CoreCivic Inc (CXW) 2022 Q4 法說會逐字稿

Good morning. My name is Latif, 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 Fourth Quarter 2022 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question-and-answer session. (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, operator. 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 Fourth 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 Fourth 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 on the Investors page of our website 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, everyone, and thank you for joining us today for our Fourth Quarter 2022 Earnings Call.

On today's call, I will provide you with details on our Fourth Quarter financial performance and our newly issued 2023 full year financial guidance. I will also discuss with you our latest operational developments, update you on our capital allocation strategy and discuss the latest developments with our government partners, including the completion of the transition of contracts at our La Palma facility from a federal mission to a new contract with the State of Arizona.

Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will review our Fourth Quarter 2022 Financial Results and our newly issued full year 2023 guidance in greater detail. He will also provide a more detailed update on our ongoing capital structure initiatives. Before I get started, I would like to take a moment and highlight a significant milestone for the company.

On June 28, we celebrated CoreCivic's 40th anniversary. It brings me deep pride to know that I got to celebrate this milestone alongside a team of some of the most dedicated people in the field of corrections and reentry services.

Over the years, we have expanded both in the number of government contracts and our capabilities through our partnerships with federal, state and local governments. As a result, our workforce has significantly grown and the scope of services we provide has meaningfully expanded. Most excitingly, our reentry services have evolved to reflect a more robust rehabilitated approach to programming to further support the individuals in our care as they prepare to return home to their communities.

While 40 years of continuous 24/7 operations as an achievement we're celebrating, is important to call attention to the original reason the company was founded. Back in 1983, the court teamed at prison in more than 40 states were in crisis due to overcrowded conditions, challenging infrastructure and the correctional services provided therein. The conditions in many cases were deemed of course, to be unconstitutional. Two of the company's founders, Ton Hot and Tom Beasley saw the need for the private sector to bring solutions to the pressing issues facing these correctional systems.

From day 1, the company's purpose has been rooted in service to our nation's criminal justice system. Mr. Hato was also to go on to help establish the standards of correctional care still upheld by the Maker Correctional Association and its members today. The American Correctional Association is the leading organization at champions that cause of corrections and correctional effectiveness and has been in existence as 1870.

These standards were rooted in CoreCivic's operational approach since day one. During 2022, 15 of the facilities we manage were newly accredited or reaccredited by the ACA with an average score of 99.5%, making our portfolio average 99.5%.

Our partnerships with local, state and federal governments have helped to dramatically improve conditions for all our cash rate individuals, which is clearly something that we should also celebrate. The correction profession is not an easy field of work. It takes commitment, focus and a dedication to helping people even in what can be very difficult circumstances.

Through our 4 decades of dedicated service, CoreCivic has continued to be relied upon again and again as a solution to the needs of our government partners and the individuals in our care. We have earned a reputation as a trusted partner because the entire CoreCivic team shows up every day to help improve the lives of incarcerated individuals and keep our community safe.

I am deeply proud of the dedication of our team over the last 40 years, and I'm truly humbled for the opportunity to work alongside them. I'll now provide an overview of our fourth quarter financial results and our 2023 financial guidance.

In the fourth quarter, we generated revenue of $471.4 million, which was a decline of only 0.1% compared to the prior year quarter despite the nonrenewal of a contract with the United States Marcel Service at 11 to 10 center in 2021 and a nonrenewal of a contract with Marion County, Indiana at the Manage Marion County Jail effective January 31, 2022.

Collectively, these 2 facilities accounted for a $13.1 million or 2.7% reduction in revenue in the fourth quarter of this year versus the prior year quarter. In the fourth quarter of this past year, we generated normalized funds from operation, or FFO, of $49.1 million or $0.42 per share compared to $57.8 million or $0.48 per share in the fourth quarter of 2021.

Now the decline was driven by our nonrenewal of the 2 contracts that I just mentioned, the transition of populations at our La Palma Correctional Center pursuant to a new contract with the Arizona, the expiration of our contract with the Federal Bureau Prisons or BOP at our previously owned McRae print Center in November of 2022 and a challenging labor market.

Dave will provide more detail regarding the financial impact of these items. But I would add that while we have spent considerable amounts of incentives to recruit and retain valuable frontline staff, these investments are positioning us to take advantage of increased demand from our government partners that we believe will occur once occupancy restrictions imposed by our government partners during COVID pandemic are fully relaxed.

We are also poised to enter into new contracts and accept additional residential populations from our government partners that are unable to manage their existing population levels because of staffing challenges in their own facilities. We believe these needs could manifest into new contracts in the near term.

While our year-over-year financial results declined, we did experience a sequential improvement in financial results. There were 3 primary drivers of our improved results in the fourth quarter. Before the end of the year, we completed the transition of contracts at our La Palma Correctional Center.

As a reminder, in April of this past year, we commenced transitioning populations at our La Palma facility in Arizona from -- ICE populations to Arizona state populations pursuant to a new contract we were awarded by the Arizona Public Corrections Rehabilitation and Reentry late in 2021.

While we didn't achieve normalized utilization until the final days of the past year, our average utilization of the facility in the fourth quarter was 66% compared to only 50% during the third quarter of 2022. Though the La Palma facility currently supports the mission of the State of Arizona by caring for approximately 2,500 inmates.

We also experienced an increase in average facility utilization by our goal partners, particularly from Immigration and Customs Enforcement, or ICE. Our third quarter earnings call in early November of last year, we mentioned that ICE populations in our facilities increased 26% in the month of October.

