CoreCivic Inc (CXW) 2022 Q2 法說會逐字稿

Good morning. My name is Samara, 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 CoreCivic's Q2 2022 Earnings Call. (Operator Instructions) I would now like to turn the call over to Cameron Hopewell, CoreCivic's Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thanks, Samara. 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. We are also joined here in the room by our Vice President of Finance, Brian Hammonds.

On today's call, we will discuss our financial results for the second quarter of 2022, developments with our government partners, and provide you with other general business updates. During today's call, our 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 second quarter 2022 earnings release issued after market yesterday, and in our Securities and Exchange Commission's filings, 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.

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 file on our Investors page at corecivic.com. With that, it's my pleasure to turn the call over to our President and CEO, Damon Hininger.

Thank you, Cameron. Good morning, and thank you for joining us today for our second quarter 2022 earnings call. On today's call, I will provide you with details of our second quarter financial performance, discuss with you our latest operational developments, update you on capital allocation strategy, and discuss the latest developments with our government partners, including the pending $130 million sale of our McRae facility to the state of Georgia. I will then turn the call over to our CFO, Dave Garfinkle, who will review our second quarter financial results and full year 2022 guidance in greater detail and we'll update you on our ongoing capital structure initiatives.

Before proceeding with the agenda, I would like to take a moment to address a tragedy that occurred at our Davis Correctional facility in Holdenville, Oklahoma. This past weekend, CoreCivic Correctional Officer, Alan Hershberger, lost his life in the line of duty, succumbing to an injury from an unprovoked attack by an inmate. Officer Hershberger joined CoreCivic in October 2021 after a career in the military. He served in the United States Navy, the Army National Guard and Army Reserves. Originally from Smithville, Missouri, Officer Hershberger started with us at our Leavenworth Detention Center in Kansas. He was very well-liked and respected by all those who knew him and worked alongside him throughout our company. Our hearts are with his family and friends as well as the entire team at Davis, where they are providing support services -- where we are providing support services to assist our people as they cope with this loss.

In the past couple of days, numerous correctional leaders from across the country have personally reached out to me to offer their support and condolences. They understand the gravity of the calling and sacrifice that the dedicated men and women in our profession make each and every day to keep our communities, coworkers and those in our care safe. On behalf of the CoreCivic family, I am grateful for their support and unity at such a difficult time. Alan Hershberger served his community and his nation faithfully. We mourn his loss as we also gratefully acknowledge his service and dedication to public safety. Thank you for the time to speak of the loss of Offer Hershberger. I will now proceed with the rest of the agenda for today's call.

I would like to lead with an update on developments with our government partners. The most significant development in the second quarter was news of the pending sale of our 1,978-bed McRae correctional facility to the State of Georgia for $130 million. The asset sale is notable for a number of reasons. First, the McRae facility currently has a management contract with the Federal Bureau of Prisons that is scheduled to expire on November 30. A contract that for the last few years was clearly not going to be renewed by the BOP.

Second, the asset sale is expected to close in the third quarter, which will provide significant after-tax cash proceeds that will allow us to more quickly execute on our share repurchase authorization and pay down debt. Third, this is once again a market opportunity resulting from correctional systems seeking to modernize their facilities and not a result of prison population growth. This is a really great deal for the State of Georgia as it helps them take a drastic step to modernize their system.

Finally, and most importantly, this asset sale reinforces the significant underlying value of our correctional and detention real estate assets, which is clearly not reflected in the valuation of our publicly traded debt and equity securities. The sale price for McRae is nearly $66,000 per bed, which when used to approximate the value of our nearly 71,000 company-owned correctional beds, indicates a $4.7 billion value that is nearly triple the price the public markets apply to our equity.

Now, while we do not expect the sale of our correctional and detention facilities to government entities to become a growing trend, we view this as an excellent opportunity to recycle capital and create value due to the dislocation of the pricing of our public securities and our assets true market values.

Let me now briefly discuss ongoing developments with our federal partners. Beginning first with our federal customers within the Department of Justice, the BOP and United States Marshals Service. The BOP has experienced significant declines in inmate populations in the last decade, which is a trend that is not expected to reverse. In response to this long-term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners. As mentioned earlier, our last remaining prison contract with the BOP is at our McRae facility in Georgia, again, which expires in November of 2022, representing less than 2% of our total revenue.

Following the expiration of our contract in McRae, we only expect to generate revenue from the BOP through the provision of residential reentry facility contracts. As for the United States Marshals Service, their prisoner populations have remained relatively consistent in recent years. Their need for capacity around the country remains unchanged. The United States Marshals Service continues to be impacted by the executive order signed by President Biden and issued in January 2021 that directed the Attorney General to not renew Department of Justice contracts directly with privately operated criminal detention facilities.

In 2022, we have no direct contracts with the United States Marshals Service that are set for expiration and now have only 2 total remaining direct contracts with United States Marshals Service that are set to expire in later years. We did however recently renew an indirect contract with United States Marshals Service at our 2,672-bed Tallahatchie County Correctional facility. The contract was set to expire on June 30, but the local government authority responsible for the contract exercised a 2-year renewal option on the contract. We continue to work closely with the United States Marshals Service to ensure their capacity needs are being met in order to support their critical public safety mission.

