CoreCivic Inc (CXW) 2018 Q3 法說會逐字稿

Good day, and welcome to CoreCivic's Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions).

At this time, I would like to turn the conference over to Mr. Cameron Hopewell, Managing Director of Investor Relations. Please go ahead, sir.

Thank you, Ryan. 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 Dave Garfinkle, Chief Financial Officer.

During today's call, all remarks, including our answers to your questions, 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 third quarter 2018 earnings release and in our Securities and Exchange Commission filings, including forms 10-K, 10-Q and 8-K reports. You're 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.

On this call, we will also discuss 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 that we have on our investors page at www.corecivic.com.

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

Thank you, Cameron, and good morning, and thank you to everyone for joining our third quarter 2018 conference call today. We are also joined here in the room by our Vice President, Finance, Brian Hammonds. CoreCivic is a diversified real estate investment trust, specialized in delivering government real estate solutions to serve the public good. We are the country's largest private owner of government-leased real estate assets, with 104 facilities totaling over 17 million square feet of real estate and a 35-year history of delivering a broad range of solutions to help solve tough government challenges in flexible, cost-effective ways. Our assets generate a consistent cash flow stream underwritten by investment-grade government tenants.

We have 3 complementary business segments, each of which is anchored in providing specialized real estate to government tenants. Our safety segment focuses on corrections and detention facility ownership and management, and includes 51 correctional and detention facilities with a design capacity of nearly 73,000 beds. Our community segment is a growing network of residential reentry centers that helps address America’s recidivism crisis and includes 26 residential reentry facilities with a design capacity of 5,214 beds.

Finally, our property segment is a quickly growing portfolio of mission-critical government leased properties that, as of the end of the third quarter, includes 27 properties representing nearly 2.3 million square feet of real estate.

Across all of our segments, we have active agreements with over 125 government agencies that have a variety of core missions. This provides meaningful diversification, not only in our real estate assets, but also in our customer base. Each of our business segments leverage core competencies we have developed in delivering real estate solutions and each has a significant runway for continued growth. As we continue to execute on our strategies for growth in each business segment, we expect the company to benefit from an increasingly diverse stream of growing cash flows on a per-share basis.

To briefly summarize our third quarter financial performance, total revenue of nearly $463 million, increased 4.5% from the prior year quarter. While it is important to highlight that each business segment experienced year-over-year revenue growth, most notable was the growth of our properties and community segments. CoreCivic Properties revenue of $15.3 million represented a 50% increase year-over-year and CoreCivic Community revenue of $25.1 million was up 31% from the prior year quarter.

Our normalized FFO of $0.58 per share during the quarter fell within the range of our guidance and represented a 3.6% increase in per-share results versus the prior year. Our adjusted EBITDA in the third quarter of $99.7 million also fell within the middle range of our guidance for the quarter and represented a 6.8% increase year-over-year.

Our third quarter growth was driven by a combination of organic growth in CoreCivic Safety due to 7 new contract wins with state and federal partners, representing approximately 4,500 beds. And accretive M&A transactions to expand our community and property portfolios. These positive developments more than overcame a decline in average daily California inmate populations, increased interest expenses in a rising rate environment, incremental debt from a recent M&A transactions and incremental salary and benefits expenses. Those personnel expenses were chiefly at our Tallahatchie County Correctional Facility and La Palma Correctional Center, where we anticipate new contracts and projected increases in capacity utilization under existing contracts. Dave will describe these in more detail following the conclusion of my remarks.

Also included in yesterday's earnings release was our updated full year 2018 financial guidance. We currently expect to generate normalized FFO per share of $2.29 to $2.31. Our updated guidance represents a modest adjustment from our previous guidance of normalized FFO per share of $2.29 to $2.33, due primarily to our election to incur higher personnel expenses in the fourth quarter at certain facilities in anticipation of new contract awards and higher utilization of certain existing contracts that we believe could materialize in the near term. Dave will cover in detail the primary drivers of our guidance. However, it is important to note our 2018 guidance does not include the potential impact of new contracts or acquisitions, aside from the new contract with Vermont, we announced in September. This new contract will have minimal impact this year given the timing of the contract award. However, this additional contract brings our total new contract wins in CoreCivic Safety, over approximately the last 18 months, up to 8 new contracts, representing roughly 4,800 beds.