We attributed that increase to the start of the federal government's fiscal year, which meant that AUC had more budget certainty with new appropriations to start the year and pandemic-related occupancy restrictions were gradually being lifted. While the increase in utilization was noteworthy and had a modestly positive impact on the fourth quarter, utilization levels were still below the pre-pandemic levels and occurred despite a reduction in utilization in the final days of December as I prepared for the termination of Title 42, which obviously did not occur, which I'll discuss in greater detail shortly.

The third driver of our improved fourth quarter performance was a continuation of modest improvement in the employment market, a trend we began to detect in the middle of 2022. That trend has allowed us to reduce reliance on registry nursing and various forms of incentive compensation.

These costs still remain elevated from their pre pandemic levels, but with salaries and benefits representing approximately 2/3 of the operating expenses, even modest improvements in the employment market can result in meaningful cost savings.

As for our newly issued 2020 financial guidance, we are forecasting full year FFO per share in the range of $1.35 to $1.50 and adjusted funds from operations or AFFO per share in the range of $1.29 to $1.45. And -- our guidance is reflective of our completed transition at our La Palma facility, although the cost structure has yet to normalize as we work to fully staff the facility through local employees and the expectation of utilization by our federal partners to remain below pre-pandemic levels due to the continued application of Title 42.

Our guidance also reflects continued efforts to increase staff to position ourselves for increasing occupancy. Dave will provide greater details about our fourth quarter financial results as well as the financial impact of the more significant assumptions included in our full year 2023 financial guidance following the remainder of my comments.

Since I both topic of Title 42, I began our discussion of developments with our government partners with immigration custom to force fit. ICE is our largest federal partner and is within the Department of Homeland Security. Of any of our government partners, their operations and capacity utilization needs were and continued to be the most significantly impacted by COVID-19.

Notably, I implemented Oxy restrictions at ICE facilities nationwide to improve the ability for repopulations to social distance. These occupy restrictions remained in place during the fourth quarter of this past year.

In the spring of 2020, the Trump administration enacted to of fortitude to close the nation's porters and port of entry to exile-seeking individuals. Title 4Q has remained in place since that time and has also had a significant impact or reduces ISIS demand for detention capacity.

As I mentioned earlier, utilization by our federal partners, particularly ICE, across multiple facilities were up nearly 26% in the month of October alone. Nationwide, ICE was changing more than 30,000 individuals by mid-November of 2022, a notable increase while still being meaningfully below their pre-pandemic levels as well as the number of beds for which they are funded.

We believe the increased utilization was a result of slowly beginning to relax their pre pandemic oxy restrictions. This increase also coincided with the federal government's fiscal year beginning on October 1, 2022. In November, a federal court case overturned the continued use of Title 42 and a date of December 21, 2022, was said at the date that IL-42 would be terminated.

In anticipation of a significant increase in the need of contingent capacity, ICE began releasing individuals from custody to free up additional capacity. By late December, I have released over 10,000 individuals from custody. Shortly before December 21, there was a successful challenge to the federal court ruling, which is now awaited to be heard by the Supreme Court in March.

Title 42 is now expected to remain in place until the court proceedings are finalized, which likely would not occur until later this year. Also in December, Congress passed an auto and spending bill that funded 34,000 detention beds for the fiscal year ending September 30, 2023.

ICE is yet to increase its detention utilization closer to a fund level, and we expect their utilization to remain well below pre-pandemic levels, at least until the legal challenges to the Title 42 are completed. As mentioned previously, we continue to increase staffing levels in order to be well positioned to accept additional residential populations as pandemic-related oxy restrictions are removed and the legal proceedings reach a conclusion. We also continue to pursue opportunities to provide ICE with nonresidential alternatives to detention or ATD programs. We remain engaged with ICE as we believe that we can provide unique solutions to provide additional ATD programs.

We also know we can provide case financial services similar to the type of case management services we already 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 and detention capacity and nonresidential ATDs -- should these arise, we believe we are well positioned to deliver solutions to ICE.

Now for an update of our other 2 federal partners, which are within Department of Justice, which is the Federal Bureau of Prisons, or BOP and the United States Marshals Service. The BOP has experienced significant declines in their populations in the last decade. In response to this long-term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners.

Last August, we completed the sale of our 1,978-bed McRae correctional facility to the State of Georgia for $130 million. Our last remaining for the contract with the BOP was McRae facility and represented less than 2% of our total revenue.

We leased them a great facility from the State of Georgia from the sales day through November of 2022, so we could fulfill our contractual obligations to the BOP through the expiration of the contract. Following the expiration of the contract at McRae at the end of November of 2022, we all expect to generate revenue for the BOP through the provision of residential facility contracts.

The sale of our McRae facility was a great opportunity to sell an asset at a value for exceeding the valuation of our publicly traded debt and equity securities and accelerate our capital allocation strategy of reducing debt and executing on our share repurchase authorization. While we do not expect the sale of our correctional or detect facilities to government entities to become a growing trend, -- we view this as an excellent opportunity to finalize our diversification away from prison contracts with the BOP, recycle capital and create value due to the dislocation of the pricing of our public securities and our assets true market values.

The McRae facility was converted to a facility owned and operated by the State of Georgia upon the termination of our lease with the state of Georgia in November of 2022. As for the U.S. Marshals, their prison populations have remained very consistent in recent years. So their need for capacity around the country remains unchanged and significant due to their reliance on contracted detention capacity.

The Marshals were impacted by the executive order side by President Biden and issued in January 2021 that directed to Attorney General to not renew Department of adjusted contracts directly with privately operated criminal detention facilities.

