CoreCivic Inc (CXW) 2016 Q1 法說會逐字稿

Good morning. My name is Tony, and I will be your conference operator. As a reminder, this call is being recorded. At this time, I'd like to welcome you to Corrections Corporation of America's First Quarter 2016 Financial Results Conference Call. (Operator Instructions)

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

Thanks, Tony. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer.

During today's call, our remarks will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our first quarter 2016 earnings release and in our Securities and Exchange Commission's filing, including the Forms 10-K, 10-Q and 8-K reports.

You are also cautioned that any forward-looking statements reflect management's current views only, and that the Company undertakes no obligation to revise or update such statements in the future.

This call will also include a discussion of certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data on our Investors page at our website at www.cca.com.

With that, it's my pleasure to turn the call over to Damon Hininger.

Thanks, Cameron. And good morning to everyone joining our call today. Also joining us today is our VP of Finance, Brian Hammonds.

CCA is the nation's leading provider of correctional, detention, and community corrections real estate and services. We provide federal, state, and local governments flexible and efficient solutions to address specific needs unique to their correctional systems.

We see common themes facing correctional systems that include overcrowding due to population growth or a lack of funding for new capacity, the need for significant infrastructure investment resulting from government-owned facilities reaching the end of their life cycle, and the need to expand community-based reentry services offered to offenders reaching the end of their sentences and returning to their communities.

We believe we are well-positioned to be the ideal partner for governments that are actively working to address these issues. CCA's existing facility portfolio is young and operationally efficient, allowing our government partners the opportunity to lower their operating expenses when compared to relatively older and less efficient government-owned facilities.

Partnering with us allows us the opportunity to help them avoid significant upfront capital expenditures required to develop a new facility. We currently have a number of facilities that have either all or some available capacity to meet a partner's immediate need. But we also have industry-leading experience in the development of [build astute] options should a government partner have a specific need.

In a very short period of time, we have also significantly expanded our capabilities to provide community-based corrections and reentry services through a recent acquisition, which complement the reentry services provided in our correctional facilities. CCA is now the second-largest owner and operator of residential reentry facilities in the United States, and we are strategically pursuing additional investments to further grow in this area as we continue to hear from our partners that this an area of focus for them.

The mission-critical nature of our facilities, coupled with strong credit quality of our government customers, provide a foundation for stable, reoccurring cash flows. And our dividend payout policy of returning approximately 80% of our adjusted funds from operations to shareholders, provides an attractive yield, which as of today is approximately 7%.

CCA's strategy for cash flow and FFO per share growth is focused on three specific areas: owning and operating correctional detention facilities, the traditional model that has driven the majority of CCA's growth through the years; real-estate only solutions, where CCA provides mission-critical real estate assets leased by government jurisdiction; and acquiring residential reentry providers, either owned and managed or owned and leased to third-party operators.

I'll begin my discussion with the latter, as this is the area in which we've had the most recent activity. On April 8th, we closed on the $35 million acquisition of CMI, or Correctional Management, Incorporated, a residential reentry provider in Colorado that operates seven facilities, totaling 605 beds. As was also the case with our acquisition of Avalon in October 2015 in Texas and Oklahoma, CCA has significant customer overlap with CMI, as we already house nearly 3,000 inmates for the Colorado Department of Corrections at three company-owned facilities.

We have worked with the state of Colorado for many years, and we are excited to be able to provide the additional capabilities of CMI to complement our existing real estate and service offerings. The state of Colorado currently utilizes approximately 4,000 residential reentry beds, and CMI is one of state's leading providers, with recent occupancy rates in excess of 90% among its seven facilities.

The closing of this acquisition brings our total investment in the residential reentry market in the last year to over $200 million. CCA now owns and controls 24 residential reentry facilities is six states, representing nearly 5,000 beds, which we believe signifies our commitment to providing the highest-quality community corrections and residential reentry services to our government partners, while also contributing to our growth and diversifying our cash flows.

We continue to pursue additional acquisition opportunities in this market, while also competing for new contracts at our existing residential reentry facilities with available bed capacity. I cannot provide specific guidance on the timing, size, or potential earnings contribution from future acquisitions or contract wins. However, we see typical acquisition targets in this market at valuations between $5 million to $50 million, yielding unlevered returns between 8% and 15%.

The primary factors influencing valuations are the overall size and scope of the potential target, whether there is an operating component, or are we just acquiring the real estate and leasing the property to a third-party provider, and contract quality with government partners, or quality and length of lease terms in a real estate only opportunity.