We continue to see a large number of opportunities to serve government partners and we are actively pursuing attractive acquisition targets, all of which can contribute to a future growth and diversification.

And our business development, over the course of 2018, has positioned us well to continue to generate meaningful earnings growth next year, which is notable, as we haven't been able to forecast fiscal year year-over-year growth since 2015. Of the 8 new contracts in CoreCivic Safety, 6 are with state agencies to utilize existing capacity, representing incremental utilization of approximately 2,500 beds. In the first half of the year, we completed the ramp of the new contract with the State of Ohio for 996 beds at our 2,016-bed Northeast Ohio Correctional Center and a new contract with Kentucky for the full activation and utilization of our 816-bed Lee Adjustment Center. We also added new contracts with Nevada, Wyoming, South Carolina and more recently, Vermont, for a total of approximately 700 beds. Each of the 4 contracts are for out-of-state capacity to assist with overcrowding and each state's corrections system.

The remaining 2 new CoreCivic Safety contracts were signed over the summer with agencies of the federal government. In June, we were awarded a new contract with United States Marshals Service at our Tallahatchie County Correctional Facility to house 1,350 inmates with the option of housing additional population should capacity be available. Immigration and Customs Enforcement and the United States Marshals are each currently housing 600 detainees under this contract. In July, we were awarded a new contract with the federal government to utilize a portion of our 3,060-bed La Palma Correctional Center, in Arizona, under which Immigration and Customs Enforcement or ICE, currently expects to house up to 1,000 adult detainees, up from approximately 900 detainees currently. The facility today houses roughly 1,900 offenders from the State of California. However, the state has indicated it intends to take advantage of the flexibility that our business model offers and exit facility in early 2019 due to projected population reductions in their system.

As you can see, 2018 has been a year of strong demand for CoreCivic Safety, and we have been successful on winning a high percentage of new contract opportunities in the market. We continue to execute on our diversification strategy, expanding our 2 other business segments, primarily through M&A and development opportunities. CoreCivic Community includes 26 reentry facilities with a design capacity of 5,214 beds and provides nonresidential correctional alternatives to municipal, county and state governments in 6 states. Community generated 6% of our adjusted EBITDA in the third quarter and grew its top line 31% year-over-year, accomplished through the acquisition of 4 additional residential reentry facilities, representing 514 additional beds and our acquisition of Rocky Mountain Offender Management Systems, a nonresidential electronic monitoring and case management services business in January 2018.

While the pace of residential reentry facility acquisitions has slowed, due to fewer attractive candidates, we have an attractive pipeline of acquisition targets to continue our measured expansion in this market. This expansion will likely to include both residential and nonresidential service providers as we aim to offer jurisdictions a portfolio of solutions to combat recidivism and complete the cycle of rehabilitation.

CoreCivic Properties, 50% year-over-year revenue growth was primarily the result of 2 acquisitions: the purchase of a 541,000 square-foot Social Security Administration building in Baltimore, Maryland, in August, and a 261,000 square-foot Capital Commerce Center in January. These are the 2 largest non-correctional properties in our portfolio of government-leased assets. Both assets have attractive long-term leases in place with government agencies that will produce predictable long-term cash flows.

In late September, we acquired a 217,000 square-foot steel frame warehouse in Dayton, Ohio, for $7 million that was built-to-suit for the National Archives and Records Administration and lease through the GSA. While this acquisition is not individually material, it represents a great example of our ability to leverage one of our competitive advantages, which is, our comprehensive real estate expertise to close a transaction with higher-than-average complexity and simultaneously generate above-average returns. The Dayton property required certain physical plant modifications to remediate a legacy structural issue, which we had the internal expertise to complete quickly and efficiently.