ICE is our third federal partner and is within the Department of Homeland Security. Of any of our government partners, their operations and capacity utilization needs were most significantly impacted by COVID-19. Nationwide, ICE detainee populations remained well below their historic levels since the spring of 2020, and that trend remains unchanged in the second quarter of 2022. As a result, our facility utilization levels continue to remain materially below historical averages. Current utilization levels are also well below the number of beds funded through the annual budget preparation process, although the agency had nonetheless experienced budget challenges because of COVID-related and other unplanned expenditures, which has likely impacted detention levels and actions on new contract awards. As of the end of June of 2022, ICE detained approximately 24,000 individuals nationwide.

We also continue to pursue a formal procurement for a new case management nonresidential alternative detention or ATD program, specifically for young adults that was issued this January. The program is intended to provide case management services for participating low-risk young adults, ages 18 to 19, within a framework that provides compliance with immigration obligations until removal or other resolution of their immigration cases. This program is designed to assist young adults who age out of custody of the Office of Refugee Resettlement, or ORR, the agency that is responsible for caring for unaccompanied minors apprehended along the Southwest border until they reach age 18. We are actively responding to the procurement, and we know these case management services are consistent with the type of case management services we provide in our community segment.

The elevated rates of apprehensions along the Southwest border continue to create challenges, which are expected to increase the government's demand for both residential detention capacity and nonresidential ATDs also. Should new needs arise, we believe we are well positioned to deliver solutions to ICE.

Moving now to the results in the second quarter of 2022, we generated revenue of $456.7 million which was a decline of only 1.7% compared to the prior year quarter despite the nonrenewal of contracts with the United States Marshals Service at our Leavenworth Detention Center and our West Tennessee detention facility in 2021, the nonrenewal of our contract with Marion County, Indiana, at our manage-only Marion County Jail effective January 31, 2022, and the sale of 5 facilities in our property segment during the second quarter of 2021. Collectively, these 8 facilities accounted for $29 million reduction in revenue in the second quarter of 2022 versus the prior year quarter.

In the second quarter of 2022, we generated normalized funds from operations, or FFO, of $40.7 million or $0.34 per share compared to $56 million or $0.46 per share in the second quarter of 2021. Now, the decline was driven by the nonrenewal of the 3 contracts that I just mentioned, the transition of populations at our La Palma Correctional Center pursuant to a new contract with the State of Arizona, the sale of 5 noncore properties, and 2 underutilized residential reentry centers since the second quarter of 2021 and a challenging labor market. Dave will provide more detail regarding the financial impact of these transactions.

In April of this year, we commenced transitioning populations at our La Palma Correctional Center in Arizona from Immigrations and Customs Enforcement, or ICE populations, to Arizona state inmate populations pursuant to a new contract we were awarded by the Arizona Public Corrections Rehabilitation and Reentry late last year. We expect the transfer process to be completed in the first quarter of 2023, which is a quarter later than we previously contemplated as I'll discuss later. Upon achieving normalized utilization based on the contract, we expect to generate approximately $75 million to $85 million in annualized revenue.

However, because of the preparation to receive the Arizona inmates, including a reduction in the average daily population of ICE detainees at the facility, facility net operating income decreased nearly $11 million during the second quarter of 2022 compared with the second quarter of 2021. The La Palma facility currently supports the mission of ICE by caring for approximately 600 detainees and is already now caring for approximately 1,000 inmates from the State of Arizona. As a result, we continue to actively collaborate with both the Arizona Department of Corrections Rehabilitation and Reentry and ICE to ensure we continue to successfully transition the resident populations from ICE detainees to inmates from the State of Arizona.

However, it is important to note that COVID-related occupancy restrictions mandated by ICE are currently still in place and prevent us from retaining the same level of ICE detainees we care for at La Palma at other facilities we own in the region.

I would now like to take some time discussing our updated full year 2022 financial guidance. We are now forecasting full year 2022 normalized FFO per share in the range of $1.25 to $1.32 and adjusted funds from operations, or AFFO, per share in the range of $1.19 to $1.26. The midpoint of these metrics represents reductions of $0.24 per share and $0.23 per share respectively, compared with the full year 2022 financial guidance we issued in May of this year. Our updated guidance no longer reflects an anticipated termination of Title 42, a public health order that has been used since March of 2020 to deny entry at the United States southern border to asylum seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of COVID-19.

On April 1, the Center for Disease Control and Prevention, or CDC, terminated Title 42 and targeted a resumption of pre-pandemic federal immigration policies effective on May 23. On May 20, a federal judge issued a temporary restraining order blocking the termination of Title 42, ruling that the administration violated administrative law when it announced that it planned to cease Title 42. That ruling is now under appeal under decision -- under appeal with a decision unlikely before fourth quarter of this year or first quarter of next year.

The termination of Title 42 was widely expected to result in an increase in the number of undocumented people permitted to the United States to claim asylum, and therefore, we anticipate an increase in the number of people apprehended and attained by ICE, which continues to be our largest government customer. Our financial guidance now reflects Title 42 being left in place through the remainder of the year and ICE utilization remaining well below historical norms.

Our guidance also reflects a larger earnings disruption at our La Palma Correctional Center than previously estimated. Although as I mentioned, we successfully began the complex transition of inmate populations from the State of Arizona into the facility in April this year pursuant to a new management contract. We currently expect detainee populations from ICE to be below our previous estimates. We have also temporarily slowed the pace of new intake of inmates from the State of Arizona in order to bring on additional staff at the facility. Within the last few weeks, we have now hired all of the necessary staff needed to complete the ramp we have forecasted for the remainder of this year. These new employees are either scheduled for or already in our academy to resume our ramp in early September and fully complete the ramp of the second compound.