We continue to identify and pursue acquisition targets in the residential reentry market that would be complementary to CCA's existing reentry platform and are accretive to our earnings. But it is also important for our investors to know that with this new vigorous behavior on our part in pursuing acquisitions, we will always be disciplined and remain within our parameters on valuation. And with that, we have not participated in any auctions for these recently-acquired companies. Our view on auctions is that they create a strain on resources and a distraction to the management team with our otherwise robust pipeline.

Staying with initiatives to deploy capital for growth, we continue pursue opportunities to construct, own and operate facilities to address the capacity needs of our government partners. We are currently in the process of expanding our Red Rock Correctional Center in Arizona to 2,024 beds, a 400-bed expansion that is scheduled for completion in the fourth quarter of 2016, although we expect to begin receiving inmates under the new contract during the third quarter of 2016.

CCA was the successful bidder for the new 1,000-bed contract awarded by the state of Arizona in December of 2015, and the Red Rock facility is being expanded to accommodate this new contract, along with the existing 1,000-bed contract that the state awarded to CCA in 2012. Upon completion of this $35 million to $38 million expansion, CCA will be under contract for a total of 2,000 beds, with an occupancy guaranty of 90%.

Additionally, we are in the process of ramping up operations at our Trousdale Turner Correction Center, a 2,552-bed facility in Tennessee, which opened in January. The ramp-up of inmate population is scheduled to be completed around the end of the second quarter, and today we are housing over 1,700 offenders at the facility.

While these two contract awards are examples of growth opportunities coming from our traditional model of owning and operating correctional or detention facilities, in many situations we are seeing an increased interest in partnering with CCA for real estate assets for which a government entity would lease.

Many government-owned facilities, from the federal level down to local municipalities, are reaching the end of their life cycle, and are in need of a replacement. Additionally, due to budget constraints throughout and following the economic recession, even more government facilities have a significant backlog of deferred maintenance that requires significant capital investment.

Not only do these aging facilities require significant maintenance and capital expenditures, but in most cases there are significant operational inefficiencies inherent to the design of facility, which results in higher operational cost. We have spoken about aging and inefficient facilities for many years. But recently many states have acknowledged the extent of the need for additional infrastructure investment.

For example, California identified over $1 billion in deferred maintenance required for their correctional facilities in their updated blueprint, which was issued in January. The legislature in the state of New Mexico introduced a bill in February requesting $200 million for repairs and rehabilitation of state-owned prisons, which ultimately did not pass.

In March, the Governor of Alabama introduced legislation to approve $800 million for the construction of four new prisons in order to replace 14 outdated facilities. Large infrastructure investments and facility design expertise are required to meet these types of needs for mission-critical facilities. CCA provides a compelling and flexible value proposition to governments facing these challenges. And no other entity, public or private, has designed and built more criminal justice facilities over the last decade than CCA.

Whether it's a full-service solution or a design, build, and lease opportunity, we are the ideal partner for governments with our expertise and strong balance sheet.

Finally, we continue to pursue opportunities to utilize the facilities with available capacity in our portfolio. While history has shown there is a competitive advantage to having a certain amount of available beds in order to quickly respond to customer needs, our current available capacity of just over 9,000 beds is higher than we ideally carry. However, we've seen increased interest in a number of these facilities, some of which you have seen as playing out in a somewhat public manner.

Several states have expressed a need for additional bed capacity to either alleviate overcrowding in their systems, or replace antiquated government-owned facilities that pose safety concerns and budgetary pressures. Our available beds would offer appropriate cost-effective solutions should these states choose to pursue the opportunity. These opportunities are real estate only, where the state's department of corrections would assume operations.

Additionally, we continue to have a number of private discussions with potential partners that are looking for additional bed capacity, both in state and out of state. While we have yet to enter into contractual agreements with these potential customers and no incremental contribution is contemplated in our forward-looking financial guidance, they represent opportunities to increase our cash flows without requiring meaningful capital investment.

Now before I turn the call over to Dave, I would like to provide a brief update on the developments related to the operations at our South Texas Family Residential Center. As you will recall, the government and attorneys representing a class of minors in ICE custody, including minors at our facility in South Texas, have been engaged in litigation regarding the interpretation of the 1997 settlement agreement. That litigation, which concerns the care of ICE-held minors, is now in the Ninth Circuit Court of Appeals. Both parties have completed briefings in this matter, and oral arguments are scheduled for June 7, 2016. However, the timing of a court decision on this matter is currently unknown.