After accounting for approximately $1 million of additional day 1 capital expenditures, this property is expected to generate a cap rate of approximately 15%. While we don't always expect to encounter cap rates that high for properties leased to the federal government through the GSA, we are seeing accretive good return acquisition targets with cap rates from the high single digits to the lowest double digits with the potential for higher returns depending on the individual properties characteristics and transaction complexity.

So far this year, we have invested $305 million in M&A transactions to expand our CoreCivic Properties portfolio, adding 15 properties and have a robust pipeline of additional near-term accretive acquisition targets in excess of $200 million. We ended the third quarter with a total portfolio of 27 properties, representing nearly 2.3 million square foot of real estate. Our CoreCivic Properties segment generated over 11% of our adjusted EBITDA during the period.

As noted, both of our diversifying business segments have completed positive developments that are showing up in our financial results on both the top and bottom line. We are confident in our ability to build upon this positive momentum, as we execute on many new business opportunities these segments have.

I'd like to touch on 2 important ongoing facility development projects before discussing market developments and new business opportunities. First, site work for our new facility development project in Lansing, Kansas, is progressing on schedule. We're awarded the development of this new build-to-suit facility, the first-of-its-kind, nationally, by the State of Kansas, in January of this year. Secured by a 20-year lease agreement, this $160 million project will contributed to the expansion of our CoreCivic Properties portfolio and serve as the model for other states. The project will replace Kansas existing 150-year-old correctional facility and has a first quarter 2020 completion date, and we are pleased with the progress of our team and our constructive partners.

The second ongoing development project is our 1,482-bed Otay Mesa Detention Center, in California, which kicked off in the third quarter. For many years, United States Marshals Service and ICE have managed their operations with limited detention capacity in this region and continue to have excess demand for detention capacity. When we initially built the Otay Mesa facility, which opened in 2015, its 1,482-bed capacity added an incremental 500 beds to Marshals and ICE existing capacity as their previous facility. We designed Otay Mesa so that it could be officially expanded to nearly 3,000 beds in case our government partners experienced growing or changing needs in the region. The current expansion project is slated to add 512 beds to a facility at an estimated cost of approximately $43 million, which is more cost-efficient than adding capacity through a greenfield development. The initial development cost for the Otay facility was approximately $105,000 per bed and our expansion project will allow us to construct the additional 512 beds at a savings of approximately 20% per bed. The project is expected to be completed during the fourth quarter of 2019, so we anticipated incremental revenue and cash flows to benefit our CoreCivic Safety segment beginning in 2020.

Aside from these known development projects, we also have the capacity and capability to complete for near-term opportunities using our inventory of 8 idle correctional and detention facilities representing 9,800 beds, which can be quickly activated to meet government partner needs without significant CapEx investments. We continue to see a significant number of near-term market opportunities and I'll review state-level opportunities before discussing development at the federal level.

CoreCivic Safety continues to pursue the opportunity to again work with the Department of Corrections and Rehabilitation of Puerto Rico, as part of a formal procurement process. Earlier this year, Puerto Rico issued an RFP to move up to 3,200 inmates off the island in order to reduce the annual budget for the Department of Corrections and Rehabilitation. This budget reduction initiative is part of a larger effort by the Governor to address the territory's debt crisis, which is impacting essentially all of the island's government agencies and their operations. The RFP called for initial phase of 1,300 inmates to be housed off the Island. Upon full implementation of the RFP, the Department of Corrections estimates an annual budget savings of approximately $50 million. We have responded to the RFP and believe our response is compelling, not just for cost savings for the Commonwealth, but also to provide a more humane and robust programmatic environment. We believe an award could be announced shortly and, we believe, we are uniquely positioned to meet the Commonwealth urgent need.

With the successful ramp of our 816-bed Lee Adjustment Center and the Commonwealth Kentucky's need for additional capacity to relieve overcrowding, we have the opportunity to market our 2 remaining idle facilities located in that state. The Marion Adjustment Center and Southeast Kentucky Correctional Facility have a combined capacity of approximately 1,500 beds, which Kentucky's need for additional capacity far exceeds. We believe, meaningful discussions on the potential to use these facilities to alleviate overcrowding will restart when the legislature returns to session in January.