Our updated guidance also reflects the pending $130 million sale of our 1,978-bed McRae Correctional Facility to the State of Georgia, an agreement reached during the second quarter, and the loss of that facility's existing contract with the Federal Bureau of Prisons. Once the sale is completed, we will lease the facility from the Georgia Building Authority until expiration of the BOP contract on November 30. This rent expense of course, was not previously included in our May guidance. Dave will provide greater details about our second quarter financial results as well as the financial impact of the more significant assumptions included in our updated full year guidance following the remainder of my comments.

Finally, during the second quarter, we had a multiple important milestone to continue to strengthen our balance sheet. First, we entered into a new bank credit facility to extend its maturity by 3 additional years. We opted to significantly reduce the size of our -- reduce the size at $350 million versus the previous $1 billion facility since we no longer require such a large credit facility as a taxable C corporation since we're no longer under the REIT structure. The new facility provides us with the flexibility to quickly repay the outstanding $124 million balance on our Term Loan B. The Term Loan B was not scheduled to mature until December of 2024, but its high variable interest rate and security features made it a high priority for repayment with our significant cash on hand.

During the quarter, we also repurchased an additional 3.6 million of our outstanding senior unsecured notes, which are scheduled to mature in May of 2023 and have a remaining balance of only 170 million. Following the maturity of those notes, our next bond maturity isn't until April of 2026, and we have less than $100 million in variable rate debt. We remain committed to our targeted total leverage ratio or net debt to adjusted EBITDA range of 2.25x to 2.75x. We have made progress in reducing our overall leverage due to the strong cash flows the company generates, and we expect our leverage to continue to decline over time. Understanding that recently our EBITDA has been negatively impacted by the short-term transition of contracts at our La Palma Facility in Arizona, mathematically increasing leverage though debt levels have declined. As this transition nears completion, we expect our leverage to naturally decline.

And in a very clear sign of our view of the business, we are also very pleased to begin executing on our share repurchase authorization during the quarter. Yesterday, our Board of Directors authorized an increase in our share repurchase program of up to an additional 75 million shares -- $75 million in shares of our common stock. As a result of the increased authorization, the aggregate authorization under our share repurchase program increased from the original authorization of up to $150 million in shares of our common stock to $225 million in shares of our common stock. Since May 16, we have repurchased 4.3 million shares of our common stock at an aggregate purchase price of $52.1 million. The additional authorization approved yesterday provides us with our remaining purchase authorization of nearly $173 million.

Our capital allocation strategy has been prudent for positioning the company to generate long-term value through our stable capital structure and continue to cost effectively meet the needs of our government customers with less reliance on outside sources of capital. I'll now turn the call over to Dave to provide a more detailed look of our financial results in the second quarter of 2022, discuss and detail our updated full year guidance, and provide additional financial updates. Dave?

Thank you, Damon, and good morning, everyone. In the second quarter of 2022, we reported net income of $0.09 per share or $0.13 of adjusted earnings per share, $0.34 of normalized FFO per share, and AFFO per share of $0.33. Adjusted and normalized per share amounts exclude a gain on sale of real estate assets of $1.1 million, expenses associated with debt repayments and refinancing transactions of $6.8 million, and shareholder litigation expense of $1.9 million. The shareholder litigation pertains to derivative lawsuits that raised similar allegations to those associated with the shareholder litigation we settled last year, which had been stayed pending resolution of the original shareholder litigation. During the second quarter of 2022, we reached a settlement with the plaintiffs in the derivative lawsuits including attorney fees and expenses.

The decline in adjusted EPS and normalized FFO per share of $0.12 compared with the prior year quarter primarily resulted from an EBITDA decline of $10.8 million or $0.06 per share due to the earnings disruption at our 3,060-bed La Palma Correctional Center, the second largest facility in our portfolio, as we continue to transition from ICE populations to populations from the State of Arizona pursuant to a new management contract that commenced in April for up to 2,706 inmates.

Contract terminations since the end of the second quarter of last year at our West Tennessee, Leavenworth and the manage-only Marion County Jail, contributed to an EBITDA reduction of $4.5 million or $0.03 per share from the prior year quarter. Per share results decreased $0.01 as a result of the sale of 7 properties, 5 of which were noncore properties in our property segment sold during the second quarter of last year and 2 were underutilized community segment facilities sold in the first quarter of this year that generated $4.4 million of EBITDA in the second quarter of 2021 with the remaining per share reduction from the prior year mostly due to higher salaries and inflation.

Occupancy in our safety and community facilities continues to reflect the impact of COVID-19 and decreased to 69.5% in the second quarter of 2022 from 71.6% in the prior year quarter, although this decline from the prior year was attributable to the contract terminations at the West Tennessee facility on September 30, 2021, and our Leavenworth facility on December 31, 2021, and due to the ongoing transition of populations at La Palma. Occupancy declined from 70.6% in the first quarter of 2022, largely due to the transition at La Palma where populations declined by 253 residents compared with the first quarter, driven by faster declines in ICE detainees.

Our overall ICE detainee populations remain well below historical levels as the Southwest border has effectively remained close to asylum seekers and adults attempting to cross the southern border without proper documentation or authority in an effort to contain the spread of COVID-19 under a policy known as Title 42. On April 1, 2022, the CDC issued a public health determination terminating Title 42 with an effective date of May 23, 2022. However, on April 25, a federal judge issued a temporary restraining order blocking the termination of Title 42, which the judge affirmed on May 20. That ruling is under appeal by the administration.

