Geo Group Inc (GEO) 2008 Q3 法說會逐字稿

Good day ladies and gentleman and welcome to the third quarter 2008 The GEO Group earnings conference call. My name is Eric and I will be your audio coordinator for today. (OPERATOR INSTRUCTIONS) As a reminder, the conference is being recorded for replay purposes. I would now like to turn your presentation over to your host, Mr. Pablo Paez, Director of Corporate Relations. Please proceed.

Thank you, operator. Good morning everyone and thank you for joining us for today's discussion of the GEO Group's third quarter 2008 earnings results. With with us today is George Zoley, Chairman and Chief Executive Officer. Wayne Calabrese, Vice-Chairman, President and Chief Operating Officer. Jerry O'Rourke, Chief Financial Officer and Brian Evans, Vice President of Finance, Treasurer and Chief Accounting Officer. This morning, we'll discuss our third quarter performance and current business development activities and will conclude the call with a question-and-answer session. This conference call is also being webcast live on our web site at www.thegeogroupinc.com. A replay of the audio webcast will be available on the web site for one year. A telephone replay will also be available through December 3 at 1-888-286-8010. The pass code for the telephone replay is 10053474.

During the call, we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results may be found on the conference call section of our Investor Relations web page. Before I turn the call over to George, please let me remind you that much of the information we will discuss today including the answers we give in response to your questions may include forward-looking statements, regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements. As a result of various factors, contained in our Securities & Exchange Commission filings, including the forms 10-K, 10-Q and 8K reports.

With that, please allow me to turn this call over to George Zoley. George?

Thanks, Pablo. Good morning, everyone. Thank you for joining us today. We'll get started with a brief overview of our financial results for the third quarter and provide you with an update on our business development efforts and a number of key industry topics and follow it up with a question-and-answer session.

We are very pleased with our third quarter results which continue to show strong performance from our core operations in US Corrections, GEO Care and International Services. During the quarter, we successfully activated 1725 new beds which validate the continuing strong business demand in our industry and our Company's ability to meet that demand. This morning, we reported quarterly pro forma EPS of $0.34 which represents a 26% increase over last year's third quarter results. Our GAAP EPS grew 29% to $0.31 year over year. Our operating revenues grew to $251.9 million from $232.9 million a year ago. And our adjusted EBITDA grew 14% to $42.6 million year over year. Our adjusted free cash flow for the quarter was $26.4 million.

A number of drivers contributed to the growth in revenues and earnings in the third quarter. First, we enjoyed a full quarter's contribution from the recently-activated 744 bed expansion of our La Salle Immigration Facility which was in the start-up mode during the prior quarter. Second, we received partial contributions from the activation of the 625 bed North East New Mexico Facility in August. And finally, we opened the 1100 bed Joe Corley Federal Detention Facility in Montgomery County, Texas in September which also contributed to our quarterly results.

In addition to the strong growth in our key financial metrics, we also experienced an increase in our average per diem rate for the quarter, which was $59.80 compared to $57.16 from a year ago. This represents a 4.5% increase. Finally, our Company-wide paid level of occupancy remains high at approximately 97%.

Looking at our fourth quarter outlook, we have confirmed our prior revenue and earnings guidance. We expect our quarterly operating revenues to be between $257 million and $263 million and our earnings to be in a pro forma range of $0.34 to $0.36 per share excluding $0.02 in start-up expenses. Several drivers are contributing to this sequential growth in revenues and earnings in the fourth quarter. First, we will enjoy a full quarter's contribution from the opening of the 625 bed North East New Mexico facility. The 1100 bed Joe Corley Facility in Montgomery County, Texas, and the 1500 bed Company-owned Laredo, Texas Facility.

Additionally, the opening of the 500 bed expansion of the East Mississippi facility will have a partial contribution in the fourth quarter. We also expect to activate the 654 bed Maverick County Texas Facility in December. Although the opening of our Maverick Facility was delayed from October to December, we are maintaining our start-up guidance because this delay is offset by the accelerated opening of our East Mississippi expansion from December to October. Further, because Laredo is a take or pay contract which opened in October, there will be no carry forward for start-up costs into the fourth quarter.

Just a brief word on our 2009 activations before I address our capital projects in financing as well as our key market segments. In the first half of 2009, we will activate two expansions. First, we expect to open a new 192 bed expansion at our Robert Deyton Federal Detention Facility in Georgia in the month of January. Then in Florida, we expect to activate a 384 bed expansion at our Graceville State Prison in the month of February. In the second half of 2009, we expect to complete a number of Company-owned construction projects. In Michigan, we will complete a 1225 bed expansion of our 500 bed Northlake Facility by October 2009. We expect to complete the 545-bed expansion of our Immigration Detention Center in Tacoma by December 2009. In Colorado, we expect to complete the 1100 bed expansion of the Aurora Immigration Detention Facility by the end of 2009. In Florida, we expect to complete the 100 bed expansion of our Broward Immigration Transition Center by the end of 2009.