In many instances, we are having ongoing discussions with potential government partners that have not led to a formal public procurement process. Currently, we are in active discussions with a number of other states that have correctional capacity needs that could materialize over the next 12 months. We estimate these states could, in aggregate, utilize 1,000 to 2,000 beds and discussions are focused on solutions from our CoreCivic Safety segment.

We also have existing idle correctional facilities in Colorado, Oklahoma and Minnesota, where we continue to pursue opportunities to lead capacity to address the problems of overcrowding and/or aged infrastructure. These 3 properties being considered represent approximately 4,500 idle beds. Should we successfully enter into a lease agreement, the facility would be moved to the CoreCivic Properties portfolio, as we would not be providing correctional operations under the contemplated agreements.

In CoreCivic Properties, we are tracking additional development project opportunities similar to the Lansing, Kansas build-to-suit development, of more than half a dozen other states that are publicly exploring private sector solutions to replace their aging prison infrastructure. The runway for opportunities of this kind looking only at the replacement of out-of-date criminal justice infrastructure is substantial. In total, we estimate that $15 billion to $20 billion of required investments are desperately needed to make these facilities safer for staff and inmates alike, more efficient and to provide the kind of reentry programming space we know can help people better prepare to rejoin their communities.

Private sector solutions in collaboration with government, similar to what we just accomplished in Kansas, are the key to solving these national infrastructure challenges.

Turning to the federal level, CoreCivic Safety's recent contracts wins with United States Marshals Service and ICE at Tallahatchie and La Palma clearly indicate both agencies' increased capacity requirements, which are projected to grow. United States Marshals average daily prisoner populations have grown substantially from 52,000 at the beginning of this year to approximately 58,000 as of September 30. Multiple CoreCivic facilities with Marshal contracts already in place have experienced an increase in Marshal populations and we have the capacity available to accommodate additional growth.

For example, our new 1,350-bed contract with the Marshals at Tallahatchie was nearly fully utilized between the Marshals and ICE by the end of the third quarter. Should the agency have additional capacity needs, we have multiple facilities that could be activated to accommodate this growth if our existing capacity is insufficient.

ICE has also gradually increased its utilization of our detention capacity through the first 3 quarters of 2018, with a 1,000-bed contract at La Palma facility in July. We saw apprehension rates increased meaningful in September resulting in rising capacity needs. Should ICE continue to have increased needs for detention space, we have the ability to provide incremental capacity for facilities already operating under contracts with the agency and can also activate idle facilities across our portfolio.

Finally, we are awaiting an announcement from the Federal Bureau of Prisons on CAR XIX procurement that was issued in 2017 and is intended to provide an additional 9,540 beds from the private sector to alleviate overcrowded conditions in BOP-operated facilities and to increase utilization of the Bureau's most cost-effective beds. We believe an award announcement for this opportunity will come in the first half of federal fiscal year.

As a reminder, today we only have 2 contracts with the BOP for correctional facility capacity representing 5% of our total revenue.

As you can see, we have experienced very positive developments across all 3 business segments through new contract awards, increased utilization and accretive M&A transactions. Coupled with the fact that the utilization of our existing contracts have been mostly stable, these positive developments show that we have the right strategies to grow the business and serve our partners and we have put the company on trajectory of cash flow growth over the next year.

At this time, I'd like to turn the call over to our CFO, Dave Garfinkle, to provide an overview of our third quarter results and updated full year 2018 financial guidance. David?

Thank you, Damon, and good morning, everyone. In the third quarter, we generated normalized FFO of $0.58 per share, compared to our guidance range of $0.57 to $0.59. And AFFO totaled $0.54 per share, compared to our guidance range of $0.55 to $0.57. Adjusted EBITDA of $99.7 million came in at the midpoint of our guidance for the third quarter. Although FFO per share was in line with our guidance, our third quarter results were negatively impacted by higher salary expenses than forecasted due to retention of staff at our Tallahatchie facility in Mississippi and at our La Palma facility in Arizona. We retained higher staffing levels to ensure a smooth transition for 2 proposals, Vermont and Puerto Rico, that could potentially utilize approximately 1,700 beds in the aggregate that became available due to declines in California populations at these facilities or to be ready for opportunities to utilize the available capacity under existing contracts.