Whenever Title 42 is terminated, such action may result in an increase in the number of undocumented people permitted to enter the United States claiming asylum and could result in an increase in the number of people apprehended and detained by ICE. With depressed occupancy levels, we are in a position to significantly grow earnings whenever the impact of COVID-19 restrictions subsides.

Operating margins were 22.2% in the second quarter of 2022 compared with 26.8% in the prior year quarter and 22.5% in the first quarter of 2022. The decrease in our operating margin primarily reflects incremental expenses resulting from increases in wage rates, including registry nursing due to a shortage of nursing staff across the country. The increases in wage rates were necessary to help address depressed staffing levels we experienced in 2021, which have not yet recovered. Our government partners are experiencing the same staffing challenges, which has contributed to some of the per diem increases we have been able to achieve as governments acknowledge the need to fund additional staffing costs.

Operating margins were also impacted by the transition of inmate populations at our La Palma Correctional Center, which negatively impacted margins by 2% compared with the prior year quarter. Longer term, we expect operating margin percentages to trend toward those we experienced pre-pandemic of approximately 25%.

Turning to the balance sheet, during May 2022, we entered into a new $350 million bank credit facility, consisting of a $100 million Term Loan A and a revolving credit facility with a borrowing capacity of $250 million expiring in May 2026. In connection with obtaining this new bank credit facility, we paid down our previous Term Loan A by $67.5 million. Shortly after closing on the new bank credit facility, we fully repaid the outstanding balance of $124.1 million on our Term Loan B. We repaid these balances with cash on hand.

Combined with our cash balance as of June 30 of $115.6 million, we have $348.8 million of liquidity, including the capacity on our revolving credit facility, which remains undrawn. With the extension in the maturity of our bank credit facility to 2026 and the repayment of our Term Loan B, the only maturity before 2026 is the $170.1 million outstanding balance of 4.625% unsecured notes, which we expect to repay with cash on hand in early 2023. The new Term Loan A, comprising 7% of our total outstanding debt, is now our only variable rate debt outstanding. With these debt repayments, we have significantly reduced our exposure to rising interest rates, and we have no need to access the capital markets in the near term.

Having achieved these significant milestones and having repaid $530 million of net debt since the beginning of 2021 through the first quarter of 2022, reducing leverage to 2.7x from 4x when we announced our conversion from a REIT to a taxable C corporation, in May 2022, our Board of Directors approved a $150 million share repurchase plan. Since May 16, we have repurchased 4.3 million shares of stock at a cost of $52.1 million. Yesterday, our board increased the authorization by $75 million to a total of $225 million. Although the stock repurchases contributed to an increase in leverage to 3.1x using the trailing 12 months through June 30, 2022, we remain focused on managing to our leverage target of 2.25x to 2.75x.

Last month, we entered into a purchase and sale agreement to sell our 1,978-bed McRae Correctional Facility to the Georgia Building Authority for $130 million, which we expect to be completed later in the third quarter. We have a management contract with the Bureau of Prisons at this facility expiring November 30, 2022, which we do not expect to be renewed. We also sold 2 additional properties in a parcel of land last month that generated net sales proceeds of approximately $15.6 million. Applying the after-tax net proceeds from these sales, our pro forma leverage as of June 30, 2022 was 2.7x.

Moving lastly to a discussion of our 2022 financial guidance, for the full year 2022, we expect to generate adjusted EPS of $0.44 to $0.50, normalized FFO per share of $1.25 to $1.32, and AFFO per share of $1.19 to $1.26. Our per share results were consistent with our internal forecast for the second quarter. However, our guidance for the second half of the year no longer reflects the termination of Title 42 and reflects the larger earnings disruption at our La Palma facility, the sale of our McRae facility, and the continuation of a challenging labor market.

Although the CDC terminated Title 42 on April 1, 2022 with an effective date of May 23, 2022, on May 20, a federal judge ruled that the administration violated administrative law when it announced that it planned to halt its termination. Our previous guidance anticipated higher occupancy levels from ICE from the potential termination of Title 42, which is no longer contemplated in our current guidance, resulting in a reduction to our previous guidance of approximately $0.10 per share.

The larger earnings disruption at La Palma is due to a combination of ICE transitioning out of the facility faster, higher labor and incentive costs necessary to attract and retain staff at the facility, and an extension of the intake schedule to the first quarter of 2023 from the fourth quarter of 2022, mutually agreed with Arizona during the second quarter. We are also making significant investments in our hiring processes to help ensure we have sufficient staff to meet the new schedule. The larger earnings disruption at La Palma results in a reduction to our previous guidance of approximately $0.10 per share.

Our 2022 forecast reflects a decrease in EBITDA at La Palma of approximately $25 million from pre-pandemic levels and an even larger decrease from 2021. The facility transition is expected to be complete in the first quarter of 2023, at which time we remain confident facility EBITDA will return to pre-pandemic levels, providing meaningful growth to our 2023 financial results compared with 2022.

Finally, upon completion of the sale of our McRae Correctional Facility, which was not contemplated in our previous forecast, we will incur rent expense through the expiration date of our contract with the BOP on November 30, 2022, resulting in a reduction to our previous guidance of $0.02 per share. These 3 items, 2 of which we expect to be temporary, account for a reduction in our previous guidance of approximately $0.22 per share.

