CoreCivic, Inc. (NYSE:CXW) Q3 2023 Earnings Call Transcript November 7, 2023
Operator: Good day and thank you for standing by. Welcome to the Q3 2023 CoreCivic, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Gutierrez of Dresner Corporate Services. Please go ahead.
David Gutierrez : 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 third quarter of 2023, 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 third quarter 2023 earnings release issued aftermarket yesterday and in our Securities and Exchange Commission filings, including 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, management will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in the corresponding earnings release and included in the company’s quarterly supplemental financial data report posted on the Investors page of the company's website at corecivic.com. With that, it is my pleasure to turn the call over to our President and CEO, Damon Hininger.
Damon Hininger: Thank you, David. Good morning, and thank you for joining us today for our third quarter 2023 earnings call. On today's call, I will provide you with details of our third quarter financial performance and our updated 2023 full year financial guidance, which reflects another increase in our core earnings metrics from last year's quarter's 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. Following my remarks, I will turn the call over to our CFO, David Garfinkle, who will review our financial results and our updated financial guidance in greater detail. He will also provide a more detailed update on our ongoing capital structure initiatives, including details of our new bank credit facility attained just after quarter end.
I'll now provide a brief overview of our third quarter financial results and our updated 2023 financial guidance. In the third quarter, we generated revenue of $483.7 million which was a 4% increase compared with the prior year quarter. This increase is in spite of the expiration of our final prison contract with the Federal Bureau of Prisons at our previously owned McRae Correctional Facility in November of 2022 and the expiration of our lease agreement with the Oklahoma Department of Corrections at our North Fork Correctional Facility on June 30, 2023. Excluding these two expirations, our total revenue increased 7%, demonstrating strong occupancy and revenue growth from our core Safety and Community portfolios. We generated normalized funds from operations or FFO of $40.5 million or $0.35 per share compared with $33.9 million or $0.29 per share in the third quarter of 2022, representing a per share increase of 21%.
The increase in FFO was driven by the higher federal and state populations, combined with lower interest expense resulting from our debt reduction strategy. The increase in FFO occurred despite the sale of our McRae facility and the expiration of the lease with Oklahoma, which resulted in combined reductions to EBITDA of $4.8 million from the prior year quarter. While we continue to experience ongoing labor market pressures and continue to incur temporary incentives and related incremental operating expenses in many markets, we have achieved notable improvements in our attraction and retention rate as a result of our staffing strategies and due to an overall improvement in the hiring environment. We believe the favorable operating expense trends will continue as the tight labor market continues to loosen.
As we have mentioned on past several conference calls, we have made significant investments in our existing staff and have successfully increased our staffing levels through improved recruiting and retention. These investments have enabled us to reduce the amount of temporary incentives from the prior year quarter and have positioned us to accept the additional populations we have begun to experience. From the third quarter of 2022 to the third quarter of this year, occupancy in our Safety segment increased from 70% to 72.6% and occupancy in our Community segment increased from 57.5% to 62.8%. The increase in occupancy in our Safety segment primarily resulted from higher detention populations from our largest government partner, Immigration and Customs Enforcement or ICE.
On May 11th, Title 42, a temporary public health order issued by the CDC that had officially closed our nation's border to asylum-seeking individuals since the onset of the COVID-19 pandemic, came to an end. At the same time, occupancy restrictions implemented during the pandemic at our ICE facilities also came to an end. Without the ability to deny entry to the United States and quickly remove individuals using the authority granted under Title 42, there has been an increase in the number of people in the custody of the Department of Homeland Security, or DHS ICE is one of the agencies within the DHS that is responsible for enforcing immigration laws, arresting and detaining individuals who have entered the country illegally. These activities have increased since the end of Title 42 and the country continues to report record numbers of people encountered at the Southern border.