While this decision created some inefficiencies and negatively impacted operating margins during the quarter, retention of experienced staff is important to ensuring an expedited, efficient and high-quality transition when we are able to secure new opportunities for existing capacity.

We've successfully secured new contracts in the past when we have retained staff like this to position us for growth prospects. On September 19, we announced we did win the contract award from Vermont to care for up to 350 inmates at our Tallahatchie facility. We were also able to accept U.S. Marshals prisoners quickly at our Tallahatchie Facility following a new contract award in June and ICE detainees quickly at our La Palma facility following a new contract award in July, where we retained staff despite reductions in California populations. We remain optimistic above the additional contract awards from the government of Puerto Rico as well as increasing opportunities to utilize the available capacity due to increasing demand on the Southwest border.

In addition, while the new contract with ICE at La Palma is no doubt beneficial for the long-term financial performance of the facility, it did have a transitory impact on revenue in the third quarter at our Central Arizona Florence Correctional Complex, where we care for both U.S. Marshals prisoners and ICE detainees. The combination of maintaining higher staffing levels and the transitory impact on revenue at our Central Arizona Complex, negatively affected our per share results by approximately $0.03 relative to our prior guidance. When compared with the prior-year quarter, total revenue increased to $462.7 million in the third quarter of 2018, compared with $442.8 million in the prior-year quarter, an increase of 4.5%. This increase, the largest quarterly increase in 10 quarters, was achieved despite reductions in revenue totaling $19.6 million resulting from the expiration in the third quarter of 2017 of 3 low-margin, managed-only contracts in Texas and the reduction in California populations.

FFO per share increased from the prior year quarter by $0.02 and AFFO increased by $0.01. Adjusted EBITDA increased $6.4 million or 6.8% from the prior-year quarter and EBITDA margins improved to 21.5% in Q3 2018 from 21.1% in Q3 2017. Net operating income increased to cross all 3 business segments by $5.4 million or 4.4%, most notably in our CoreCivic Properties segment, which increased $3.7 million or 48%.

Financial results on our CoreCivic Properties segment were favorably impacted by the acquisition on August 23, 2018, of the 541,000 square-foot SSA Baltimore property. Earnings from our CoreCivic Safety segment were positively impacted by higher contract utilization by the U.S. Marshals Service across the portfolio; a new contract with the State of Ohio for up to 996 offenders at our Northeast Ohio Correctional Center, which began during the third quarter of 2017; and new federal populations at our Tallahatchie and La Palma facilities resulting from new contract awards executed in June and July 2018, respectively.

Although still ramping during the third quarter, the new contract of Tallahatchie for up to 1,350 offenders essentially replaced the California inmate populations at this facility that were transferred back to the state during the first half of 2018. Over the past 18 months, we've also executed 6 new state contracts for correctional capacity in our CoreCivic Safety segment, including the aforementioned contract with Ohio and the contract we just signed with Vermont. 5 of these contracts are with new state partners, which, we believe, reflects the value proposition we provide to states with correctional capacity and programming needs. We also maintained an average contract retention rate of 94% at our own facilities over the past 5 3/4 years, which, we believe, reflects the long-term durability of our solutions and the quality of services we provide.

These financial results were partially offset by higher interest expense, primarily resulting from the repayment in October 2017 of variable rate short-term borrowings under our revolving credit facility with net proceeds from the issuance of $250 million, 10-year unsecured notes at a fixed interest rate of 4.75% as well as the $242 million acquisition of SSA Baltimore financed partially with an assumed $157.3 million mortgage note with a 4.5% fixed rate with over 15 years remaining. The remaining balance was funded with our revolving credit facility.

In addition to this acquisition, we completed 5 accretive M&A transactions since the end of the third quarter of 2017 with investments totaling $92.5 million. These acquisitions included 3 residential reentry centers, a company that provides nonresidential correctional alternatives, including electronic monitoring and case management services as reported in our CoreCivic Community portfolio, and 14 government-leased properties operated by third-party tenants under our CoreCivic Properties portfolio.