Additionally, earlier this year, the state of Texas completed the rules promulgation process with respect to licensing of family residential centers like our South Texas Family Residential Center. The standards established by the state of Texas are in addition to federal family residential standards that already apply at our facility. We submitted our license application to the state during the first quarter of 2016, and the state agency responsible for the licensure is in the process of conducting their review.

As part of that review process, we hosted a public hearing regarding our facility's operations and mission last week. We have been responsive to all inquiries from the state, and stand ready to provide additional information as we await completion of the licensure review process.

And like last fall, the state has again encountered legal challenges this week to their authority to license family residential centers, with the state receiving a 14-day restraining order yesterday, which prevents any issuance of a license during that period of time.

Finally, we believe successful licensure at the facility is fully consistent with ICE's intended mission for the South Texas facility, and will enhance the facility's ability to address the diverse needs of migrants apprehended at the southern border.

Now I'd like to turn the call over to Dave, to cover our first quarter financial performance, and review the primary drivers of our updated financial guidance for 2016.

Thank you, Damon. And good morning, everyone. In the first quarter we generated $0.40 of adjusted EPS, compared to our February guidance range of $0.37 to $0.39, and $0.02 ahead of the first call consensus estimate.

Normalized FFO totaled $0.60 per share, exceeding our February guidance range of $0.57 to $0.59, and AFFO totaled $0.61 per share, ahead of our February guidance range of $0.56 to $0.58. The adjusted or normalized results exclude $1.1 million of M&A expenses incurred during the first quarter of 2016, and $1 million of asset impairments during the first quarter of 2015.

Per-share results exceeded expectations largely due to stronger revenue, driven by higher than anticipated inmate populations across numerous facilities. Federal revenue was particularly strong in the Southwest. And we began to see increasing federal population at our newly constructed Otay Mesa Detention Center in California, which were higher than our forecast.

However, the first quarter was constrained by an operating loss of $0.02 per share at our new Trousdale Turner Correctional Center, which began receiving inmates from the state of Tennessee in January. The operating loss of $0.02 at Trousdale compares with an operating loss of $0.01 per share included in our guidance for the first quarter, and was $0.01 more than we expected, due to higher startup expenses which are very difficult to predict for a ramp-up of a facility of this size. Revenues at this facility during the quarter were in line with our expectations.

Although EPS and FFO were $0.01 above the high end of our guidance, AFFO was $0.03 above the high end of our guidance, because maintenance capital expenditures on real estate were $1.6 million lower than expected.

Maintenance capital expenditures can fluctuate from quarter to quarter, although they are typically lowest in the first quarter. We have maintained our annual guidance for maintenance CapEx on real estate. So we expect to incur higher CapEx levels in future quarters, relative to the first quarter.

The most significant factors affecting first quarter results compared with the prior-year quarter include the aforementioned startup expenses at the Trousdale facility, the decline in inmate populations from the state of California, refinancing short-term debt with long-term debt in the third quarter of 2015, and the previously announced termination of the contract with the Federal Bureau of Prisons at our Northeast Ohio Correctional Center effective May 31, 2015.

The decline in California populations, which were consistent with our projections, had the largest impact of these items, and contributed to a reduction in per-share results of about $0.08 from the prior-year quarter. The negative financial impact of these events was partially offset by a full quarter of operations at our South Texas Family Residential Center, which was still ramping up during the first quarter in the prior year; increased populations resulting from the activation of our new Otay Mesa Detention Center in the fourth quarter of 2015; and the acquisition of Avalon Correctional Services, which was also completed in the fourth quarter of 2015.

Our balance sheet remains strong, with leverage of 3.6 times, and fixed charge coverage at 6.2 times. At March 31, we had $55 million of cash on hand, and $485 million of availability on our $900 million revolving bank credit facility, and no debt maturities until 2020.

During the first quarter, we put in place an at-the-market equity distribution program, which is a popular vehicle used by REITs and other companies to efficiently raise equity capital from time to time. We believe the program, commonly known as an ATM program, is a perfect tool to match fund proceeds with M&A activity and other capital need in order to manage our capital allocation strategy.