The unprecedented growth we're experiencing requires the investment of significant Company capital. Our current committed capital projects require CapEx of $130 million in 2008 and $148 million in 2009. Over the last two quarters, we had given guidance related to execution of an accordion feature in our existing credit facility to continue to support our capital projects. We have moved quickly to set in place much of this additional barring capacity as possible through our existing banking relationships. We are very pleased with our execution of the initial call on this accordion feature. We've added $85 million in additional borrowing capacity while maintaining the competitive interest rate spreads we had in place. Our expanded revolver now has a total capacity of $235 million, bearing interest at LIBOR plus 2%. And our term loan remains at LIBOR plus 1.5%.

We presently have $74 million in borrowings outstanding under a revolver along with $44 million set aside for letters of credit. Our cash on hand is presently approximately $45 million. With this expanded borrowing capacity, we have the necessary capital to support our previously committed capital projects in Michigan, Tacoma, Broward, Aurora and Robert Deyton. And, the land acquisition and planning cost for a new Oklahoma project while retaining approximately $60 million in liquidity. Further, we're able to add another $65 million in borrowing capacity by year end 2008 and we can also add another $150 million through another accordion feature beginning January 1, 2009. Consequently, we have the ability to seek more than $200 million in additional debt complementing our existing $60 million in liquidity. Although the credit margins have obviously tightened as banks look to lend, we believe they'll be looking for defensive recession proof industries with highly-predictable and visible government source cash flows. We're fortunate to be in an industry whose only line of business is the provision of essential government services to state and federal agencies.

I would now like to address our two primary market segments beginning with the state market. We continue to see significant growth opportunities in the state market primarily in states where we currently operate. These states continue to face significant correctional bed needs and are increasingly relying on private sector to meet this demand. As states across the country face budgetary pressures, their ability to achieve cost savings become even more important priority which leads to the use of public private partnerships to develop and manage major correctional infrastructure projects.

Just a couple of weeks ago, we announced a $48 million contract award in Florida for the management and operation of a new 2,000 bed healthcare prison which will open in mid 2010. This is the largest award for a managed only contract in the history of privatized corrections and requires no capital from GEO. This new facility will be built using state-sponsored bonds. The facility will be managed by GEO Corrections and GEO Care which will provide the medical and mental health treatment required for the special needs inmate population. GEO Corrections and GEO Care will recognize $28 million and $20 million in annual revenues respectively. This major project is indicative of the continuing need for more correctional beds in general and the growing demand for special needs beds in Florida and other states around the country.

We believe that our ability to partner with GEO Care gives us the competitive advantage in pursuing additional projects of this kind in other states. We believe the states of Oklahoma, Idaho, California, Georgia, Arizona, Virginia, and others have an aggregate need for 15,000 new correctional beds, approximately. In August, California issued a request for information regarding additional out-of-state beds. While no awards have been made, we continue to believe that California has an urgent need for several thousands of additional out-of-state beds. In Virginia, we're continuing work on an unsolicited proposal for a 2,000 bed correctional facility and expect to have an interim agreement signed later this year or early next year.

Turning to the federal market, all three detention agencies, the Bureau of Prisons, the US Marshal Service and ICE continue to be funded by Congress to grow their detention capacity. The US Marshals and the BOP both house criminal aliens facing charges for serving time as a result of criminal conviction. And ICE houses alien populations facing deportation proceedings. ICE's population may include both undocumented aliens and criminal aliens who have completed their federal or state sentences. Earlier this year, ICE launched a new $800 million initiative targeting criminal aliens throughout the country. Last month, Congress allocated an additional $200 million to the initial $800 million first allotted for this purpose.

ICE estimates that federal, state and local prisons in jails hold between 300,000 and 450,000 criminal aliens who are deportable upon completing their sentences. These federal initiatives to target, detain and deport criminal aliens throughout the country will continue to drive the need for immigration detention beds over the next several years. And these initiatives have been fully funded by Congress on a bipartisan basis. We currently house a population of approximately 10,000 aliens at our federal facilities. two thirds of our alien detainees are criminal aliens with only one third noncriminal aliens. With regard to specific RFPs, the BOP has four procurements related to the housing of criminal aliens, CARS 8-11. CAR 8 and CAR 9 will result in awards with a combined total of 4,000 new beds. We expect these procurements to be awarded by the second or third quarter of next year to coincide with the final passage of a new federal budget under the new administration. CAR 10 and CAR 11 will result in awards with a combined total of 3,800 beds which are currently provided at two existing private facilities. We expect these awards to be made in the second quarter of next year. ICE has issued two presolicitation or sources sought notices for 545 additional beds at the Seattle/Tacoma area and for 100 additional beds in the Miami Broward area. We're expanding both of our ICE facilities in those areas in anticipation of this demand.

Finally, I would like to take a few moments to update you on our International and GEO Care business development efforts. As you may remember, we've been waiting to be short listed for the five 3,000 bed projects in South Africa. Due to difficulties with one of the project sights the government in South Africa has decided to move forward with four of the projects totaling 12,000 beds at this time. Last month we received notice that our South African subsidiary has been short listed for all four of these projects totaling 12,000 beds. But, no more than two prison projects can be awarded to any one bidder. We expect the official RFPs to be issued on December 1 with bids due on April 30, 2009 in contract awards being announced in the third or fourth quarter next year.