Last quarter, we reported on the increase in demand for detention capacity since Title 42 was lifted. That trend has continued as the number of people in ICE detention increased 18% nationwide during the third quarter alone, resulting in a cumulative increase of approximately 66% nationwide since the end of Title 42. Since May 11th through September 30th, high detention populations within our facilities have increased 4,729 or 84%, which we believe was possible at least in part because of the investments in staffing I previously mentioned. Due to fixed payments under many of our Federal contracts, the increase in residential populations did not result in a proportionate increase in our financial results at such facilities until populations clear the minimum compensated bed total associated with fixed payment levels, which largely occurred during the third quarter.
The increase in occupancy in our Safety segment also resulted from higher occupancy levels from several state government partners, including most significantly, the State of Arizona at our La Palma Correctional Center in Eloy, Arizona. La Palma is the second largest facility in our portfolio. Recall that we were awarded a new management contract from the State of Arizona and began receiving populations from the State in April of last year. The ramp of this facility was substantially complete by the end of 2022. We continue to incur elevated operating expenses at the facility associated with temporary staffing and believe expenses will continue to normalize as we continue to hire and train permanent staff. During the third quarter of 2023, we also experienced increases in populations from the state of Oklahoma, Colorado, and Idaho, and more recently in the fourth quarter from Georgia.
Further, we remain in discussions with several additional states to help address their challenges in the near to long-term. As an example, last quarter, we mentioned that the State of Montana, a current government partner of ours, was expected to issue a request for proposal for the placement for up to 120 out of state inmates. The RFP was issued, and we were recently notified by the state of their intent to award the contract to CoreCivic. As a reminder, this would be utilized in existing capacity at our Saguaro production facility in Arizona. Although not typically an avenue of growth in the past, we have had an increase in the number of discussions with county governments, for bed capacity needs in our safety segment as well. At the end of September, we announced that we had signed a new management contract with Hinds County, Mississippi for up to 250 adult male pretrial detainees at our Tallahatchie County Correctional Facility in Mississippi.
In October, we completed the intake process for approximately 200 residents from Hinds County at the Tallahatchie facility. The Tallahatchie facility is a good example of the flexible capacity we can provide to our government customers as we also care for over 400 residents from the United States Marshals Service, Vermont, South Carolina, the U.S. Virgin Islands, and the local county in Tallahatchie County. I couldn't be more proud of the leadership and staff at our Tallahatchie County facility. As mentioned, occupancy in our community segment, which comprises of 23 residential reentry facilities, increased from 57.5% to 62.8% in the Q3 of 2023 over the prior year period. We also provide electronic monitoring and case management services in our community segment.
Our community segment represents a vital part of our mission and is often critical to the successful reentry of residents in our care. Net operating income in this segment increased 50% in the third quarter of 2023 from the prior year quarter due to the increase in occupancy as well as per diem increases we have been able to obtain. We were also able to reduce temporary staffing incentives like we did in our community segment. We expect the occupancy trend to continue in the community segment now that all pandemic related public health policies have come to an end as more of our government partners are returning to residential reentry programs to help individuals be better prepared for successfully transitioning into our communities. Finally, we never take for granted renewals of existing management contracts and continue to enjoy a contract retention rate up 95% over the previous 5 years.
During the third quarter, we executed a 5 year extension of the contract with the United States Marshals Service at our 4,128 bed Central Arizona Florence Correctional Complex, the largest facility in our portfolio where we provide significant capacity to this government agency as well as ICE. We also executed notable contract extensions with Vermont at our Tallahatchie facility in Mississippi, ICE at our Elizabeth Detention Center in New Jersey, Montana at our Crossroads Correctional Center in Montana, Tennessee at our managed only South Central Correctional Center and the Texas Department of Criminal Justice for five residential reentry centers we own in Texas. As mentioned last quarter, we entered into an agreement with State of Oklahoma to lease our 1,670 bed Davis Correctional Facility effective October 1, 2023.
We successfully transitioned operations to the state, which is now operating facility with government employees. Affectively converting this facility from one in which we own and operate in our safety segment to one that we simply lease to the state and will now report in our property segment. We were pleased to reach a positive conclusion to this facility's contract renegotiation and we believe that a lease agreement is best for the long-term outlook for the facility that also meets the long-term needs of the state. As we look forward, we remain optimistic in the macro environment for our federal, state, and local business. Our governments are facing complex challenges and we see increased opportunities to serve their growing needs. At the Federal level, although we continue to see a steady increase in detention bed utilization, the long-term impact of the end of Title 42 is still unclear as there are other factors that impact detention utilization levels by ICE.