In 2022, we had no direct contracts with the Marshals that were set for exploration. And now we have only 2 remaining direct contracts with the Marshalls. One of those contracts is that our 4,128-bed Center, Arizona Florence Correctional Complex in Arizona and has a contract expiration in September of 2023.

Both facilities provide significant path into the marshal that we believe would be very challenging to replace, but we likely will not have resolution on potential contract extensions until we are closer to the existing contract expiration dates. We continue to work closely with the Marshals to ensure the capacity needs are being met in order to support their critical public safety mission.

At the city level, we continue to hear the employment market as the most substantial and ongoing challenge correctional systems are facing. We have certainly faced the same challenges, but we are able to meaningfully increase staffing across the company during 2022, and these efforts look extend into 2023.

There are multiple states that are dealing with such significant staffing challenges that they have had to reduce facility capacity and shutter housing units as a result. We are in conversations with a number of states to help address their challenges in the near to long term, and we look forward to providing you updates as these discussions evolve.

I will close out my comments by highlighting the great accomplishments we had in 2022 that continues to strengthen our balance sheet. On the capital structure side, we began the year with entering into a new bank credit facility. This process involves bringing together several new banks that are supportive of our company's mission. It allowed us to extend the maturity of the facility to May of 2026, and we reduced our exposure to variable rate debt to just under $100 million.

Throughout 2022, we reduced our total debt by $287 million. And just last week, we repaid the remaining $154 million on our 4.625% senior unsecured notes, which were scheduled to mature in May of 2023. Since announcing our updated capital allocation strategy in the summer of 2020, we have cut our overall debt and half or by over $1 billion. We now have no debt maturities until April of 2026, which will provide us with a great deal of flexibility in how we deploy our free cash flow.

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 meaningful progress in reducing our overall leverage due to the strong cash flow 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 swap term transition of contracts at our La Palma in Arizona and ongoing pandemic-related oxy restrictions with our federal partners, mathematically increase the leverage, though debt levels have declined. As these headwinds near completion, we expect our leverage to naturally decline.

We continue to execute our stock repurchase program of $225 million stock repurchase authorization authorized by the Board of Directors last year. During 2022, we repurchased 6.6 million shares of our common stock at an aggregate purchase price of $74.5 million or approximately 5% of our total shares outstanding.

In January of this year, we repurchased an additional $10 million of our common stock, so we have $140.5 million remaining on our share repurchase authorization. This would allow us to repurchase an additional 12% of our housing shares based on the recent trading price of our equity. Our capital allocation strategy has enabled us to remain flexible and in future quarters is expected to include a combination of share repurchases and debt repayments taking into consideration factors such as the price of our securities, liquidity, progress towards caving our targeted leverage ratio and potential returns on other opportunities to deploy capital.

We continue to believe our capital allocation strategy has been prudent for the positioning of the company to generate long-term value through a 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 at our financial results in the fourth quarter, discuss in detail our full year 2023 financial guidance and provide additional financial updates. Dave?

Thank you, Damon, and good morning, everyone.

In the fourth quarter of 2022, we reported net income of $0.21 per share or $0.22 of adjusted earnings per share, normalized FFO per share of $0.42 and AFFO per share of $0.38. The adjusted and normalized per share results were $0.09 above average analyst estimates, primarily due to lower operating expenses, stemming from moderated staffing incentives and a federal credit as further described later. Adjusted and normalized per share amounts exclude a gain on sale of real estate assets, asset impairments and expenses associated with debt repayments as detailed in the reconciliations to non-GAAP metrics included in the press release.

The decline in normalized FFO per share of $0.06 per share compared with the prior year quarter included an EBITDA decline of $9.1 million or $0.06 per share due to the earnings disruption in our 3,060-bed La Palma Correctional Center, the second largest facility in our portfolio as we continue the transition to populations from the State of Arizona pursuit to the new management contract that commenced in April for up to 2,706 in MACE.

We previously had a contract with ICE at this facility. And during the prior year quarter through the beginning of this year, we carried for an average daily population of over 1,800 ICE detainees at the La Palma facility, which were fully transitioned out by the end of September. The intake process for Arizona residents was substantially complete by the end of December, and we currently care for approximately 2,500 inmates from Arizona at this facility.

Although occupancy at the La Palma facility during the fourth quarter of 2022 surpassed the occupancy level in the fourth quarter of 2021, we incurred substantial transition expenses in the fourth quarter, which we will -- which we expect will normalize around the middle of 2023.

Fourth quarter results were also impacted by the expiration on November 30 of the final prison contract that we had with the Federal Bureau of Prisons at our McRae correctional facility, which contributed to a decline of $0.02 per share from the fourth quarter of 2021.

These declines were partially offset by employee retention credits we are entitled to under the CARES Act for retaining employees who could not perform their job duties at 100% capacity as a result of COVID-19 restrictions during 2020 and a portion of 2021 -- these credits were reflected in the fourth quarter of 2022 as a reduction to operating expenses and amounted to $0.02 per share net of related expenses resulting from the credits.

We produced notable improvement in sequential financial performance compared with the third quarter of 2022, our adjusted EPS increased $0.14 from $0.08 per share in Q3 to $0.22 per share in Q4 and normalized FFO per share increased $0.13 from $0.29 per share in Q3 to $0.42 per share in Q4. These per share increases were attributable to a reduction in expenses associated with a very tight labor market as we were able to reduce temporary staffing incentives and registry nursing expenses we incurred during the third quarter.