With regards to GEO Care, we're very pleased with the recent contract award in Florida which will add $20 million to GEO Care's revenue base. GEO Care is also currently competing for a contract to provide mental healthcare services at existing correctional facilities in Florida's region four which covers all facilities in South Florida. And just last Friday, the state of Florida issued an RFP for the renovation, construction, and operation of a state psychiatric hospital with a minimum of 600 beds. Proposals are due December 15th with contract award expected in the first quarter of 2009. Additionally, a number of states are considering the privatization of state mental health hospitals and GEO Care continues to aggressively market its services throughout the country.

In closing, we're very pleased with our third quarter results and are confirming our guidance for the fourth quarter. We continue to see strong demand in our primary business segments at the state and federal levels as evidenced by the recent announcement of our new contract in Florida and the RFPs we're competing on at the state and federal levels. We've expanded our borrowing capacity in the middle of a very difficult market while maintaining the very competitive interest rate spreads we had in place which is a testament to the strength of our Company and the strong demand in our industry. We currently have approximately $750 million in Company-owned facilities and with our announced projects, this amount will increase to approximately $1 billion by the end of 2009 which will drive our future growth into 2010 and 2011. We expect to compete for more than 20,000 beds in the US and overseas in the next 12 months and we hope to win at least our market share.

This concludes my presentation. I now will be pleased to open the call to any questions.

(OPERATOR INSTRUCTIONS) Your first question comes from the line of Todd Van Fleet with First Analysis Securities.

Please proceed.

Good morning, guys. Nice quarter. George, Jerry, the capital availability that you outlined last week then, if I understand it right, that pretty much takes you through any projects that you currently have or plan to get underway prior to -- or even within 2010, is that right? If we look out over the course of the next two plus years, the capital availability that you outlined last week supports those projects?

Yes.

Ok. Thinking about Q4, I know that you feel good about where you're at in the guidance that you've given but if you were to outline or highlight maybe the top maybe two risks as you see it to the quarter and your ability to perform things that might pop up maybe to bite you here and there, what would those risks have to be, would you say?

As you may recall, the risks that we were articulating in the last conference call related to shifting of beds at various facilities and following that on a daily basis as I do, I can say that we're well within our -- the guidance we originally gave and are presently reaffirming.

Ok. So, I think Maverick County, Montgomery and then Laredo were probably the three facilities I guess of some note, George, which might have presented some risks related to inmates transfers. Is that correct?

Yes. So, I really can't see anything else, you know, at this time.

Right. So, we have Laredo, which is the take or pay contract. Montgomery County sounds like it is ramping up nicely. You talked about Maverick being a little bit protracted in terms of the ramp up but you feel you've adequately covered that in your numbers here that you put out there for Q4.

That's correct. As I said, during my planned remarks, we had a -- kind of a switch between East Mississippi accelerating from December to October and now Maverick, you know, stepping back from October to December. And the costs became a wash on the quarter.

Ok. One more before I jump out. George, I talked about you know, the demand that you guys still see out there with respect to ICE. Criminal beds, noncriminal beds and the like. How long do you think it would be if you had to handicap it, how long do you think it would be until you got wind of some notable change or significant change to your forecast or kind of the world view as you guys have it and know it today? How long would it take before something were to alter that? Would it be shortly after November 4th? Would it be three months? Would it be six months? Would it be twelve months? Is there a way to handicap that in terms of the time frame by which you feel, you know, things are unlikely to change from their current state for, you know, three to six months and then possibly maybe at the six-month mark, just speaking hypothetically, that we could see if things are going to change that they would change by that point.

I think you're implying there could be a possible change at the federal level because of the November elections and with regard to our federal market, it is for the most part being driven by the need for detention beds for criminal aliens. And as you may remember from my planned remarks, that that initiative is being fully funded presently under a bipartisan contract -- Congress and the funding for it to increase from $800 million to $1 billion, it's called the Secure Communities Initiative and this is to accelerate the deportation of criminal aliens and to do that, the federal agencies have to provide for more detention and bed space to receive these criminal aliens from wherever they're located either at the state or federal or local levels. They have to create, in effect, processing centers for these people to be processed and removed and this initiative, if you read the congressional reports, you know, is a five to ten year effort. And people may ask the question, well, if you start supporting several thousand per month out of a pool of 400,000, aren't you going to deplete it in a year or two or so forth? You have to remember that this pool of 300,000 to 400,000 is being fed by a pool of 15 million aliens who are here in the country illegally and give rise to more criminal activity in the future.

Ok, thank you.

Next question comes from the line of Kevin Campbell with Avondale Partners. Please proceed.

Good morning. I wanted to follow up on Todd's question on the capital availability and your comments in the prepared remarks, George. I thought I heard you say that for Oklahoma, that you had the capital to support the land acquisition and the planning which then sounded like you didn't have the capital for the construction. So, just so I'm clear, do you have all of the necessary capital to complete the construction of that facility?