We target a leverage ratio of between 3 times and 4 times, and have operated within this range or lower over the past decade. Although we have modest capital expenditure commitments, we continue pursue M&A activity, and have an active pipeline, as Damon mentioned in his remarks. As our leverage increases to fund these opportunities, the ATM program is available for managing our targeted leverage ratios.

For the remainder of 2016, the only substantive capital commitment we have is for the expansion of our 1,596-bed Red Rock Correction Center, pursuant to a new contract that was awarded in late December 2015 from the state of Arizona for an additional 1,000 inmates.

As we currently have approximately 1,000 inmates at the facility pursuant to a preexisting contract with Arizona, we are expanding the design capacity of the facility to 2,024 beds, at an estimated total cost of $35 million to $38 million, including additional space for inmate reentry programming and support services. We have invested $8.8 million in this expansion through the end of the first quarter. Construction is expected to be completed late in the fourth quarter of 2016. Although we expect to begin receiving inmates under the new contract during the third quarter of 2016.

Moving next to a further discussion of our guidance, as indicated in the press release, adjusted EPS guidance for the full year is a range of $1.81 to $1.87, up from $1.76 to $1.84 from our February guidance, while Q2 adjusted EPS guidance is a range of $0.44 to $0.46.

Full year normalized FFO per share guidance is a range of $2.60 to $2.66, up from $2.54 to $2.62 from our February guidance. And full year AFFO per share guidance is $2.53 to $2.59, up from $2.47 to $2.55 from our February guidance.

Our increase in guidance reflects the Q1 beat carried through to the full year, and the accretive impact from the acquisition of Correctional Management, Inc., completed at the beginning of the second quarter of 2016. Our full year guidance reflects the operating loss I mentioned at the Trousdale facility during the first quarter of $0.02 per share, turning profitable near the end of the second quarter of 2016, and achieving our targeted return during the second half of the year.

Our guidance also includes startup expenses incurred during the second half of $0.01 to $0.02 per share for the ramp of the new contract at our Red Rock facility. Therefore, as I mentioned last quarter, our earnings are still back-end loaded.

We are projecting continued stable inmate populations from the state of California, averaging a little under 5,000 inmates for the remainder of the year. This projection is consistent with the state's draft budget and updated report of inmate population projections released by the state in January. Average daily inmate populations from California were 5,100 during the first quarter of 2016, which as I mentioned, was consistent with our forecast and the last draft budget released by California.

As a reminder, we have a contract with the state of California for up to 6,562 inmates, expiring June 30, 2019, should they have the need for additional inmates over that time period. The contract also includes renewal options to extend beyond the expiration by mutual agreement.

Our guidance does not include any substantial new contract awards or contract losses. Our guidance also does not include any impact from regulations proposed by the Department of Labor to increase the total compensation required to exempt employees from qualifying for overtime, because the final regulations, as well as the effective data are unknown. While the proposed regulations would result in the increase in the number of employees eligible for overtime pay, our strategy is to address the new rules will be dependent on the final regulation.

Finally, as we announced last month, on April 8th we closed on the acquisition of 100% of the stock of CMI, along with the real estate used in the operation of CMI's business, for a total purchase price of $35 million, funded with our revolving credit facility. CMI, a privately-held community corrections company that operates seven community corrections facilities, including six owned and one leased, with approximately 600 beds in Colorado, specializes in community correction services, drug and alcohol treatment services, and residential reentry services.

Our guidance includes $0.02 of FFO per share for our period of ownership in 2016. The acquisition of CMI brings our reentry portfolio to 24 facilities, with a designed capacity of 4,970 beds located in six states. Although we continue to pursue a number of attractive investment opportunities, particularly in the reentry space, our guidance does not include any new M&A activity beyond CMI.

The magnitude and timing of our M&A activities is difficult to predict. And therefore we will update our guidance on a quarterly basis if and when we successfully complete such a transaction.

Once again, we have provided EBITDA guidance in our press release, which enables you to calculate our estimated effective income tax rate of approximately 5%, and provides you with an estimate of total depreciation and interest expense for both the second quarter and full year. We expect G&A expenses to be around 5.5% of total revenue.

I will now turn the call back to Damon for closing comments before opening the lines for questions.

Thanks so much, Dave. So before I turn the call over to the operator for the Q&A session, I'd like to reiterate that we believe we have ample avenues for growth through the impact from recently completed acquisitions, targeting additional acquisitions of residential reentry facilities, ramping up new contracts in Tennessee and Arizona, utilizing available capacity, and competing for new development projects.