Although these expenses were still higher than the fourth quarter of 2021, we are pleased with the sequential decline. As the labor market continues to improve, which will take some additional time, we expect to further reduce reliance on these expenses. The fourth quarter comparison to the third quarter includes the same $0.02 benefit from the aforementioned employee retention credits, stronger federal populations at several facilities and lower interest expense.

Likewise, margins at our safety and community facilities increased from 19.2% in the third quarter of 2022 from 24.1% during the fourth quarter of 2022. Excluding the benefit of the employee retention credits, our operating margin was 22.6% in the fourth quarter of 2022, a notable improvement from the third quarter, primarily resulting from the favorable trend in operating expenses.

Longer term, we expect operating margin percentages to trend towards those we experienced pre pandemic of approximately 25% as higher per diem rates, we have been successful in obtaining from many of our government partners are expected to translate into increasing margins as they are applied to increasing occupancy levels and as expenses continue to normalize.

Despite the improvement in sequential financial performance, our financial results continue to be impacted by occupancy restrictions implemented during the COVID-19 pandemic that largely remained in place during the fourth quarter for most federal facilities. Occupancy in our safety and community facilities was 71.1% in the fourth quarter of 2022 compared with 72.5% in the prior year quarter.

The slight decline from the prior year was attributable to the expiration of a contract with the U.S. Marshals Service and our 1,033 bed Levin worth Detention Center on December 31, 2021. Our overall ICE detainee populations remain well below historical levels as the Southwest border has effectively remained closed to many 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 November 19, 2022, a federal judge ruled that the process by which the federal government began expulsions under Title 42 with a violation of the Administrative Procedures Act, requiring the federal government to process all of asylum seekers under applicable law in effect prior to the implementation of Title 42. Therefore, Title 42 is set to terminate here the end of the year.

However, on December 27, 2022, the Supreme Court granted a temporary stay on the cessation of Title 42 while it considers an appeal by a group of states to continue Title 42. Oral arguments are scheduled for next month. 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 as asylum and could result in an increase in the number of people apprehended and detained by ICE. With depressed occupancy levels, we will be positioned to significantly grow earnings whenever the impact of COVID-19 and Title 42 restrictions subside.

Turning next to the balance sheet. As of December 31, we had $149 million of cash on hand and an additional $233 million of borrowing capacity on our revolving credit facility, providing us with total liquidity of $382 million.

During 2022, we reduced our debt balance by $287.4 million or by $137.2 million, net of the change in cash. During the fourth quarter of 2022, we purchased $12.8 million of our 4 5/8% senior notes in open market purchases, reducing the outstanding balance of these notes to $153.8 million. These notes were scheduled to mature on May 1, 2023.

In keeping with our debt reduction strategy, we repaid in full the outstanding principal balance of these notes on February 1, 2023, using cash on hand and a $35 million draw under our revolving credit facility. During the fourth quarter, we also purchased $27.4 million of our 8.25% senior notes in open market purchases, reducing the outstanding balance of these notes to $614.1 million -- we now have no maturities until the 8.25% senior notes mature in 2026.

Leverage measured by net debt to EBITDA was 3.2x using the trailing 12 months ended December 31, 2022. In order to help ensure we progress toward our leverage target, we made no share repurchases during the fourth quarter. However, we will continue to be opportunistic in repurchasing shares without materially increasing leverage and have repurchased $10 million of shares so far in 2023.

Since our Board authorized the repurchase program in May, we have repurchased over 6% of our outstanding shares or a total of 7.5 million shares at a cost of $84.5 million and have remaining authorization for over $140 million more of our shares.

Going forward, we expect to continue to use our liquidity as well as cash flow from operations to repurchase the combination of our stock and bonds, taking into consideration a number of factors, including the amount authorized under our repurchase plan, liquidity, share price, progress toward achieving our targeted leverage of 2.25x to 2.75x and potential returns on other opportunities to deploy capital.

Moving lastly to a discussion of our 2023 financial guidance. For the full year 2023, we expect to generate adjusted EPS of $0.50 to $0.65 normalized FFO per share of $1.35 to $1.50 and AFFO per share of $1.29 to $1.45.

Our guidance contemplates the continuation of a tight, albeit improving labor market with less reliance on temporary incentives, but offset by higher staffing levels. Because of the lead time necessary to hire and train staff and because we anticipate an eventual end of occupancy restrictions, including Title 42, we continue efforts to hire staff in order to prepare for increases in occupancy, resulting in sequentially improving performance throughout the year.

Although we expect to be prepared for an increase in occupancy, our guidance does not contemplate a surge of ICE detainees in the second half of the year but a more measured increase. Our guidance reflects an increase in EBITDA at our La Palma Correctional Center and Eloy Detention Center by a total of nearly $18 million as a result of the transition of populations during 2022 from ICE to Arizona at the La Palma facility and our expected higher average occupancy by ICE at the nearby Eloy facility in 2023.

Although we are in discussions with a number of states for new opportunities, our guidance does not include any new contract awards because the timing of government actions on new contracts is always difficult to predict, which would be upside to our guidance if we are successful. Our guidance reflects the previously mentioned expiration on November 30 of the Federal Bureau of Prisons contract at the McRae facility, which generated $6.4 million of EBITDA in 2022. Our guidance also contemplates retention of the lease with California at our California City facility through March 2024, the date indicated in a previously disclosed termination notice we received in December 2022.

There are a few things to remember when cross walking the fourth quarter of 2022 to the first quarter of 2023. Compared to the fourth quarter, Q1 is seasonally weaker because of 2 fewer days in the quarter and because we incur approximately 75% of our unemployment taxes during the first quarter, resulting in a collective $0.03 per share decline from Q4 to Q1. The benefit of the employee retention credits in Q4 results in an additional $0.02 decline to Q1.