On our -- on this call, on our -- our accordion which has now provided additional $60 million in liquidity, we have the capital necessary for the planning phases of that project which is land acquisition, design, engineering, planning. But with the availability, about a year in to draw down another $65 million and by next year or two, access another $150 million, we'll have the access when we need it to fully finance that project. As well as others.

Ok. I just wanted to make sure I was clear whether or not this current $85 million gave you that access or not -- it sounds like you will need some additional capital in order to complete that that has been announced. So, could you talk also about -- I know you touched briefly in your prepared comments about state budgets but are there any states that have come back to you saying we had agreed to a 3% or 4% rate increase but because our budget is significantly worse than we thought ,work with us here. Can you reduce this rate or eliminate it? Has that happened at all?

No, it has not. Which may be surprising to our listeners because we all read about newspaper articles about many if not most states being in a budget deficit. I think part of it relates to the Department of Corrections is part of the public safety responsibility of the state and is -- received a lot of guarding in compared to other agencies. I think other agencies are the first ones to experience and have to take significant budget deficits, the department of corrections is usually the last one. And no one, at this time, as yet, has come back to us, you know, and asked us to reduce per diem rates. More likely, outcome would be that they would be talking about trying to achieve some economies or reduce our per diem increase for the following year. And past history has been that they've given us an opportunity to give them flexibility on how to accomplish this. And we've done it through a change of scope of services, cutback on doing certain things that are discretionary and can achieve some cost savings as well as providing additional beds to give them leverage in achieving additional capacity because many of these states also need more beds at the same time they're experiencing their budget deficits. Which is almost a contradiction in objectives but that's the case. So, what we try to deliver is cost savings while still providing more capacity.

And are there any states though that perhaps are looking to overcrowd their existing facilities rather than move over toward more of the private sector and leverage off their own fixed costs? Have you seen that? Or are we really sort of beyond their ability to do that?

I think it is the latter. I really am not aware of any state that is suggesting they're going to overcrowd their own facilities because many have been through the ringer with the federal courts on that very issue and the reason, large part of why we're in business is because of that issue and the need to provide constitutional standards of incarceration.

On the flip side, are you seeing any new states that were previously not utilizing the private sector, taking a look at it again and is there anybody that's perhaps close to making that switch?

I think -- this is Wayne, Kevin. George mentioned Idaho and Georgia in his remarks. You know, we have feelers out in each of our three regions talking with various states obviously about either expanding what they have or venturing into new efforts.

And with regards to Georgia, I know we had seen some talk about them privatizing some of their state psychiatric facilities. There was also a large RFI for a mental health prison for GEO Care. Could you comment on that? Any change there?

Well, the RFP came out Friday. That was part of my planned remarks. And it is for a very large facility. 600 beds but it also involves --

Georgia or Florida?

That's Georgia.

Ok. I had written down Florida in my notes.

No, it's Georgia. And it is to take over an existing facility in the interim and it is part of a consolidation play to close down older facilities, relocate them temporarily in one facility and then build a brand new facility which will be 600 beds. I believe it requires five years experience in this business to be qualified to bid.

Ok. Great. I'll jump back in the queue. Thank you.

your next question comes from the line of T.C. Robillard with Banc of America Securities. Please proceed.

Thank you. Good morning, guys. Just -- George, can I just follow up real quick on one of your responses to one of Kevin's questions where you said, past history, you indicated you would be able to do things in terms of chain of the scope of services or cut back on things that are discretionary. Can you give us a sense on what things are discretionary that you guys would have some latitude toward if the states were to come back looking for some price concession?

Well, the first area that comes to mind that falls into the discretionary category, remember, the discretion is really on part of the client because they specify the level of services. The area would be programming. And there's different types of programming that we provided to different clients and different locations. Programming basic education, vocational training, treatment programming, various types of treatment. And that's a fairly expensive activity. And that is available to be reduced in levels and servicing that's a very labor-intensive activity. It is something that we'll probably come into discussion.

Ok. That's helpful. Just wanted to talk a little bit on the pro forma operating margins you guys saw great sequential in year on year improvements, 140, 120 basis points respectively. You only had 5% growth on the mandate side, occupancy levels look to be pretty similar. What was the big driver there in terms of getting that margin improvement because I know last quarter, you guys actually saw margins essentially flattish year on year. So, can you give us a sense as to what drove the margin improvement?

Well, I think it is the continuing increase in company-owned facilities. And facilities that are federal projects. So, if you go starting with earlier year with the opening of La Salle Facility, now with the opening of the Laredo Facility, you're seeing more and more company-owned facilities coming online.

Ok. And how big is federal in terms of revenue and EBITDA?

Well, I think federal is maybe 40% of our revenues but it is with a majority of our EBITDA.

Majority, 75% or majority being just over 50%?

Over 50%.

Ok. And then I guess the last question that I had was to go back to another question on the elections and I know a lot of people have obviously made a big push around the presidential election but given the chatter that's out there and the risk that the democrats could actually take back over Congress, is there a risk over the next couple of years, if that were to be the case and I know that's a big if, do you feel that there's risk to the current criminal alien projects that are in existence today?