The most significant factor historically has been funding levels approved congress. However, the country is still facing significant challenges at the southern border and geopolitical events only enhance the need for border security. Although the appropriations process for funding in the near-term, as well as the remainder of the fiscal year ending September 30, 2024, is still in flux, there appears to be bipartisan support for additional border funding for the Department of Homeland Security and ICE to help address the challenges at our southern border. The outcome of the appropriations process is expected to have significant impact on the overall population levels in our ICE facilities moving forward. And even though detention funding and related services are just part of the overall solution, we are positioned well to serve their needs.
Another part of the overall management of the border that could potentially expand the scope of services includes alternative detention. Earlier this year, ICE issued a request for information or RFI for Release and Reporting Management Services. This RFI is seeking information about monitoring technology, participant coordination services, including physical space, participant engagement and interactions and program management, and community services to help people comply with their immigration obligations. Though not yet funded by Congress and only in the early stages, the RFI is intended to apply to noncitizens released from DHS custody and, according to the RFI, involves engaging with a large portion of the 5.7 million individuals on the current non-detained docket.
At the state level, overall state budgets are in very good shape. Most states are reporting increases in their prison populations, in many states are also projecting further increases in their prison populations. Jail backlogs, which are a leading indicator for state prison populations, remain significant. Additionally, courts continue to normalize operations and cases are adjudicated, so state correctional agencies will surely be impacted. So to summarize, the macro environment is improving and is beginning to manifest in our financial results as some of the headwinds we faced during the pandemic are turning into tailwinds. Based on our updated outlook, we are updating our full year normalized FFO per share forecast to a range of a $1.40 to a $1.46 an adjusted funds for operations or AFFO per share to a range of a $1.34 to a $1.40.
These represent increases of $0.02 at the midpoint of our previously issued guidance. We're currently preparing our 2024 budget and expect to issue financial guidance for the full year 2024 in February when we announce our fourth quarter 2023 results. We are obviously focused on a solution to the pending lease expiration with the State California at our California City Correctional Center. This facility, which generates approximately 25 million in annual EBITDA, is in a great location, but the lease is currently scheduled to expire on March 31, 2024. We are experiencing growth in many parts of our business, which will mitigate the financial impact of lease expiration if we are unable to identify an alternative solution in the short-term. I will close out my comments by discussing our continued progress on our capital allocation strategy and further strengthening our balance sheet.
We continue to make progress on our debt reduction strategy. Our debt reduction has contributed to meaningful decreases in our interest expense, particularly noteworthy considering the significant rise in interest rates. Leverage measured by net debt to EBITDA using the trailing 12 months ended September 30, 2023, was at 2.8x, just marginally higher than our long term targeted range of 2.25x to 2.75x. We did not repurchase any shares of our common stock under our share repurchase program during the third quarter, prioritizing our cash flows on repaying debt. With the progress we have made on reducing our leverage, we will be opportunistic in repurchasing shares in future quarters, while being mindful of reaching our targeted leverage range.
We have approximately 125 million remaining of our share purchase program after having repurchased 9.2 million shares of our common stock for approximately $100 million since the Board authorized our share repurchase program in May of last year. Subsequent to quarter end, we entered into a new bank credit facility increasing the size from $350 million to $400 million and extending the maturity to October of 2028. Dave will provide further details of the new facility. We are very grateful for the support of our new and existing bank partners enabling us to extend our overall debt maturities and providing us with greater financial flexibility in managing the business and how we balance our capital allocation strategy. Following the extension of our bank credit facility, we have no debt maturities until April of 2026 when approximately 600 million of our senior notes is scheduled to mature.
With the strength of our cash flows, we have extensive flexibility and how we deploy our free cash flow in the future and flexibility about opportunistically accessing the capital markets. I'll now turn the call over to Dave, who will provide a more detailed look at our financial results in the third quarter. He will also discuss in detail, the increase in our full year 2022 financial guidance and further details about our new bank credit facility and capital allocation strategy. Dave?