As Damon discussed, in the final days of December, ICE reduced its utilization to create capacity in anticipation of the termination of Title 42. The decline extended through January and although those populations have been steadily recovering, is expected to contribute to a reduction of approximately $0.02 to $0.03 per share when compared with Q4.

We expect our normalized effective tax rate to be 26% to 28% and the 2023 full year EBITDA guidance in our press release provides you with our estimate of total depreciation and interest expense. We expect G&A expenses in 2023 to be comparable to 2022.

During 2023, we expect to incur $61 million to $63 million of maintenance capital expenditures, roughly in line with 2022 and $3 million to $4 million of other capital investments, which is substantially lower than 2022 when we were completing several renovation projects.

We remain focused on managing to our leverage target and will scope stock repurchase levels to EBITDA performance. However, to reiterate, we will remain flexible and will continue to be opportunistic in repurchasing shares without materially increasing leverage.

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

Thank you. (Operator Instructions). Our first question comes from the line of Joe Gomes of Noble Capital Markets.

Thank you... Good morning, Damon and David, congrats on the quarter.

So I wanted to start maybe diving a little bit more into the so-called guaranteed minimum contracts with ICE. I know you had mentioned previously, you've been in discussions with them on some of the facilities that you have that do not have those types of contracts. Just maybe give an idea of the progress on those. Is there a kind of a time frame in your mind if you don't receive, let's call it, relief, what do you do with those facilities. And I don't know if you can kind of give us ballpark figure. If you were to receive some relief, what could that mean on the financial end...

Yes. Thank you for that question. We really didn't talk about it in our script, but I guess I will say here in the near term and keep me honest or a day for the last probably 90 to 120 days. We've had some pretty meaningful discussions with ICE about how they see the world after Title 42 and obviously the need from a population perspective. So you know that part of the story, but also we have a couple of facilities that to your point, maybe doesn't have a fixed monthly payment or other provisions in the contract. And additionally, they've been pretty receptive on these conversations. So we've had some pretty good renegotiation of contracts, either with that provision changed or tweaked or maybe some improvement on the pricing or maybe a combination of both.

So I don't necessarily want to parse it out and go kind of facility by facility. But I will say that we've been pretty encouraged by the conversation and again, we think that behavior is pretty indicative of as they look out in the next 6 to 12 months and the likely pulling back of Title 42 that they're going to need us needles beds and need that capacity.

But anything you'd add to that, Dave?

Yes. I'd add a couple of things. Our guidance does reflect some of those negotiations coming to fruition. But I'd also say, as we mentioned previously, our ICE populations, in particular, are much lower than historically historic levels. And so we have a lot of conversations with ICE about individual facilities when those occupancy levels are so low, about their mission, what do they want to do? Do they want to consolidate populations into fewer facilities? And so far, they have been reluctant to do that. They want to maintain that capacity, which I think is an indication of future need.

So based on that, they're a good partner. We try to work with them and just expect that they'll eventually have those needs or we'll continue those conversations about consolidations in the fewer facilities.

One other thing I'd add, Joe... We've been saying this for a couple of quarters that we've been leaning forward on staffing facilities in anticipation for increased occupancy and then also the -- again, going back of Title 42. And so we've estimated that if we were kind of staffing to what Oxy was today versus kind of lean forward, we probably would be pretty close from a guidance perspective to what -- the Street estimates are for 2023.

So I think that's pretty notable. Again, that gives us -- hopefully, it gives us a little indication again from the kind of feedback that we're getting for Icon kind of what their needs are, today's point about the conversation of consolidating within facilities or within a facility because they know various units. -- We're keeping those facilities open and again, leading for a little bit on a staffing perspective. So again, we know that obviously that impacts a little bit guidance this year and then come close to what the analyst estimates are.

But again, if we would kind of calibrate staffing appropriately with current population, then we actually probably be pretty darn close to the guidance or to analyst estimates.

Thanks for that insight. Much appreciate it. On the ICE occupancy restrictions. How much flexibility have you seen lately? And would those at the latest be part of the administration's May 11, all COVID health restrictions are to be removed. Would that be part of those occupancy restricts will be part of that?

We think that's the case. Again, in this environment, I can never make any definitive statements because, again, there's a lot of moving parts here with the pandemic emergency being terminated on May 11 and all the ongoing kind of court activity with Title 42. So we think that's the case. But let me -- I guess, maybe back up just a tab because I know it's been a little confusing for all of us on Title 42, the court case and then also the proclamation that the pandemic emergency will be terminal on the 11. So let me give maybe a little more color on that, again, in this environment can never make any definitive statements, but let me go ahead and take a shot at it.

So as you just noted, administration plans to allow the pandemic emergency to expire on May 11. So again, that's been while they reported in the press. The administration has suggested that there would also be this that would also be the end of Title 42 border restrictions. It's correct that the Title 42 order says on its face that it will end when the pandemic emergency ends.

Whether that happens automatically or with another termination order from CDC isn't clear at the moment. But the administration is also in federal court litigation about its prior efforts in terminate Title 42, and it's in litigation in the Supreme Court about Title 42 as well. No way to know, obviously, but I'd be afraid to roll out efforts by the court or various border states to keep Title 42 restrictions in place longer.