The EBITDA guidance in our press release enables you to calculate our annual effective income tax rate of 27% to 29% and provides you with our estimate of total depreciation and interest expense. We expect 2022 G&A expenses to be slightly lower than 2021. During 2022, we expect to incur $63.5 million to $66 million of maintenance capital expenditures, in line with 2021 and unchanged from our previous guidance. We also expect to incur $16 million to $18 million for facility renovations, including $4 million to $5 million at La Palma for the new Arizona contract. With depressed occupancy levels and the transition of La Palma expected to stabilize in early 2023, we are in a position to significantly grow earnings without the need to construct new capacity or deploy new capital.

I will now turn the call back to the operator, Samara, to open up the lines for questions.

(Operator Instructions) And we'll take our first question from Joe Gomes with NOBLE Capital.

Good morning. Our condolences and thanks for taking my questions. I just wanted to talk a little bit, pardon me, about ICE populations. They had been creeping up modestly in the first quarter and I think in the fourth quarter last year also. If we kind of take out what's happening at La Palma, are you seeing any type of increase in ICE populations at other facilities? Is it staying flat? Is it decreasing? If you could just give us a little more insight onto the ICE populations.

Absolutely. Yes, Joe, this is Damon, and thank you again for your comments earlier. So yes, putting aside La Palma, I'd say it's been relatively stable. I mean we always have some ups and downs with ICE populations just because of their mission and the kind of huge numbers that we see kind of fluctuate from intakes from day-to-day. But I guess a little bit of your question also kind of looking at the rest of the year, I mean obviously, you heard what we said about kind of policy and potential impacts that it would have on populations.

We have assumed that none of that is going to change for the rest of the year, but we also do know that I guess a little more globally too with ICE populations, I mean they have, as has been publicly reported, they do have a reprogramming request for about $360 million for the rest of this fiscal year that they're trying to get approved through Congress. And then obviously, we'll watch closely what happens next fiscal year, which will begin on October 1. My guess would be is that they probably start the fiscal year with a continued resolution which has been pretty similar kind of action that you've seen in previous years. But anything you'd add to that, Dave?

Yes. Just excluding La Palma, and I guess the South Texas facility, they were down a couple of hundred from last year's second quarter and basically flat with the first quarter. They've been pretty consistent, excluding the transition at La Palma.

On the U.S. Marshals Service, I'm sure you guys have seen the GEO renewal of their direct facility. You've got a couple of directs, I think they come up one next year and one after that. Are you in any discussions with the Marshals Service in terms of maybe being able to use that as precedence for the facility that comes due, I believe, next year?

Yes, great question. And we did note GEO's extension there at the Western Region facility in San Diego, so we did follow that closely. For a couple of reasons, one of which is not only the contract, but also, we've got another facility within the region that supports ICE as you know. But yes, we've talk to ICE -- or excuse me, Marshals Service, on a regular basis. In fact, I was up meeting with them at their headquarters here I guess in the last 2, 3 weeks, and always talking about not only kind of just general operational issues, but also, as we're thinking about these contracts coming up for renewal. As you noted, one in next year in 2023 and then also we've got the last one that would be potentially impacted would be 2025, so obviously a few years out.

I know they're watching closely not only what their needs are operationally, but I know they're working kind of in sync by contract working with the various stakeholders of what the needs are and what the alternatives are with those regions or not. And as I think you know, Joe, I mean, we have a facility in Florence that houses on any given day about 3,000 to 3,500 federal prisoners for the District of Arizona. We think it's very compelling location-wise, operationally, physical plant. It's in close proximity to the Federal Courts here in Tucson and Phoenix. We'll continue to monitor and obviously communicate closely with the Marshals Service, but my sense is that this is probably the next one in line that they'll probably put their focus in on and think about alternatives that are not there, or could not be there, I should say, because of the size of that quantity, but also how they think about continuing to use the beds within our facility. But anything you'd add to that, Dave?

Just highlight maybe the obvious, that it's more than twice the size of the Western Region Facility that GEO has, so it's a great facility, and it would be very difficult to replicate the capacity that we have there to continue to serve their needs.

On new business opportunities, you talked about the young adult program previously. In other calls, you've talked about a couple of other states that you were looking at. Anything new on the new business opportunities?

We've got -- let's talk about state first. We've got conversations going on with a couple of states. I'd say we've probably got one new state in the fold that I wouldn't be able to publicly disclose that's gotten in the mix because of not only some budget issues, but also some staffing issues within their state, that puts a pressure on facilities that they think they need to either ramp down relative to quantity or occupancy or potentially close altogether. So yes, we've got probably 2 or 3 states that are still in the mix for increased utilization. And again, I think 2 of them would be potentially new states that we are not currently doing business with. On the federal side, like I said, I think the story on ICE is also we'll watch closely what happens in the new fiscal year, not only with some of these policies that the administration is trying to pull back on, but also what their funding level is next year.

As you know, that customer is unique versus all of our other customers because their quantity they use in detention capacity is driven in big part not only by policy, but also in dollars appropriated for detention capacity. So again, we'll be watching that in the coming days and weeks as we get closer to the new fiscal year. I'd say right now with the Marshals Service, they have been relatively stable. Putting aside Leavenworth and West Tennessee in our portfolio relative to utilization, we have seen a little bit of increase in a couple of our facilities. And they've expressed to us they probably are going to be stable, maybe modestly grow here in the next probably 24 months. I don't know, anything you'd add to that, Dave?

I'd just emphasize that our occupancy is at 70%, so growth with existing customers, including with ICE for example, through the reversal of Title 42 and the continued ramp-up of Arizona will obviously create a natural growth in '23 as those things kind of resolve themselves.