We believe our strong balance sheet and operating performance will maintain our access to capital, allowing us to fund the accretive growth opportunities, as we've discussed. We expect our earnings will trend positively throughout the year, as evidenced by our updated 2016 guidance. Additionally, we remain committed to our dividend payout policy, and will increase future dividends as our earnings and cash flows increase.

Finally, last week was a national recognition of the work that reentry professionals do both in public and private facilities. And this week actually is correctional officer employee's week here in the United States. And with that, I just want to say how much I appreciate the CCA management team, our administrators and wardens and our entire CCA team here in Nashville and nationwide. I'm eternally grateful of the significant work you do for our Company.

Thank you again for calling in to today's conference call. And let me now turn the call over to our operator for the question-and-answer session.

(Operator Instructions) Tobey Sommer, SunTrust

Thanks. I'm curious about the real estate transaction opportunities that you're looking at and those investments. What could those mean to your historically targeted returns and EBITDA margins? And I know you don't have a lot of them under your belt yet. But how do you think about that over the longer term? Thanks.

Tobey, good morning. This is Damon, and thanks for your question. And the answer is that it really will depend on the location and the jurisdiction relative to the return. And I think it's the same discipline we've shown on what I'd say owned and managed solutions.

So if we've got a jurisdiction that has a very specific need in a locale where there may be not a necessarily obvious user, if for whatever reason they vacated the premise, then we would think about maybe a higher return, and with that maybe lease terms that are longer in length and maybe add a little more rate relative to the lease rate that provides a little more of a return to us, because of the higher risk profile. So it's really just determined by the jurisdiction.

But having all things equal, if it's a real estate only solution, versus an owned and operated solution that we do already, the risk obviously is going to be a little lower with a real estate only. Just because we don't have the operational risk and the legal risk, and some of the other kind of areas of the expenses that would have some volatility that we typically experience with our owned and managed segment. And so with that we may require maybe a little lower return.

And I'd add, even though margins there would go up, because you don't have the level of operating expenses we have in the core business.

Okay. Thank you. That's helpful. And how would you characterize the evolution of your conversations going from sort of introducing the concept in what you may be able to offer customers, and is there a difference in the cadence of those conversations when I think about local, state, and maybe even federal conversations you're having? Thank you.

Yes, Tobey. This is Damon again. I would say, yes. I would say the cadence has picked up, I'd say primarily at the local level, where you've got a lot of jurisdictions for the reasons we've talked in the past. Maybe they've deferred maintenance. Maybe they've got a significant unfunded pension liability. But they clearly have a need. And also, say, we see an opportunity where not only they get additional bed capacity, but maybe consolidate their system. Because they've maybe built a facility or two or three over the last 30 to 50 years.

So I'd say the interest and the solutions that we've put in front of them, I'd say that interest is growing. And we're getting more interest from more jurisdictions, let's just say, also. So I'd say we've got, I'd say, about a handful of jurisdictions that are very intrigued by what we've brought to the table. And we're hopeful we can get one of these across the finish line sometime soon.

Thanks. And I want to ask one more question about California, then I'll get back in the queue. You're looking for, I guess, pretty stable volumes from California for the balance of the year. How should we think about the state's-- the capacity that they've got coming online, and what, if anything, it means for the kind of business that you're doing with them, which may be a little bit apples and oranges? Thank you.

Yes, Tobey, so a couple answers there. The first part is, yes, for the rest of the year, we feel like we are in a position where it's kind of stabilized our populations on the out-of-state program. So they have said, California has said and they have indicated as such in their proposed budget in January, which we expect they may revise coming out here in the next couple weeks that they need about 4,700 to 5,000 beds out of state for the coming fiscal year.

And so all indications, again, we've reached I think a good level of kind of stability within our system, based on their feedback, but also what they're proposing to fund next fiscal year. And as we look out to the next couple of years, based on their projections, they continue to say that they're going to really need the out-of-state program long term. And I'd say long term, being in, say, the next three to five years. Because they are showing a forecasted increase in their population within the state, even though they do have some capacity, as you noted, coming online in state.

So we feel like we've reached a good point with them on the out-of-state program. We've got good clarity for the foreseeable future on what the needs are, and also Cal City, which is the solution in state, continues to be a kind of viable solution for them, both short term and long term.

And further, the classification of inmates that they need are the types of inmates that we house for them. So that's favorable for CCA as well.