So I think you know, Joe, that I mean, the spring quarter will hear arguments on March 1, but probably won't issue a decision until probably June or July. So again, plenty of uncertainty. But our goal, as I said earlier, our goal is to be ready, whether Title 42 goes away in May or in June or July or possibly some of the later days. And again, based on the conversations we've had with ICE and some activity, we've had some contracts with amendments on pricing and fixed monthly payment, again, as peers that they are continuing to kind of march forward on getting themselves prepared for the likely outcome of Title 42 being rescinded.

Okay. Switching gears, the California facility where you've got the lease termination notice, which I think is in 2024, although currently, it's only funded, I think, through what the first half of this year. It sounds reading your press release of all the improvements that you made, the aging of other California facilities that you might have some hope that, that decision is reversed. I mean could you comment on that? And then also, you mentioned that facility generates about $34 million in revenue annually. What kind of EBITDA does that facility produce?

Well, a tag team with Dave on this one, Joe, this is Damon again. Let me first to say when we got the communication from the state late in 22, they indicated, again, they want to give plenty of runway for not just us and the facility but also for the operations with CDCR and also the community. And I've had some actually direct conversations with leadership within the state where that was reaffirmed here in the last 30 days.

So that gives us comfort and confidence in that facility, even though we're not in the next fiscal year, as you noted, is July 1 is coming around that will be in place through the rest of this year through March of next year. So I can't say this initially, but based on communications I've had direct-to-state officials, we feel like that's the likely case. So on a parallel path, we're working, obviously, with the state, but also assessing kind of the long-term kind of opportunities and needs that could be fulfilled with that facility.

So nothing to disclose today but those conversations are ongoing on several different fronts, and it's not just with what they do say so I'll just kind of leave it there. Second part of your question, I'll let Dave tackle that one.

Yes. So on our supplemental disclosure report, we do disclose the margins of each of our segments, and Cal City is -- you could fill just the amount of revenue, it's a significant component of the property segment. So its margin is very comparable to the margins that we disclosed in the Property segment, which is around 70%, 75%.

Okay. Great. Thanks. Let me step aside and let someone else ask a couple of questions.

Thank you, Joe.

Yes, sir.

Thank you. Our next question comes from the line of M. Marin of Zacks.

Thank you. So I have a couple of questions. Just to dig a little deeper on what you were just saying during your prepared remarks and again, as this recent questions on Title 42, as you noted, we've expected Title 42 to be terminated in the past. There has been litigation that have that has impacted that the time line there. So how should we view Title 42 in 2023. If mail really is going to see the end of a lot of these COVID regulations. Is this really do you think... From what you are here?

Well, this is Damon. A lot of really smart legal mines that are on cable talk shows every night are trying to answer this question. So I don't know if I've got anything more interesting than they've been able to provide other than what I just said. Again, a very definitive action by the administration on terminating the pandemic emergency on May 11.

So that's again, very, very definitive at least on that piece. And I know the administration is trying to maybe argument that that then should obviously impact Title 42 since they're linked. Type of linked to the pandemic emergency. But it's hard to say us hard to say, with these kind of court actions at the lore courts and the one that's also proceeded through the Supreme Court, how that impacts timing.

So what I just shared earlier is our best estimate, but also to provide additional clarity on that front. I don't know any to add to that, David.

Yes. In terms of timing, as Damon answered the timing question in terms of the actual impact. I think if you go back to the end of December, it could be an indication when ICE took down detention capacity by about 30% in the last couple of weeks of December, that was nationwide, our populations correlated with that reduction. So while that obviously didn't happen at the end of the year. I think it does give us a playbook for what could happen when the termination of Title 42 is imminent, which I would think it would be imminent -- whether it's May, whether it's June, July or some other date, that's really a lot of crystal ball difficult to predict.

But I will tell you, as I mentioned in my prepared remarks, our guidance does not anticipate a surge that could happen, but more of a measured increase in the second half of the year. So we wouldn't expect anything to happen early in the year. Certainly nothing before May 11.

So I think that would be the earliest date something could happen. But given how many lawsuits have arisen around the timing that would just be very difficult for us to kind of pinpoint...

The point is a really important one because our guidance is conservative from the perspective that Dave just noted relative to increasing occupancy. So we've looked at what the portfolio is today. And as always, we will assess by customer by customer and build that into guidance. But we're not anticipating leases from a guidance perspective, again, a huge surge. But on the other side, we are being served on the staff front, as I said earlier.

So if we were not staffing up, as I said earlier, like we are today in anticipation for increased needs, again, our guidance would probably be pretty close to consensus. So that at least gives you a little sense of how to look at the rest of the year that we've got the expenses built in, not necessarily the increase in occupancy.

So obviously, we'll get more on that as we get closer to the spring and summer months.

Okay. And for sure. I think we all understand that nobody on those, but you do have a sense that maybe this time this time in the real time. So then I have one other question, and it's about a model which you had introduced in one of your facilities about a year, 1.5 years ago, the Northeast in Ohio correctional facility where you were operating that under 2 different contracts, I think, one with the state and one with a County.

As you continue to have discussions with different entities now and near-term discussions. Are there any other facilities where you might think that it would be beneficial to introduce that same kind of dual contract model?

Yes. Great question. And the short answer is absolutely. I mean, we are always looking at if we've got a facility that's either underutilized or so is vacant, where the prospects either with existing or new partners where we could either act to the facility or higher or increased occupancy. So absolutely. So -- and I think we've shown over the last couple of decades that not only can we manage the complexity when you have multiple customers, but also especially if they're different levels.