One other I'd just say on ICE is that, and we talk to them on a regular basis, not only just kind of general operational issues, but also, it's pretty clear to us that they continue. And I think I mentioned this back in May, but they continue to look at not only the former procurement with the case manager service for young adults, but also capacity that we've got within our system, either in existing facilities that are in operation or maybe vacant facilities. We continue to provide them information and additional detail as appropriate as they think about -- as they kind of game plan what potentially their needs are going to be mission-wise as they go to new fiscal year.

And on the McRae, obviously that's a really nice sale for you guys. You do have some other facilities that are idled. Do you talk with any other states about some of those facilities that are idled, about possibly helping them meet their needs for upgrading older facilities that they currently use?

Yes. Great question. I guess let me -- before I answer that, let me just give you just a view right now as we think about the balance sheet and also kind of our capital structure. I mean we feel like we've really gotten the company in a great, great spot. As you know, Joe, look at our leverage, it's down to the lowest level I think we've had in about a dozen years. Brand-new credit facility, it's got a great group of banks to support that. We've got obviously the maturities that we did last year. That's a long way to say that we feel like we've really positioned the company in a very stable place for the foreseeable future. And that's always been kind of our style. As I think about kind of our capital needs, as we think about our maintenance CapEx, as we think about growth CapEx, but also having the capital for buyback program we did in May. I mean we're really, really good, I mean better than anyone else in the industry relative to where we sit at the moment.

With that, there's no pressure on us to sell a facility that we don't think is matched or on par with its market value. We have expressed over the years on certain facilities where we don't think we've got any kind of near-term business opportunities, express jurisdictions I should say, that potentially these facilities would be attractive to them. We'll keep talking to them about those opportunities. I didn't mention this in my comments, but obviously the transaction with McRae indicates obviously the value of our underlying real estate, but it's also a great market comp. If we did have a jurisdiction with an interest in another state that we've got in the portfolio, having a real-life market comp obviously is helpful in that discussion too. Anything you'd add to that, Dave?

Yes, I agree that the balance sheet is in great shape and don't need to sell any assets. The opportunity with the Georgia Building Authority was a unique one that was a win-win for them because they needed additional capacity to replace outdated infrastructure. It was great for us, a great sale. We'll generate net proceeds on an asset that was going to be idle at the end of November. It was unique, and as Damon mentioned in his script, I don't think there's going to be a trend of additional prison facilities nor are we seeking to sell additional prison facilities. We do have, I would add that we do have some smaller assets. We sold 3 as I mentioned in my script, 2 smaller facilities and an undeveloped parcel of land for about $15 million, $16 million in net proceeds. We'll continue to prune the portfolio and look at assets like that, perhaps idle residential reentry facilities that could have multiple uses.

Where we're not seeing prospects of a customer, just be better off monetizing those assets, taking proceeds and buying back stock as we continue to believe our stock is undervalued. But I don't see really the size of sales of the McRae facility or other prison assets. Not to say -- never say never, but we don't need to. It would be nice if we could sell an idle one to do what we're doing with McRae because buying back stock with those proceeds makes a lot of sense. But I think it's probably going to be more on the smaller sized assets, pruning that community portfolio where we don't see long-term opportunities.

One more for me, if I may. You mentioned the buyback a couple of times and great job here so far in what you're doing. The buyback, are you restricted at all in the current environment since you just reported earnings? Or is that something that is able to continue unabated even here and there's no blackout period, I guess?

That's correct. I mean we do have quarterly blackout periods for earnings, and you can enter into 10b5 trading plans, planned sales basically, that enable you to trade through a blackout period if you are not in possession of material nonpublic information at the time you enter into those 10b5 trading plans, which we did here this last quarter. We will likely do that again for the next quarter, but our trading window will be opening once earnings are disseminated properly, and so we'd be able to trade without a 10b5 plan in the short term. No other restrictions. We do have restricted payment baskets in the debt that we issued last year, but we're nowhere near those restricted levels. So really, no -- the only inhibitor would be our leverage profile, which we've said 2.25x, 2.75x is the target, so that's really going to be the governor going forward.

And with the short-term disruption in earnings, as we see the ability to get clarity around the 2023 budget, once we finish that and get that clarity, I'd expect that we'd be able to pull that leverage back down to the target level. But you could see it tick up above the 2.75x here like it did in the second quarter. In the second quarter it was really because we had visibility on the net proceeds of McRae coming in. And as I mentioned in my script, pro forma for those sale proceeds were back down to 2.7x. We'll look at it like that. As we have visibility to get back within the leverage target, we'll take advantage of opportunities in the marketplace.

And we'll take our next question from Jay McCanless with Wedbush.

In terms of the share repurchases, what type of cadence do you have in mind? Are you -- I know you talked a second ago about the 10b5-1 plans, is it you are going to have a pretty steady buyback cadence? And also, as part of that question, what do you expect the share count to be by the end of the year?

Yes, good question. I'd say our goal is to consistently repurchase shares. We're a long-term buyer of shares at these prices. And as we've discussed for the past couple of years, intend to return capital to shareholders once we accomplished our leverage targets, which we have done. I wouldn't want to put a number out there yet for 2023 until we get our budget finalized, which we've kind of kicked that process off and we get some clarity down the road on Title 42 and things like that. I'd hate to put a number out there, but I think the buybacks that we've completed to date are somewhat representative of what you'd expect going forward.

We'll take our next question from Kirk Ludtke with Imperial Capital.