So the beds they have coming online are not sort of equivalent beds?

Correct. Correct, they're the lower level.

Thank you very much.

Michael Kodesch, Canaccord Genuity

Hey, guys. Good morning, and thanks for taking my questions here, also nice quarter. I guess just first off, you mentioned in your prepared remarks a little bit about some of your idle facilities and pursuing some contracts with those. A headline actually hit, I think this morning, about a meeting with the Oklahoma Corrections Board to potentially replace some of their housing with actually the facility that was vacated by, I believe, the out-of-state California beds. So I was wondering if you could just provide a little bit more color as to what's happening there. Thanks.

Michael, thank you. This is Damon. I appreciate your question. Oklahoma has been one of those states that you've seen in the headlines this spring where they are considering a potential lease of a facility by the private sector, CCA. And with that, potentially they could close one of their older antiquated facilities. So nothing to report today, but they are a state that has expressed interest on a potential solution that we could provide to them in state.

Okay, great. Thanks. And then I guess my only other question here-- and this is a bit more speculative-- but, so what's going on in Alabama with the $800 million budget? I guess that's kind of seen a lot of approvals as this point. Is there any space for the private sector to play in that? Thanks.

Absolutely. And we think that in Alabama and some of the other states I mentioned, as they think about the opportunity to close and consolidate their system, it could be the solution where the private sector provides the whole solution, or it could be a public-private partnership where maybe part of it's publically funded, and some it's privately funded.

So we think, yes, Alabama, like other states that are considering these type of solutions, and again, it could be kind of all of the above type of approach in providing that solution.

Great. Thanks again. That's all from me, and nice quarter.

Kevin McVeigh, Macquarie

Great. Let me add my congratulations as well. Hey, just a couple thoughts around the dividend growth, Damon; should we think about that in terms of consistent with the rate of growth of EBITDA? Or is there any way to just try to frame what that potential opportunity is?

Yes, what we've said, Kevin, in the last couple of years we've pegged it to AFFO. So as we think about kind of what that looks like now, but also as we look at the forecast over the next, say, 6 to 12 months, then that will play a part as we think about the dividend and what adjustments we want to make quarter for quarter.

Got it. And then nice to see your federal partners kind of stepping up a little bit. Any thoughts on that pace over the balance of the year? And then just as each respective party, it seems like they're getting their kind of respective nominees in place. Anything to think about, Damon, in terms of that over the next couple [3-6] months?

Yes, on the federal side, I'll just say we don't see any kind of meaningful new opportunities. And I think it's for obvious reasons. We've got a national election going on right now. We've got two of our three federal partners at the leadership level have vacancies. So they are led with interim directors. And so I think as we go through the end of this year, early next year, we're probably not going to see a lot of activity, just because we'll have a new president inaugurated in January, and he or she then will go about the business-- go ahead and start filling some of the leadership positions.

So I think as we think about our three federal partners, it will be just status quo for the rest of the 2016.

Got it. And then just one last one on pricing and attrition. How's it been in terms of pricing discussions with some of your partners? And anything to call out around turnover?

So on the pricing side, I would say it's incrementally becoming a little better and better. And I'd look at the last kind of 36 months as the nice kind of modest trend of improved pricing. We still have got a lot of legislatures in session around the country. But our state folks, as they kind of continue to kind of keep the ear on the ground in these legislatures, do feel that funding is improving overall. There's a couple spots where oil and gas has impacted some revenues for certain states. But overall, I feel like state revenues are improving. And in turn with that, it has created a little bit of a relief for us on pricing and also on getting in our annual escalators.

So it is improved. Again, it's not dramatic year over year. But it still continues on the trend of an improved model, so year over year.

Awesome, thanks.

And turnover?

Yes, I would say we've seen pockets where staffing compensation levels have been challenging. I would not characterize that as across the board. So when you look at certain markets, we've had certain challenges where we've had to make adjustments and look at that closer and just make adjustments. But we'll continue to monitor that as the overall economy continues to improve, and make adjustments accordingly going forward as well.

Okay, awesome. Thanks, guys.

Andrew Berg, Post Advisory Group

Hey, guys. I may have missed this. Can you just go back over how much the startup costs were that impacted you in the quarter, and what the anticipated impact will be 2Q? I think you guys have talked previously about most of the impact being in the first half of the year.