No, I don't. Just to repeat, maybe what I've already said, there's two basic markets in the federal area. One is to secure the border and that results in the need for undocumented alien detention beds. And those comprise about one third of our business. But the other initiative is the criminal aliens and that's part of what's now being called the secure communities initiative and that results in the need for criminal alien beds and that represents two thirds of the detention beds we're providing to the federal agencies. And you can recall from what I just said earlier, this initiative is being increased in a fairly timely manner by a democratically-controlled Congress that the president only asked for a program funding of $800 million, it was the democratic chairman I believe of the committee and approved by the democratically-controlled Congress that added another $200 million to this program. So, we see very strong bipartisan support if not democratic leadership in this secure community initiative that necessitates the need for criminal alien detention beds.

That's great. That's really helpful color. And then I'm sorry. Did I have one extra just housekeeping. Jerry or Brian, do you have cash from ops in CapEx for the quarter?

Cash from operations for the quarter was about $16 million. And CapEx was about -- I don't have that right in front of me. We'll come back to that.

Thanks fine. Thanks, guys.

your next question comes from the line of (inaudible) with Barclays.

Hi, guys. Just to get back on the issue of pricing, I know you mentioned that you aren't seeing any pressure from your customers now but can you give us a sense of sort of what is the time line around when your customers themselves need to sit down and look at the budget and then possibly come back to you with negotiations around the pricing front and just with respect to that, would you or have you seen historically, sort of a different strategy negotiations with respect to sort of your renewals on existing contracts as opposed to brand new RFPs or contracts that they would (inaudible) you.

Most of our stakes are on a July 1 fiscal year. And I really, for the most part, wouldn't expect much in discussions until spring of next year. To possibly affect the fiscal year budget that starts July 1, 2009. That's not to say that somebody may not come to us before then but I would find that highly unusual. And Pablo in his great research did some research to find out what were the per diem increases in some very down years like 2001, 2002. And he showed as well as 2003, and the respective increases were 2.9% so just under 3% 2001, 2002, 5%. And then the average, the three years is just under 4%. So, we seem to have done well in past down cycles as far as per diem increases.

Ok. And I guess on the -- for the available capacity on the U.S. correction side, what is your sort of occupancy rate and you said (inaudible) everything combined and also most of your available beds, I guess are accounted for are a lot of times still open for billing.

I think our U.S. corrections side is probably 97% as well. It is pretty close. The state facilities are almost always full. All the time. It is the federal facilities that do have fluctuations but on a composite average, you know, U.S. corrections as well as International is about 97%. What was the last question?

Just on the available beds that you have, I guess that in effect answer the question but I guess all of your expansions and projects that you have in the pipeline, are most of those, would you say sort of accounted for as you have discussions ongoing with customers or are some of them still pretty open to bids should an opportunistic RFPR come out there.

Well, the Tacoma expansion is in response to the solicitation and so that's for an existing client. The Aurora expansion is for federal fly-ins. The Robert Deyton expansion is for federal clients, the Broward expansion is for existing federal clients. Northlake, Michigan, that's an unspecified client so that's quasi-spec. We have not yet identified a client for that.

Ok. And finally, I guess just on the -- you mentioned sort of the margin --

can I add that the Oklahoma project does not have a specific identified client.

Ok, great. Just, the final question on sort of the incremental margin improvement that you anticipate seeing, you mentioned it was because of your greater percentage of own prisons, is that implying basically the fact that you're being able to leverage your own capacity by expanding further and it is that incremental expansion that's helping you grow the margins over time?

Yes, it is. You can see by the listing I've given you that we did several expansions last year as well. Again, at federal facilities predominantly. But it is expansions that are allowing us to increase the margin profitability for the company.

And how much do you think like -- I mean without asking for '09 guidance or anything of the sort, how much more of an improvement can you see, at least just from your U.S. corrections, on a margin front?

I really haven't done a specific calculation. So, I really can't say. But it gives us comfort in the guidance we've given out.

Ok. Great. Thanks a lot, guys.

Your next question comes from the line of Emily Shanks ( with Lehman Brothers) with Barclays Capital. Please proceed.

Hi, good morning. This is actually Jason Trujillo in for Emily. My first question relates to, if you could update us on any specific contracts that are expiring over the next year.

Well, the contract in Louisiana is expiring in the fourth quarter and we expect an extension of at least six months and possibly two years. The contract in journey, Australia, is being refit and we expect a decision there any time.

I think in December we'll have even a little before that, the contract, whoever is awarded is expected to be signed mid December.

And we have a contract in a small facility in Houston, Texas.

All right, great. That's very helpful. And then when does the California contract expire? If you could remind us of that.

Well, there is -- the smaller of the four facilities, McFarland expires, I believe, in 2010 with a five-year renewable option. That's the next expiration date.

Ok. Thank you. And then just lastly, can you give us total nonrecourse debt? At quarter end?

Brian, do you have that?

Yeah, hold on a second. $114 million, $114.7.

All right, great. Thank you very much for that.

next question comes from the line of Chuck Russ with Insight Investments. Please proceed.