My condolences as well. And thank you for the detailed presentation, very helpful. Sounds like -- with respect to the buybacks, it sounds like you plan to continue to buy shares above the target range. Is there a leverage ratio above which you would not buy shares?

Well, yes, let me tag team with Dave on this. As you know, we said our range is 2.25x to 2.75x, so that would be kind of a range that we're always looking at to keep us picking off or buying back shares. We will take into account, as Dave alluded to earlier, I mean, we will take into account we are obviously seeing a disruption of earnings from La Palma with the new Arizona contract. We will take that into account. If we have a quarter where we're a little above, but we know that Arizona will kind of normalize once that facility is at kind of full ramp, we'll take that into account. Anything you'd add to that, Dave?

That's exactly right. And that's what I was trying to say, you probably said it better than I did.

It sounds like you've ramped staffing really company-wide. Where does your staffing stand relative to where it would need to be if Title 42 was lifted?

Good question, and keep me honest here, Dave. I mean I'm thinking about facilities primarily on the Southwest Border that have ICE contracts, we stand actually pretty well at those facilities. I'm just thinking from kind of San Diego down to Laredo, Texas. I think we're overall pretty good. I think there's 1 or 2 facilities where we still have this taking on full blast to recruit employees into the enterprise. But I think we're relatively good. I mean, we do have a transition. We talked about La Palma going from ICE to Arizona, we do think that will have an impact on facilities in Arizona like Eloy and also our Florence facility to have ICE contracts. And so there will be some transition of staff will come to those locations. That helps us a little bit from a staffing perspective. But I'd say relatively speaking, we're probably in pretty good shape. Anything to add to that, Dave?

Yes. We have a lot of -- right now, we have a lot of people augmenting staff, kind of traveling, and some expenses come with that. We try to minimize that to the extent possible. But that does enable us, it's a good thing a large company like ourselves with many correctional facilities, it enables us to redeploy staff where we might have too many staff at one facility to help out at a staff that's short. But I'd say generally speaking, as we go through the rest of the year, any staff that we bring on I think would come with additional populations. And therefore, I wouldn't expect a meaningful deterioration.

There could be some, but I wouldn't expect a meaningful deterioration in margins or EBITDA levels for additional staff because we would be bringing them on in conjunction with bringing in additional inmate populations. I think part of the second quarter, we were doing that, and I think we're -- we'd be staffed at adequate inmate populations we have today. But any additional staff would I'd expect come with additional residents.

That's a good point.

And then with respect to the ICE population at La Palma, it sounds as though the occupancy limitations have prevented a lot of those detainees from being moved to your ICE facilities nearby?

Yes, that's correct. I'm sorry?

But eventually, those occupancy limitations go away and that part of the idea there is still intact. It's just it's delayed as well? I mean, could you elaborate maybe on how many -- how that might work and how many detainees you might be able to claw back?

Yes, that's a great question. Again, keep me honest here, Dave, but think about -- and the way ICE is doing this, they're doing it kind of by location, not necessarily kind of globally as a policy, but they're looking at kind of COVID activity and rates of infection by certain locations and then that informs their thinking of what type of occupancy cap they want within the facility that we've got in that location. I'd say generally, I mean, we have some facilities that are little higher than others, but I'd say generally those caps have been kind of at 75% of total capacity. Yes, you're exactly right. We do expect, just like the rest of the world, that COVID will continue to subside and some of these protections that were put in place will continue to kind of be pulled back a little bit, and then we'll see occupancy improve throughout the ICE portfolio. But anything to add to that?

No. No, that covers it.

There were 900 ICE detainees at La Palma at one point?

At one point were 1,800 before we started the transition.

Yes, 1,800 and today we're about 600.

Maybe that 900 was first quarter. 1,800, how many of those could be -- without, absent occupancy limitations at the nearby facilities, how many of those 1,800 ICE detainees might end up at another CoreCivic facility?

If the limitations were put in place?

Correct.

Probably an additional 500.

Pretty much the remaining population.

Yes, maybe a little higher, maybe 700, but I'd say 500 to 700.

And then lastly, on the ICE funding, it's funded -- ICE is funded for 34,000 detainees currently. You said the population, I think, was 24,000, and we're coming up into a budget process. Has Congress ever not funded ICE?

Oh, gosh. I've been with the company 30 years, and I'd say no. I don't remember ever not getting funded. Again, the funding levels have gone up and down over the years. But yes, I've never seen a situation where they haven't funded ICE for detention capacity. And I guess one thing -- it's not your question, but I do want to kind of elaborate on the point I made earlier, even though they're funded at 34,000, ICE was required to spend a lot of money in kind of nonrelated detention capacity expenses this fiscal year, and that was all COVID related. We do think that the nationwide number of 24,000, 25,000, the reason that's lower than the actual funded amount is just because they had to kind of take money from that account that's used for detention capacity and spend it for other COVID-related expenditures. Anything you'd add to that, Dave?

Going back to the earlier question, I have been tracking the funding levels, detention bit funding levels for ICE since 2007. Back then it was 27,500 and it's gone up. And it was around 34,000 throughout the Obama administration, which has been even higher during the Trump administration, has come back down. As far as funding for ICE goes, it used to be INS, but it's been funded since however long that agency has existed.

And we'll take our next question from M. Marin with Zacks.

Thank you. I'd like to follow up on one of the questions you received earlier on staffing. With wage inflation impacting you and impacting so many others across the board in lots of sectors, do you think longer term there might be an opportunity to reduce the ratio of staff to occupancy? Either through, I don't know, enhanced training of staff or other measures?