So we've got facilities that have a federal contract, as you noted, with North Beach Ohio and also as a state partner. So -- and very different missions, one's a very short-term population. The other one is a longer-term population that has unique medical and mental health and program needs. So -- so answer is absolutely. We're always looking at those opportunities.

Okay. Thank you very much.

Our next question comes from the line of Jay McCanless of Wedbush.

If we think about the facilities that might not be affected by Title 42, what type of trends in occupancy are you embedding in the guidance for fiscal '23?

Yes. Great question. And I'll tag team with Dave on this a little bit. But so outside the immigrate customs enforcement, the only other sort of partner is Marshals Service, and we, I think, feel like we're pretty stable through the course of the year. We may see some increases from various contracts around the country, but nothing too notable to draw attention to. So really then the other opportunities on the state side. And actually, we're seeing pretty robust engagement from state partners, either existing state partners. -- or news day partners.

As you know, with the election this past November, there's a fair amount of new governors in office around the country, and I've been encouraged to see that criminal justice reform and also improving the conditions of people within their retinal systems, not only just from a housing perspective and a residential perspective, also from a program perspective, it's a high priority for them as they come into office. And so we've had a few states already reached out to us that would be new states for us, answering questions relative to how we can maybe meet their needs short term and long term.

Another thing I'll just say is that kind of a growing kind of growing trend has been very troubling but also a solution that we think we're uniquely positioned to provide for and that is the deal with addiction, especially with (inaudible) and the fetal crisis, I was encouraged by the President or early this week in the State of Union talking about this being a big issue and a big priority for his misstate going forward, and I'm hearing the same thing from governors around the country.

So we're looking actually this year to do a program in prison and also do a program that's community-based that would help with addiction and these are called MAP programs or medically assisted treatment programs. And so that could be an interesting solution to help these individuals that are dealing with addiction, both in prison and community based. And again, what we're hearing from governor, especially new governors that just gone sore in, this is something of a real interest of them as they deal with the challenges of addiction not only just in Croman system, but also in the general community, but I don't anything to add to that, David.

Yes. Just with respect to the guidance, which we don't have any of that in our guidance. So if we were to implement some MAP programs, which we are looking at a couple of pilot programs, there could be some start-up expenses, and I'm not talking nickels, pennies, if that, in start-up expenses to activate a program like that and the revenue for that would probably be back-end loaded in the year.

Likewise, as I mentioned in my prepared remarks, we're not contemplating any new state contracts in our guidance, though we continue to have the conversations that Damon just described. So that could be upside to the guidance is we're able to get one or more of those contracts across the finish line. But generally speaking, I would say the Marshals populations are relatively stable in our guidance throughout the rest of the year and state populations have been fairly stable, even toward the tail end of the pandemic here second half of 2022. So we're forecasting those to be pretty stable in the '23 guidance as well.

Okay. Great. And then -- so my second question, I think you may have addressed this earlier, but there has been some uptick in per diem rates. But how should we think about additional increases for '23 at both the state and federal level?

Yes, good question. As I alluded to earlier, the question around making capacity at facilities where we've got ICE contracts. Again, we've had some pretty good engagement with our partner on that front, again, with maybe changes to the fixed multi-payment but also the premium rate. So that I think is potentially -- and we've -- as David alluded to earlier, we've built some of that into the guidance for this year. The state side, as you know, is always a flurry of activity in the spring.

So most, if not all, states are back in session. We're actively engaging with all the proper stakeholders in states where we currently operate and looking at not only the needs that we've got from a staffing perspective and get some salary increases but also maybe premium adjustments. So too early to tell, but I will tell you we are encouraged by the amount of engagement and support that we're feeling from our state partners. We had a record year last year on podium increases with our state partners. So I feel like -- I don't know if I could say this year is going to be the same, but it does feel very encouraging. The only thing I'd just say, just generally, a lot of economic information out there relative to recession in the labor markets and how it's infecting employers in various industries, we are somewhat encouraged that state budgets may not be impacted dramatically like they were a decade ago with the -- great recession. So state budgets, if they get dramatically impacted and that potentially put some pressure on pricing. At the moment, we're not feeling that or seeing that again with the states, I think, relatively speaking, I know it's not exactly the same case in every state in the country.

But I'd say, relatively speaking, I think mostly feel pretty good about their economic environment, their revenues and have built up some pretty nice rainy name funds in the last couple of years.

Okay. Great. And that actually dump hills into my last question. How should we think about net operating margins trending through 2023, given the strength that you guys put up in the fiscal fourth quarter '22?

Yes, this is Dave. I'd say we did have the employee retention credits in the fourth quarter that inflated the fourth quarter margins a bit. I gave the margins, excluding those credits would be 22.6%. That's probably the number to compare going forward from Q4 '22, I'd say fairly stable as it's a leveraged model though. As occupancy goes up, margins go up, we are optimistic we'll get back to our pre pandemic margins of around 25%. Don't expect that to be in '23, though, because we don't forecast our occupancies to get into pre pandemic levels in '23.

But I would say, stable right around the number in Q4, certainly during the first 2 quarters of 2023 with a possibility of them increasing higher in Q3 and Q4 as we would expect occupancy levels to sequentially increase.

Okay. That's great. Thank you.

Thank you. Our next question comes from the line of Ben Briggs of StoneX Financial.

You answered most of mine on the scripted portion or in the previous Q&A, but I do have a couple left. So as it relates to the La Palma facility, I know that's still kind of ramping and costs haven't really normalized there. When do you guys anticipate that facility being fully staffed and having its cost structure reach a normalized level?