Hi. In general terms, from everything you've said, it sounds to me like you are expecting industry growth going forward to be relatively unaffected. Am I over simplifying and putting words in your mouth or can you talk about that? Do you expect industry demand to be hurt at all with the credit crunch et cetera?

Remember, we're in two markets, the state market and the federal market. The federal market is driven from -- is being driven for the most part as we've been discussing by the need for criminal alien detention beds. And that's being consistently funded. At the state level, you're obviously hearing about states with different deficits all around the country, particularly -- including the sun belt states where our customers are primarily located but from coast-to-coast we're seeing the continued need for more capacity. Florida itself has a budget deficit, I think of $3 or $4 billion. And yet in the last month, it just issued an award to us for a new 2,000 bed facility. That's what may seem to be contradictory, how can states proceed with funding additional capacity in the face of budget deficits? Well, the answer is they must because of the constitutional requirements to provide constitutional incarceration. That means having to provide for more capacity. It is increasingly so, we're doing it through the private sector. When Florida had one project to prove last year, it was a private corrections project. If you go across the southern states, you're going to see that most of their new projects are going to be provided by the private sector in the future because they've seen that that is the most cost-effective means to provide for new capacity. Even not withstanding any budget deficits they may have and maybe more so because of the budget deficits.

Ok. Thanks. You know, all of that said, would you -- should we expect the next three, five years to show the same kind of growth we've seen in the past three to five years

I think so. And that's before considering there could be an increase in the crime statistics as unemployment rates go up. You know, that's historically been the case. We're starting to hear about it already from our state clients. They're starting to see an uptick of their new intakes which will drive the need for even more bed space.

Thank you.

You have a follow-up question from the line of Todd Van Fleet with First Analysis. Please proceed.

Just wanted to make sure I understood. What was happening in South Africa. You said they pulled back on one of the five procurements I guess and it is now four. If I understand it right and that one of your sites that you had proposed or maybe it is the only site you proposed, maybe you can shed some light on that but one of the sites you proposed has been chosen as acceptable for the four. For one of the four. Is that right, George?

He's just come back from a two-week stint in south Africa.

Hi, Todd. Originally, there were five sites and five prisons that were, four of them were paired up, two and two so there were three projects to bid on. Project A which had one prison. Project B which had two and project C which had two. For a total of five. All five sites were selected by government and were available for bidding to all prequalified bidders, as George said in his script remarks, we had, in fact, been waiting, prequalification which we received this past month and so four prequalified bidders are now going to be bidding for four projects. The five prisons, one was [Port Shepston] has been deleted because of issues the government had with the [Port Shepston] site. That give four prisons and rather than keeping the four in three bid packages, they divided them into four discreet packages so you now are bidding on four projects, one prison in each of those four bids for 3,000 beds apiece. Before, it was possible for one bidder to win as many as three. You could win A and B or C. Today you can win no more than two projects for a total of 6,000 beds, two of the four.

Ok, so, Wayne, as it stands now, you have -- is it still viewed that Geo has the opportunity for six or is it 3,000 beds?

No, Geo and each of the three other prequalified bidders each have the ability to win as many as 6,000 beds or two of the four bids.

Ok. And so, these are four facilities at four different sites? George said one of the sites was -- that GEO had was chosen.

No, no. One of the five sites, no bidder including GEO had anything to do with the selection of the sites. There were five government sites for five prisons. One of those sites was not able to be pushed through on a zoning, what they call planning basis. So, it has fallen away at least temporarily. Government may be able to resuscitate it down the road but for now, the bids have changed. There are four bids for four prisons on four sites selected by government and that's what we'll be bidding on. All four of those prisons and we can win no more than two.

Ok. Thanks for that clarification. On -- let me switch to domestic, in California, what's your thinking regarding -- what might come out of the state following the three judge panel hearing later on this month?

I think a lot of it depends on what the three judge federal panel says. If they impose a cap of reducing the population by 20,000 beds, I would hazard to guess that there would be awards of 20,000 beds. If it is only 10,000, it's 10,000. So, I think the state has armed itself with enough proposals to deal with the scope impact of what the federal judges could levy against the state. So, we think those decisions could be made by the end of the year.

But, is that the current thinking then that the panel would put a cap on the state's population as an outcome, one of the possible outcomes I guess from that meeting, that hearing?

I'm not ascribing that to official state of California thinking. That's just our outsider view look inside that. I think they want to be prepared to be able to respond with as many beds as necessary to not have to release people from their system.

Ok. Thanks. One quick one for Jerry of the G&A, Jerry, came back in a little bit, which was nice to see. I think first time that's happened in a little while. Was that due to any one factor more than another or are we getting a head fake here?

No. If you recall, you asked that same question last time and we gave you guidance that we thought that the third quarter number was going to come down into the $17 million range and that was because the second quarter was -- had an additional charge associated with our annual leadership conference. So, that number has come back down so we normalized at the $17 million number and we think it will stabilize there as we said last quarter, to hold between 17. So, no head fakes.

That's great. Thank you.