Yes, a good question. I guess the way I'd answer it is that there are some things that, over time, have improved staffing. Technology is an example. But I'd say the biggest impact is the way we design facilities. Looking at it from this perspective, operational cost-wise, about 2/3 of the operational costs if you look at P&L per facility, is salary and benefits. We take a lot of time on the frontend when we design a facility. In some cases, we even remodel or maybe reconfigure facilities to make it most staff efficient, where there's clean lines of site, it's a very safe, very open, a lot of natural lighting, but also helps us on the staffing levels. And so that's been kind of goal #1 when we design new facilities that we own and operate.

But also, it's been a big catalyst for the solutions we've done on the property side because we can say, in the case of Kansas a couple of years ago, I mean, we saved them almost $18 million annually in operating costs for salary and benefits just because we designed a much more efficient facility from a staffing perspective. But anything you'd add to that, Dave?

I can think of 2 facilities that we renovated this year that would redesign the facility to add additional populations without a commensurate increase in staffing. So that's how you really get the efficiencies. But as I think you know M, most of our contracts have required staffing patterns and so those aren't decisions that we'd make in a vacuum. That's always a collaborative discussion we have with our government partners.

One other question, which is from an ESG perspective, where are you right now regarding some of the training and other programs that you generally offer in the facilities? Have things returned to a more normalized pre-COVID levels?

Yes. Great question. And I would say yes, pretty darn close. I mean we have resumed in-person training I guess for several, several months for all the required training that we either do preservice or in service at our facilities. But also, our national I'd say programs, like CoreCivic University, those have resumed to be back in-person. And then in fact, we actually had our leadership conference in Tampa last week for all of our facility leaders where there was a lot of training within those sessions. So yes, I'd say we're virtually, no pun intended, we were kind of back in-person kind of regular sessions and training, both at the national level and also at the local level. Anything to add to that, Dave?

No. In the early parts of the pandemic, we kind of had to shut those things down. Our training department really got creative and started doing our training, CoreCivic University, virtually. But as Damon mentioned, now we're back to in-person sessions.

And I will say, I don't know if this is part of your question, too, you note that with an ESG connection, but I'd say we're pretty darn close to staying also on in-facility programming. Education, vocation, whatnot. I think we're pretty much back to normal on that front. Again, we used some technology on the frontend with tablets and other curriculums that we could deliver through those platforms, but I'd say we're pretty much back to normal now on that front, too.

And we'll take our next question from Ben Briggs with StoneX Financial.

I wanted to touch on the McRae correctional facility sale. The $66,000 a bed that you got for that facility comes to a roughly, if you extrapolate that out, it comes to a roughly $4.7 billion valuation for the real estate. Can you talk a little bit about that? And while there's obviously going to be some variability in valuation from facility to facility, do you think this $66,000 a bed metric is about right generally speaking? And is that at the high or low end of newbuild replacement values?

Yes, great question. A couple of answers there, and again, I'll tag team with Dave on this a little bit, but we think that's a great deal for Georgia. I mean if they went out to build a brand-new facility today based on this construction environment and also cost materials, I would venture a guess that that's probably going to be $100,000 per bed, maybe even a little higher. It's a great transaction for Georgia. But if you look at from our side, I mean this is a facility that we've had for 20 years. We built a brand new around 2001, 2002, so it's a 20-year-old asset. But it's decades younger than probably the average age of Georgia's current inventory that they publicly operate. Again, great, great solution where they get a new, more modern facility at a great rate. I think to answer your question, $66,000 per bed, we think that's a very fair deal for both us and the state of Georgia. But I think looking at kind of replacement value and the cost of real estate, that probably, I don't know, at the high end, I'd say maybe kind of mid. What would you say?

Yes. Certainly, if they were to construct a new facility themselves, it's going to be way north of that. Again, it's a 20-year-old asset, so that accounts for some of the difference. But I think still it's probably $150,000 a bed minimum. But I would add, there's nothing unusual about that facility, as Damon mentioned, 20 years old. It's about the same age as the average age in our portfolio. We think it's very representative of the correctional assets that we own across the country, providing a good proxy for that $4.7 billion of real estate. And if you back out our net debt, as Damon described in his remarks, you end up with a stock price of around $29, $30 a share, if you just extrapolate that price per bed.

And one thing I would add, too, it is politically really, really, really hard for a jurisdiction, especially a state jurisdiction to build a new facility, probably for obvious reasons. We, again, thinking that we've got newer, more modern facilities that we either could sell, again, not looking to do this transaction quite frequently as I mentioned earlier, or lease like we've done through a lot of different states here in the last couple of years. Or potentially properties like Kansas. Again, we think not only these opportunities to sell but also lease just really shows how difficult it is for a jurisdiction to do it themselves, just shows again how valuable our real estate is.

I appreciate that. That's great color, especially on that potential $100,000 replacement value or new build value. And then the second question for me, basically on the same subject is, your press release says $130 million. It sounds to me like that was gross proceeds. Can you just give any color on the net proceeds, net of transaction costs and the like?

Yes, there's no broker, so it'll be very -- the net proceeds will be very close to that except for taxes, so apply a tax rate that we will have to pay taxes on the gain. The net proceeds will probably be $105 million, $110 million after we satisfy taxes on the capital gain.

That concludes today's question-and-answer session, and it also concludes today's call. Thank you for your participation, and you may now disconnect.