. So I would say yes, it is modestly a little better than it was, say, 12 months ago. It's definitely a lot better than it was, say, two years ago.

Got it. And then, obviously, California. It seems like they dampened the out-of-state opportunity. Are there any other Cal City opportunities within state that what kind of help you become just a more for formidable partner in-state as you think about potential opportunities with the state, obviously given the tentative relationship you have.

Hard to say definitively. I will say we enjoy a really great working relationship with CDCR. To your point a little bit, both with the out-of-state program and now a very strong partnership within the Cal City, that partnership is growing and is getting more meaningful. So with the news on Monday, it's a little early to predict on what they will do here in the near-term, so it will probably be a few weeks until we get more of a reaction and feedback from the state on how they think about potential and what they would do in-state further.

Super. Thank you.

Appreciate it, Kevin.

Kevin Campbell, Avondale Partners.

Good morning. Thanks for taking my questions. Can you guys maybe start by talking about the balance sheet a little bit. As you mentioned, you're relatively under-levered relative to peers, so is there any thought about either levering up and doing a buyback or special dividend? Are there restrictions on your ability to do that, et cetera.

Sure, Kevin. This is Todd. I would say we're always working to maximize shareholder returns, which includes optimizing our capital policy and capital structure to do so. Past examples of actions we have taken in this area include previous share buybacks, initiating a dividend and of course executing a REIT conversion resulting in a significant increase in the dividend payout. We will continue to evaluate our capital policy for opportunities to maximize shareholder returns going forward.

Is there any view about the leverage ratios? You guys historically have probably been more comfortable at this leverage ratio, but now with the REIT conversion, has management had any change in view on that? Would you be willing to operate at a higher level for an extended period?

We've said over the past year we've got capital policy in place that would put a cap on our leverage to ratio at around four times. I think we have said we'd be willing to go above that for some short period of time if there was a perfect storm in terms of capital needs and demand for capital. And then we've got a dividend payout ratio around three-fourths.

We will revisit that policy; as Damon mentioned, we revisit that every quarter with the Board. We will revisit that again at the next Board meeting. But as of today, that is our capital policy as strictly stated to around four times, or a little above three times. So we've got some runway there, a very strong cash flow, so no changes at this point.

Okay. Damon, you mentioned Utah in your prepared remarks. Could you maybe give us a little bit more color on the opportunity there, say the number of beds, the timing, et cetera?

Absolutely, Kevin. What they are doing in Utah, they have of facility in Draper, Utah, that they are looking to basically do a swap, kind of a land swap. It is getting, as I understand it, kind of enveloped by the metropolitan area of Salt Lake City, so the Department of Corrections and the Legislator and a few other stakeholders are looking at, is there an opportunity to move, basically, that operation, which is about 5,000 beds, to another location that would be suitable for a correctional facility.

So they are in the process right now with the various stakeholders through basically a kind of a commission. I think they are partnered with MGT, who has helped in the industry in the past on helping Department of Corrections look at the type of solutions and help evaluate the most viable opportunity for -- the most viable solution, I should say. They are going through that process this year to determine what is the most viable and then how they, if they do move forward, procure it and solicit proposals from the industry.

So the opportunity is to look at some existing facilities get displaced and the build -- or get turned over from private development and then find a new location that would be up to 5,000 beds. As we understand it, the likely, if they do move forward, solution would be for the government, for the Department of Correction, still to operate it and just look for a partner to provide the real estate solution. But the services components could still also be an option too.

And your -- correct me if I'm wrong, your average cost per bed to build is -- or at least for the private sector is roughly $50,000. Is that a good number to think about in conjunction with this 5,000? Or because it would be such a large facility, you'd get more leverage and the costs would be lower?

That is probably still a pretty good number. It may be a tad better that to your point with the higher quantity, but that's probably a pretty good number.

I'm sorry, last question on Utah timing. Have they given any sense as to when a, a decision will be made, and when the facility might actually be used?