We're trying to be consistent.

your next question comes from the line of Kevin Campbell with a follow-up from Avondale partners. Please proceed.

Could you guys tell us what the capitalized interest was for the quarter?

Kevin, this is Brian. Cap I for Q3 was about $1.1 million. Just to follow up with T.C.'s question earlier, the CapEx for the quarter was about $28 million. Year-to-date, we're about $99 million in CapEx.

What should we expect for capitalized interest? I know you haven't provided guidance for next year but help us understand it and where it could fall out. Maybe on an individual project level or overall and just sort of help us get a better feeling as to how that's going to impact numbers next year and into 2010. It seems like it would benefit earnings next year because you have a lot of company-owned projects coming online. Then as they open and the benefit drops off, it could be a negative impact to earnings despite revenue and EBITDA growth. Am I thinking about that correctly?

No. I think that there will be capitalized interest next year but when the projects come online, and you stop capitalizing the interest, earnings from the projects that we're building will more than -- will offset the increased interest expense associated with the construction of those projects.

Sure. But it is still a negative, taking it by itself, it is still a negative impact.

On the interest expense line alone.

Yeah. Ok. Tax rate came in a little bit lower for the quarter. 36.8% I think. We were thinking it would be roughly around 39%. What should we assume going forward?

Yeah, we had a tax -- a Florida tax credit that dropped the rate. I think we had guided last time to be in the 38% to 39% range. And fortunately, we were able to pick up some significant Florida tax credits from the Graceville project that dropped it down to just under 38%. We believe that the fourth quarter will be in the high 38% range. But below 39%.

Ok. Then looking at your adjusted free cash flow, it was down year over year as you point out in your press release, but I didn't see any commentary and I might have missed it earlier in the call about what sort of drove that -- drove that downward.

The biggest thing was a timing if you look in the press release, you can see it kind of jumps right out there is the timing of certain cash tax payments.

Yep.

So, that's really the main driver.

Ok.

Everything else is pretty consistent quarter over quarter.

Ok. Then lastly, we had noticed in some of our checks that the Arizona populations outside of Newcastle, at some of the other facilities had been coming down a little bit throughout the quarter. Is there anything unusual going on there?

No. Our Arizona population is at full capacity.

Ok. Thank you very much.

Your next question comes from the line of Ted [Hillemeyer] from Northstar Partners. Please proceed.

You guys had given the rebids for 2008. Do you have the number or what gets rebid in 2009?

Not off the top of our head. I think it is typically maybe 20% of all of the contracts, either our are renewed by negotiation or actually -- I can't think of a major rebid next year. I can't either.

Ok. Secondly, last year, I think there was a lot of discussion on the fourth quarter call related to seasonality. I think -- you were saying in 2006, you had strengthened the fourth quarter and that was unusual and then were disappointed with I guess the look of strength last year. Can you address that issue and what your expectations are?

Well, we've given our guidance for the fourth quarter.

When you think about seasonality, what typically happens at the state level and federal level in fourth quarter?

In the state level, nothing happens. In the fourth quarter. There is no seasonality. Our state populations are almost constant. They stay at the same level. Generally, 97% to 100%. At the federal level, there is a fourth quarter seasonality that we have to play with year by year to see to what extent it is going to take place. It does seem to occur and we've taken into consideration in our guidance which we've now reaffirmed.

It is related to letting people go around the holidays or --

no, the judges are off on the holidays and there's less prosecutions taking place and maybe there's less people coming across the border, a combination of factors that come into play. That result in softer or lower sense of -- in the federal facilities.

Ok. And then last quarter, there was a lot of discussion of concerns about back filling facilities. Is it as simple as they were backfilled? Can you take us back to what the concerns were and what actually occurred?

Well, with the opening of several facilities at the beginning of the fourth quarter, which have now occurred, we were concerned that there would be a domino kind of impact to some other surrounding facilities and it has occurred to some extent but it is well within the guidance we have now reaffirmed today. And we feel confident that it will achieve the financial targets we've identified.

That's all for me. Thanks.

Your next question comes from the line of Brad Driver with Sirius. Please proceed.

Gentlemen, Steve Langford for Brad driver. Your company was just charged with murder and manslaughter in Texas. Your comment?

Yes, the indictment was dismissed I want to say Friday. Could have been Thursday.

Are you sure?

Yes, I am.

I see. Kenneth (inaudible) dying in your Delaware County facility in April. The U.S. Department of Justice may be looking into this. Your position on this?

We have no information or comment on that.

And can you tell me what you do at Guantanamo Bay?

We have a contract with the federal agency for the housing of detainees that they bring to the facility.

Overall, your track record in terms of prisoners dying, do you have any thoughts on that?

We think our track record is exceptional. We provide medical care in accordance with ACA and National Commission on Correctional Healthcare requirements. We put our record up against any other public or private agency, not just in the United States, but around the world. We're proud of the efforts we make and the results we get.

But in Delaware County, Pennsylvania alone, according to published reports, perhaps half a dozen or more deaths in the past year.

Well, many of the deaths have been natural causes and all of them have been examined very closely by ourselves and where necessary, by the authorities. We've cooperated fully in every investigation that's been conducted by outside agencies and again, we stand by our record of performance.