Yes, I'll cover that. This is Dave. We had $0.02 of startup cost at Trousdale. It's hard-- and then we've got $0.01 to $0.02 of startup costs for the Red Rock facility. We don't have a definitive ramp schedule yet negotiated with Arizona. We're still working through that with them. But we've estimated $0.01 to $0.02 of startup there.

Coming back to Trousdale, it's more difficult to estimate what startup is at Trousdale. Because it does turn profitable. So at what point do you say startup ends and you're operational? We're not projecting to hit the targeted returns on that facility that we modeled when we did the pricing for that facility, until the second half of the year. So certainly the short answer to your question is $0.02 in Q1 for Trousdale, $0.01 to $0.02 in Q3-Q4 for Red Rock. And then Trousdale will not be optimized, I guess, is the way I would characterize that, until the second half of the year.

Okay. So first quarter, $0.03, so it looks like $3.5 million on a dollar basis versus an EPS basis?

Just $0.02 for Trousdale. Because Red Rock hasn't started yet.

Oh, okay. Got it. All right, so it's few million bucks there. And then I know that it's a little bit speculative, obviously as we start rolling a bit more into the election season. Any thoughts about-- or any concerns about what we may start hearing in terms of changes to the industry? Notwithstanding the fact that I think that you guys make a pretty compelling case for why the industry should continue to be there.

We know that Hillary has comments maybe to the contrary. And I guess, more importantly, any thoughts of what you guys may do to proactively try and counteract some of the rhetoric that comes out of Washington?

Yes, this is Damon. And let me answer that question. I appreciate the question itself. As I think about kind of the issue and this question that we've got in the past, I think it's really important to kind of look back over the last 30 years.

We have had tremendous success at the state and federal level with either at state-level governor's being a democrat or being a republican, or a president being a democrat or republican. We've been able to have really good operations, perform very, very well, and provide great value to our partners regardless of who's in the White House or who's in the Governor's residence in a respective state. And that's our focus, just to make sure that we continue to do a great job every day, have high quality operations, and then provide great value back to the taxpayers of that respective jurisdiction.

And at the end of the day, again over the 30 years, again, regardless of who gets elected in office, once they get in office and they do appreciate the value and the track record and [performance], we've had great success on renewing our contracts. And that's the other thing I would point to is that over the last 6-7 years, again with changes in leadership both at state and federal level, we've had renewal rates on our contracts north of 90%.

So there is a lot of pundits on cable TV that have a lot of views on this election season that we find ourselves in. I think the best thing to kind of look at as I think about this business and our industry, is looking over our last 30 years, which I think is a very good indicator on how we've been successful regardless of changes in leadership at the state or federal level.

And one additional point, just to be clear, under long-standing policy, we don't lobby for any legislation that would determine the basis or a duration of an individual's incarceration or detention.

Yes, I know. And I think you guys have been pretty clear in the past. And I agree. I think the service provided is needed, given the physical plan of a lot of the federal facilities. It makes perfect sense. I just wasn't sure whether there's anything you could do, lobbying or otherwise, to maybe try and offset some of the potential rhetoric that comes out. But I think the need for business is clearly there. It's more the rhetoric that I was addressing.

Yes, one thing I will say that we've done very effectively to your point, is we're constantly, on a daily basis, educating the stakeholders at the local, state and federal level. And that includes me going to DC or meeting with folks within respective states to really truly help them understand exactly what we do, the value we provide, and the quality of our operations. So that's a constant, regardless if there's an election going on or not. That's just something in our DNA that we can do every day, just to make sure.

Because there is a lot of turnover. I mean we're all focused on the national elections. But I think in the last four or five years, there's been over 1,000 new legislators within respective state capitals around the country. And so that's just a constant process where you're making sure that when someone's new to office, and we've got an operation within the respective district or state, that they're aware of who we are, what we do, the quality of operations, and with that, making sure before they have a view or a comment or have an opinion, not only that they understand exactly what we do, but also talk to our partners.

Our partners are directors of corrections, the people that we work with day in and day out. If we're not doing a good job in their eyes, we wouldn't be renewing contracts at 90%, and they would obviously have serious concerns about moving forward with the private sector. So that's a constant process. And that just doesn't happen during election season.

Got you. Okay, thank you.

Thank you. And it appears we have no further questions at this time.

All right. Well, thank you very much. We really appreciate you participating on our call today, and we look forward to reporting on our progress in the August earnings call. So thanks again, and have a great day.

Thank you. This does conclude today's conference call. You may disconnect, and have a great day.