During the third quarter of 2018, our CoreCivic Community portfolio generated 6.2% of our adjusted EBITDA and our CoreCivic Properties portfolio generated 11.3%. Our CoreCivic Properties portfolio was 99.7% leased during the third quarter with very stable cash flows from fixed monthly rents.

Since the platform acquisition of SSA Baltimore, our brokerage network has grown and our pipeline of government-leased properties has increased. We are evaluating acquisitions with cap rates from 7% to the low double digits with the potential for higher returns depending on individual property characteristics and complexity, like, we achieved with the 12-property portfolio acquisition completed in July and the property we acquired in September leased to the GSA through the National Archives and Records Administration dedicated to the IRS. The cap rates on these acquisitions were 10%, 15%, respectively.

To the extent, we can continue to identify properties like these, we will be able to execute our growth strategy of accretive acquisitions without relying on non-recourse secured debt, and instead, using our corporate balance sheet to finance many of these acquisitions, leaving our balance sheet largely unencumbered and growing our availability of contingent liquidity.

At September 30, we had $94 million of cash on hand and nearly $600 million of availability on our revolving credit facility and no debt maturities until 2020. Our capital expenditure forecast, which is included in the press release, includes $27 million of capital expenditures for the remainder of 2018 for construction of the new Lansing Correctional Facility in Kansas. This project has a total estimated cost of $155 million to $165 million, $31.8 million of which has been incurred through September 30 under a guaranteed maximum price contract with the developer. The project will be 100% financed with the previously disclosed private placement and will be drawn in quarterly installments to align with construction expenditures.

As disclosed in yesterday's press release, our capital expenditure forecast also includes $11 million in capital expenditures for the remainder of 2018 for the 512-bed expansion over 1,422-bed Otay Mesa Detention Center in California.

This facility is currently utilized by both U.S. Marshals and ICE under a contract that expires in June 2023 inclusive of extension options, which we've held since 1998. This facility has had long-standing demand from both federal partners in a strategic location with limited capacity. The expansion is expected to be completed in the fourth quarter of 2019 at a total estimated cost of $43 million, including $5.8 million incurred through September 30, 2018.

Moving next to discussion of our earnings guidance. As indicated in the press release, EPS guidance for the fourth quarter of 2018 is a range of $0.39 to $0.41. Normalized FFO per share guidance for the fourth quarter is $0.61 to $0.63. And FFO per share guidance for the fourth quarter is $0.59 to $0.61. For the full year, adjusted EPS guidance is a range of $1.44 to $1.46. Full year normalized FFO per share guidance is a range of $2.29 to $2.31. And full year AFFO per share guidance is $2.18 to $2.20.

At the midpoint, our fourth quarter guidance reflects increases over Q4 2017 in EBITDA of 9%, normalized FFO per share of 3% and AFFO per share of 13% and setting up an attractive run rate as we head into 2019. Our updated guidance contemplates higher salaries for a tight labor market and includes continued current staffing levels at our Tallahatchie and La Palma facilities that will be needed if we secure further opportunities to utilize available capacity at these facilities, which impacted our prior guidance by about $0.06 per share for the full year 2018.

The negative impact of these assumptions was largely overcome through revenue growth, including the new contract with Vermont, higher populations from the U.S. Marshals and ICE, and from accretive acquisitions, which, we believe, will also generate sustainable growth and higher per share results in 2019.

Our guidance does not include any new contract awards beyond those previously announced, because the timing of government actions on new contracts is always difficult to predict. Our updated guidance includes an additional $0.01 of FFO and AFFO per share for the SSA Baltimore acquisition, which is a $0.01 dilutive for EPS, because of the noncash real estate depreciation and amortization expense impact on earnings, but not FFO or AFFO. Although our California populations were slightly below our forecast for the third quarter, we have recently seen an uptick in such populations on some days and the general pace of declines has slowed. Our guidance, therefore, reflects a range of assumptions for California populations, which averaged approximately 2,200 during the third quarter.