But, you have had to pay good amounts of money in terms of settlements.

That's the nature of the business. It is a jail business where people come in right off the streets under different conditions of medical care and it is a hazardous business and that's what we've decided -- that's why we've decided to leave that business. We're discontinuing that contract in the next two months.

Your next question comes from the line of Andrew Maury with Cowen Asset Management. Please proceed.

Yes. Most of my questions have been answered. Quickly, you mentioned the opportunity in Florida, I guess Santa Rosa would also have a role there for GEO Care. I guess, you know, we haven't been expecting so much growth from GEO Care. Do you think there are any other small opportunities between now and 2010 when that could help accelerate growth in that area?

We just announced one today which is the new RFP in Georgia for a 600 bed facility which is a very large scale facility.

Which will be several tens of millions of dollars in value. Annual operating revenues and the proposals are due December 15th. And GEO Care is competing, marketing in many other locations around the country.

Ok, great. And just one other follow-up. The timing of the cash tax payments, do you expect that will normalize you know, just in a quarter or two? And basically book taxes, you know, going forward, should approximate cash taxes or do you think there will still be a difference?

Well, I think if you look at it, booking cash taxes for third quarter '08 are approximately normalized. That's what we would expect. It was third quarter '07 where they were not normalized. There was some mistiming. Difference in timing for the payments versus the related expense. So, I think third quarter '08 more normalized. That's what we would expect going forward.

Ok. Thank you.

your next question is a follow-up from the line of Todd Van Fleet with First Analysis. Please proceed.

Guys, just one question on the facility margin. As we go from Q3 to Q4. You know, absent any changes in activity in terms of new programs coming online, new facilities coming online, going off-line, what have you, would you ordinarily expect a slight improvement in gross margin or facility margin heading from Q3 to Q4?

Jerry?

Yes, I think we're probably going to see a trend much similar to Q2 to Q3 that should continue on into Q4 with the stabilization and the maturation of these start-up activities and the expansions in particular.

We'll have a full quarter of Laredo, for instance, that's a company-owned facility online.

Yeah, no, I understand. I'm just trying to handicap if you exclude the likes of Laredo which we'll have to try to calculate or quantify what the impact is of that. But just ordinarily, if you had no other business coming online or no new business coming online, same facilities, things are static, would you normally expect a bit of a lift in the facility margins sequentially from Q3 to Q4 related to things like per diem changes, I'm trying to think of what else. You guys don't really have the number of the days in the quarter impact you.

Under those circumstances, it would be static.

It would be static?

Right.

State per diems normally take effect in the summer like July 1.

Right, right. Ok. Great, thank you.

Next question comes from the line of Matt (inaudible)with (inaudible).

Hi, guys. Congrats on another good quarter.

Thank you.

Thanks for taking so many questions, quite generous with your time, especially the guy who asked about the deaths. Anyway, we bought a bunch of stock in your company over the last few months so we obviously think it is quite cheap. One basis on which we think it is cheap is that even if you just shut off your growth, your stock is worth -- we think, more than $30 a share. Based on the math we've done, it looks to us like you could become a REIT and pay well over $2 a share in dividends in 2010. And even with the reduced prices have reached in the stock market now which were greatly reduced and might bounce, your stock would trade over $30 a share. Is converting to a REIT something you would consider if your stock stays down at the kinds of levels it is now?

As you know, we are using our free cash flow to fund our capital projects and as long as there is a need to do so, I think that's the best purpose for our free cash flow. If some unforeseeable time in the future, that stops, then, you know, we would stop and analyze what other ways would be most beneficial to increasing shareholder value. I do feel that the stock price is depressed and is undervalued and myself have exercised some options in the last few days.

Even if you did convert to become a REIT, you would have some shield of your dividend from the excess of depreciation over maintenance Cap Ex. You would have significant free cash flow in excess of dividends you could use toward growth that would reduce your growth. It seems to me when your cost of capital is as high as it is now from an equity perspective, it makes sense to do something about it. So, I would urge you to at least consider that option, were your stock to stay at these kind of levels. Ok.

Matt, this is Wayne. I just want to add something since you opened up the opportunity. In terms of the questioner who raised the issue of deaths and custody. It is something we obviously take very seriously as do all of our colleagues and the other companies as well as the public agencies around this country. It is not something that any of us take lightly. The fact is, the indictment itself was a very surprising development. We believed it was wholly inappropriate to the circumstances and we were very pleased to see it dismissed on Friday or Thursday. I'm not sure which date it occurred. But I want to make clear what we said earlier and that is all deaths in custody are taken seriously by the company. We investigate every death whether natural cause or otherwise, intenlly and we cooperate with outside agencies when they investigate and we think our track record compares very favorably to the records of investigations and outcomes around the country whether public or private.

Great. Thank you.

Sure.

we're showing no more questions in the queue at this time. I would like to turn the call over to Mr. George zolry for closing remarks.

Thank you to everyone who joined us on this call and we look forward to addressing you on the Q4 call. Thank you so much.