Yes. This is Damon. Again, I'll tag team with Dave on this. To your question about staffing, probably normalize this year, first, maybe second quarter, I mean keep on here, Dave, probably midyear. Again, we've been encouraged by the labor market globally kind of turn into our favor here in the last 6 to 8 months, and Arizona is no exception to that. But I guess maybe to the second part of your question.

Yes. Well, and I'd say the ramp we're in really good shape. So it's substantially completed as of now. So I think as we mentioned in our prepared remarks, we have about 2,500 people there today. The staffing has really been supplemented with staff from other parts of our systems. So that's really what's driving the incremental expenses at the La Palma facility. We've got travel expenses. We've got shift premiums for people to work away from their home facilities and work in Arizona, registry nursing continues to be a challenge in Arizona.

So those are the types of expenses that we continue to incur and don't expect those to really go away until the middle part of the year. But as far as the ramp goes, we're in really good shape. And staffing we're in good shape. It's just we're incurring outsized expenses because we don't have the permanent local staff there.

Okay. Got it. Got it. And then the next one was I just want to make sure I've got my math right here. So I know you guys paid down and you discussed in the scripted portion, you paid down the 4 5/8% notes due in 2023. We have about $154 million of those outstanding when you paid them down. And you said that you did that using cash and revolver off. So that was a $35 million revolver draw and $119 million of cost. Do I have that right?

That'd be correct, yes.

Okay. Great. Just wanted to make sure that I was getting the math there, right? That's for me.

Yes, you got it.

Great. Yes... That's going to be for me. Congratulations on the quarter, and...

Our next question come from the line of Kirk Luke of Imperial Capital.

Congratulations on the quarter. I just have a couple of follow-ups here. The -- I think the fourth quarter, if you annualize adjusted EBITDA, you get to mid-$300 million, it's like $350 million of EBITDA. So the guidance is below what the annual number would apply. What are the -- and almost everything we've talked about directionally year-over-year is a tailwind, right? The La Palma population, pricing. What are the -- other than McRae, what are the headwinds in the guidance?

Yes. This is Damon. I appreciate that question. I guess the only thing I would say, and I'll take the team again with Dave, but just talk about staffing. So again, as we kind of continue to ramping up staffing in anticipation of increased needs throughout the portfolio, not with ICE that is going to be significant as I try to provide a little bit of clarity on that. If we were not ramping up staffing both late last year and going into this year, I mean, I think we would easily be within range of the consensus for this year without that increased labor cost. But anything you'd add to that, David?

Yes. I mean it's definitely labor that's driving it. And again, we're not where we want to be yet. So we are increasing staffing levels throughout 2023. That's included in our guidance, and that's a bit of a drag even though we continue to incur the shift incentives and retention, referral relocation bonuses and registry nursing.

We hope those normalize. So there -- we did see the decline from Q3 to Q4. In Q4, I'd say the -- we did have the employee retention credits, so that's -- you got to take that out of -- at a run rate basis for 2023 since that's not going to be recurring in '23.

It might be good to know -- I don't know if we've talked about this in a while, but for us doing a hire an employee from the time they're hired to the time they actually don't work on a post in a facility, I mean it could almost be probably 2 to 3 months. And so part of the again, anticipation is we want to make sure we get them through the training academies as appropriate. All of our contracts have a very comprehensive background screening process, and those could take weeks, not days.

So again, that's part of it, just we want to make sure that if there is demand manifesting during the spring summer fall that we've got to staff and not have to wait for us to meet that demand.

Got it. That's helpful. Is it -- is the pricing mechanism such that you only get one shot, it's in the spring when the budget is set and then you have to wait a whole year... To get another...

Typically, typically. I mean most of our stay contracts are tied to the fiscal year, which Matador states start July 1 to June 30. And so yes, our making the case within the legislature and then ultimately what we negotiate with the private corrections, it's usually in the spring. But we do have had -- I mean, the last couple of years, we have had some, what I call, all cycle adjustments, notably if conditions have changed within the facilities where they have a unique need of services and programs, then we can negotiate that in real time. And then also the labor market, which has been fluid.

The good news about our business state is that many of our states, if not all of them operate their own facilities. So they know that they're built some challenges in their facilities, we're likely going to feel the same changes and so that we could do maybe some adjustments kind of off-cycle, but anything you'd add to that?

Yes. I was just -- I'm glad you asked that, Kurt because I was going to say from a prior question. Last year, there were a couple of off-cycle or deem increases that we received because we were providing off-cycle wage increases. Here, we are getting towards the middle of February. I don't see that happening in the first half of this year. So we haven't baked that into higher per diems into the first half of the year. We would time them with the middle part of the year as the state budgets as the states get through their budgets and implement their new budgets effective July 1.

And I guess I'd say one other thing, Kirk, on the annualization of Q4 going back to employee retention credits, if we net the cost associated with those credits. That's probably a $10.4 million annual amount that you had to back out of 23 million if you're just taking Q4 and multiplying it by 4.

Oh, interesting. Okay. That's a pretty big number then. Got it. I appreciate it. And then just to clarify, so I'm guessing that the guidance assumes the renewal of Central Arizona?

Absolutely.

Absolutely,

Yes. Got it. And then lastly, I don't ever want to ask you to comment on rumors, but there has been some press coverage of a potential deal between the bid and administration in Mexico, which I'm not sure how to interpret, but is that something that you can elaborate on or comment on?

Unfortunately, we cannot.

Okay. Got it. That's it for me. I really appreciate it.

Yes, sir.

Thank you. That does conclude today's conference call. Thank you for participating. Please disconnect your lines at this time.