The adjusted EBITDA guidance in our press release enables you to calculate our estimated effective income tax rate of 4.5% to 5.5% for the fourth quarter and provides you with our estimate of total depreciation and interest expense for the fourth quarter and full year 2018. We expect G&A expenses to be approximately 5.5% of total revenue.

Finally, our dividend is currently yielding a very attractive 7.8%. Each quarter, we review our board our dividend and factors potentially affecting the dividend, including the trajectory of our cash flows, our forecasted AFFO payout ratio, leverage levels and opportunities to deploy capital into new investments. We have traditionally announced any dividend increases in February, like, we did this past February when we released our year-end results and projections for the upcoming year.

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

Thank you, Dave. Before we move to Q&A, I want to take a moment to recognize our employees, who are teachers, chaplains, nurses, mothers, veterans and many others. These are really good people doing great work for our government partners and the individuals entrusted in our care. You know, over the last 5 years, here at CoreCivic, we have helped more than 38,000 individuals in our care further their educations by earning GEDs and industry-recognized certifications that prepares them to restart their lives, but also, as studies have shown, they are 40% less likely to come back to prison. So it's not lost on me that to have this type of success of helping people get their lives back on track, it takes a talented and passionate team making reentry a day 1 priority. So to the CoreCivic's team, I am sincerely honored to serve alongside you all and I'm grateful for all of your efforts.

So Ryan, we'll turn it over to you now for Q&A.

(Operator Instructions) It looks like our first question will come from Kevin McClure with Wells Fargo Securities.

I'm out of pocket, so I apologize if I missed a couple of things. But Dave, you said on the -- towards the end of your script that you're looking to finance some of the new office acquisitions on unencumbered basis with the balance sheet capacity. Is that correct?

That is correct, yes. For the most part. I mean, we are finding attractive acquisitions like the 12-property portfolio that we bought in July with a 10% cap rate, the National Archives and Records Administration property with a 15% cap rate. So to the extent, we continue to identify properties like these, I think, the narrow buildings are a little bit of an outsized cap rate, but to the extent we're able to find opportunities like these where the cap rates exceed our cost to capital, we will finance them off of our corporate balance sheet.

Yes, and I'll just add to it, this is Damon, that we have been pleasantly surprised by the opportunities for these type of properties that have these really nice cap rates. We've mentioned the 2 that we've signed here recently, the 10% for the portfolio and the 15% for the property up in Ohio. And Dave and I actually just did this together yesterday when we did our deal review on potential transactions, we've been really, really pleased by the amount of inbound interest we're seeing for these properties that are, kind of, unique, maybe, have some complexity, maybe have some CapEx needs, kind of, on day 1, we can quickly and efficiently go in with our real estate team to take a look at these properties and be a, not only an efficient buyer, but also, kind of, do whatever the needs are, is it renovation or expansion or improvement, very quickly for the tenant. So can't put a complete number to it, but I think we've been pleasantly surprised in kind of this M&A market that we've got these opportunities for some nice returns for these transactions.

Got it. And how many people would you say you're bidding against for some of these properties? Is there some fairly high cap rates for office assets? But I think that's the market...

Yes. That's a great question. And I think that's -- I think that's kind of the opportunities there as there is really not much competition. I think you've got some of these properties where, kind of, these typical owners who may be just looking at just the return, but don't have any kind of expertise to evaluate, not only the real estate, but also the, kind of, deep government relations expertise. We've got both at the federal state and local level, where we can quickly pick up the phone and talk to some of these tenants. We're seeing not a lot of competition. So that allows us, again, to be pretty thoughtful on the pricing to get some of these good returns. Anything to add to that, David?

Yes, I guess, Kevin, I don't mean to set expectations at every asset we're going to buy between 10% and 50% cap rates. As I mentioned in my script, we're evaluating properties with cap rates typically around 7%, maybe to 10%, except the narrow buildings are a little outside that and we don't expect to see many of those, but to the extent we're able to find cap rates between 7% and 10%, a good number of those or perhaps a majority in that rate -- in that cap rate, we would be able to finance off of our corporate balance sheet.