They haven't given any indication of the later, when it would be used, but on the first part, this year they are actively going through a process this year into the summer on actually doing this analysis to determine the best course of action for the state.

And then last question, you mentioned on Arizona, sort of in your opening script, you mentioned that the 1,500 beds were dedicated to Arizona. Now, the contract, I thought was -- I just wanted to make sure that it is 500 this year and then 500 next year. Or have they change their mind and they're going to use all 1500 in the short-term?

No, that is a good question, so let me clarify that. The contract is just what you stated. But the contract is such to where we cannot add alternate customers, so we cannot put another population in there. So in essence, the 1,500 beds is dedicated for the state of Arizona, even though they do not have a contract for that amount. But as you have seen in the news clips, there is a need and there is, as I mentioned earlier, it is a state that is growing, so we are hopeful that there may be some more demand there long term.

Okay, great. That's it for me. Thank you very much.

Thanks, Kevin.

(Operator Instructions)

Tobey Sommer, SunTrust.

Thank you. Good morning.

Good morning, Tobey.

What your expectations for per-diem pricing? We have seen more data out suggesting that state budgets are healing and I'm curious about your thoughts there. Thanks.

Tobey, this is Damon. The budget environment is consistently continuing to improve over the last 24, 36 months, so as we go back three years ago, we were still seeing a few states coming to us looking for pricing reductions and, on the whole, we were able to offset those reductions through service reductions. But did not see any of those types of requests last year, and again, we are mid-February, so we've got a few more months until the legislative sessions are over and budgets are finalized with a lot of our state partners.

But it is, on the whole, looking a better environment with our existing portfolio -- or existing state portfolio I should say. And like I said, then that has taken a little bit of pressure off of pricing.

Do you feel like you're in a position to -- would you be able to harness some of that pricing and have a little bit of margin restoration if there is a positive direction to per-diems?

I think it is really is two events. I think one, it would be the budgets improving and in turn, states then being in a position where they can fund a little higher per-diem on an annual basis. But I think that's going to be somewhat connected also what capacity is available nationwide, both with us and GEO. So I think if we see utilization go up, which we feel good we have made good progress here in 2013, that continuing to improve along with the budgets continuing to improve, then I think that will manifest itself into price improvements.

Okay. Kind of shifting gears a bit. Regarding the landlord-type development opportunities, our those primarily with existing customers or potentially new customers?

I would say primarily with new customers. You know, the unique thing with California City is there was a desire for that to be operated by the state, and there's a few states that feel strongly that an operation should be done by the state. So I think what this does for us in a Cal City solution is to go to some other jurisdictions, not only state side but maybe even at the local level, where we can say, maybe we take a little of the controversy away relative to who operates it but we could still be a viable solution as it relates to being a real estate partner. We think this could be attractive. So I would say primarily on new partners, not necessarily existing partners.

Okay. Follow-up to that, did the conversations that you're having emanate from your sales or did other potential new customers see what transpired in California and initiate conversations with you?

We have been talking about this as -- primarily with Cal City and that solution, but we have talked about this for a while, especially since we are going through reconversion and thought, this could be maybe another way for us to grow the business. We've been talking about this a while. Like I said, there been a few jurisdictions that have expressed some interest. This conversation have really been coming from us.

Right. I'll get back to the queue. Thanks for your help.

Thanks, Tobey.

That will conclude today's question-and-answer session. I would like to turn the conference back over to our speakers for any additional or closing remarks.

Very good, Tricia. This is Damon again. Let me just say,thank you very much for your time and participation today. More importantly, thank you for your investment in CCA.

Your management team is focused on executing another good quarter and year ending for 2014, and we look forward to reporting our progress during the course of the year. Thanks again for calling in, and for our folks and friends up in the Northeast, hopefully you are staying warm. Thanks again.

Ladies and gentlemen, thank you for your participation. This will conclude today's conference.