Got it. Okay. And I know it's still early and you haven't released 2019 guidance, but could you maybe give us a preliminary view on how much you're willing to spend on acquisitions in the next year and CapEx?

Yes, I can't -- we're going through the budget process right now. So you're right. It's a little bit premature to talk about 2019 guidance or capital expenditures. We do have an active pipeline, I think, Damon said in his script, we're evaluating a couple of $100 million. Obviously, that we're not going to close on a couple of $100 million. But what's interesting to me is, the pipeline turns over relatively quickly, so we see new deals coming online every week. There's some number of attractive opportunities. So not quite ready to disclose what we'd expect for an acquisition pipeline. We actually haven't done that in the past, but I think, as we go into 2019, that might be something we'd be willing to do. We really haven't matured the M&A pipeline in this market. And I think it's getting there to the point where we may be able to do that and provide some guidance in February.

Got it. Okay. And last one for me, just kind of switching gears and talking about immigration, immigration side of your business. Obviously, today is the Election Day. Do you anticipate any movement from Congress in the lame-duck session to address immigration? And then also, I mean, ICE clearly has a need as a caravan on the way, apprehensions seem to have been elevated, but Congress has traditionally been the bottleneck and reluctant to fund additional detention capacity or a meaningful expansion in detention capacity. Do you expect that to change in the lame-duck over the next Congress?

Yes. This is Damon. Let me give you a couple of observations. I think, one, just to highlight, we are in active conversations with ICE, really going back 35 years year, but here more notably, here last 24 months, it's almost a daily conversation and, kind of, what their needs are, what's in the Southwest border, as I think, you know also, we are always there if they've got a, kind of, natural disaster or hurricane they're preparing for or they need to vacate facility. So we're constantly talking to them about, kind of, emerging needs either on Southwest border or something else unique happened within their system. So I see that continuing even after today's election, I think, that's going to continue going into the lame-duck session. The second part of your question, I think, is a little bit about, kind of, funding and the bottleneck, potentially on funding from the Congress on increased needs. As you know, the current funding bill expires on December 7. It's our view that probably after today, there will probably be some activity from now towards the end of this year, end of this calendar year, I should say, on a funding bill and we think there's probably a pretty good chance that the funding bill is for the full fiscal year. So they complete a funding bill through September 30 next year. And I think, during that, deliberation with the House of Senate and Administration, there is probably a likely discussion about, kind of, immigration needs and what's, kind of, happened at Southwest border and is there increased funding that's needed during this coming year or this current fiscal year. Anything to add to that, David?

That's all right.

Okay. And then final question for me. Has your thoughts around family detention changed? Do you guys have more appetite to expand family detention purpose-built capacity? Or are you content with the South Texas Facility sole location?

Well, let me first say that our South Texas facility that's now been operational about 4 years, we've been really pleased with the operations. And I think, if you talk to ICE leadership and folks within the field office, they have been very pleased also. We think, it's really no other facility like it in the United States that is built day 1 for this mission and it's very safe in humane way to house these families that are coming in across the Southwest border. And with that, that if there is increased needs from ICE for that type of solution, we think, we've got potentially some expansion capacity at that facility to, kind of, meet their needs. Nothing to report on that today. Again, it's an overarching, kind of, conversation with ICE on, kind of, overall needs that they have got, potentially now or forecasted at any point of time, so we're always talking about potential solutions we could do at Dilley, but also at other facilities that we've got within the portfolio. So I'm very pleased with our operation and if there was an increased need from ICE, potentially, at Dilley, we think, we're well-equipped to do that and happy to do that. Anything to add to that, David?

Yes. I mean, you've seen the news articles and presumably you've seen the September numbers on family apprehensions and they're off the charge. So there's certainly a high demand for that facility at this point.

(Operator Instructions) This concludes the Q&A session as there are no more questions at this time. I will turn the conference back over to Damon Hininger.

Thank you, Ryan. I would like to thank, everyone, for joining us on today's call. And we look forward to reporting to you our full year results in February and providing an initial outlook for 2019. Thanks, again.

Ladies and gentlemen, thank you for joining today's conference call. The call has now concluded. Please disconnect your phones, and have a great day.