David Garfinkle: Thank you, Damon, and good morning, everyone. In the third quarter of 2023, we reported GAAP net income of $0.12 per share compared with $0.58 per share in the prior year quarter. Among other special items, net income in the prior year quarter included gains on sales of real estate assets of $83.8 million or $0.53 per share, including a $77.5 million gain on the sale of our McRae Correctional Facility. Adjusting for special items, Adjusted EPS during the third quarter of 2023 was $0.14 compared with $0.08 per share in the prior year quarter, an increase of $0.06 per share or 75%. Normalized FFO per share was $0.35 during the third quarter of 2023 compared with $0.29 in the prior year quarter, an increase of $0.06 per share were 21%.
The increase in adjusted EPS and normalized FFO per share primarily resulted from higher federal and state populations combined with a reduction in interest expense. These increases were partially offset by the expiration of our final prison contract with the Federal Bureau of Prisons in November 2022 and our previously owned and operated McRae Correctional Facility and the expiration of our lease with the Oklahoma Department of Corrections June 30, 2023, and our North Fork Correctional Facility. These two expirations accounted for a reduction of $0.03 per share from the prior year quarter. During the second quarter, we began to an increase in the number of residents detained by ICE as a result of the expiration of Title 42 on May 11, 2023, a policy that denied entry at the U.S. border to asylum seekers and anyone crossing the border without proper documentation or authority in an effort to contain the spread of COVID-19.
This trend continued during the third quarter as ICE detention populations increased nationwide by 18%. From June 30th to September 30th, ICE detention populations within our facilities increased by 1,972 residents, or 23%. Note that due to fixed payments at certain of our facilities, increases in populations do not always incremental revenue and compensated occupancy, because increases can occur if facilities where population levels were already included in our compensated population. Compensated occupancy in our safety and community facilities was 72% in the third quarter of 2023 compared with 70.1% in the prior year quarter. AFFO, which we consider a proxy for our cash available for capital allocation decisions increased to $42.3 million, or $0.37 per share in the third quarter of 2023 from $29.9 million or $0.25 per share in the prior year quarter, an increase of $0.12 per share or 48%.The larger per share increase in AFFO compared with adjusted EPS and normalized FFO was attributable to higher stock-based compensation and lower maintenance capital expenditures during the current year quarter.
Maintenance capital expenditures can fluctuate from quarter to quarter depending on the nature of the expenditures required, seasonal factors such as weather and budgetary conditions, but tend to level out over annual periods. Facility net operating income in our Safety segment increased $11.4 million or 14% from the prior year quarter, net of a reduction of $1.6 million for the contract with the BOP at the McRae facility. Facility net operating income in our Community segment increased $2.2 million or 50% from the prior year quarter. Facility net operating income in our property segment declined $3.3 million from the prior year quarter, primarily due to the lease expiration at our North Fork facility amounting to $3.1 million. The increases in occupancy contributed to an increase in margins in our safety and community facilities, which increased from 19.2% in the third quarter of 2022 to 21.3% during the third quarter of 2023.
Further, during the third quarter, we were able to reduce certain labor related expenses, such as registry nursing, temporary wage incentives, and travel despite inflation and ongoing labor market pressures that have been steadily easing over the past several quarters. Longer term, we continue to believe operating margins will trend toward 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 labor related expenses continue to normalize. Turning next to the balance sheet, we continue to make progress on our debt reduction strategy, increasing our total debt repaid year-to-date through September 30th to $137.7 million net of the change in cash, including $65 million during the third quarter of 2023.
Our leverage measured by net debt to EBITDA was 2.8x using the trailing 12 months ended September 30, 2023. As of September 30th, we had $103.7 million of cash on hand and an additional $232.6 million of borrowing capacity on our revolving credit facility, providing us with total liquidity of $336.3 million. Subsequent to quarter end, we completed an amendment and extension of our bank credit facility, effectively replacing our previous bank credit facility, increasing the total size from $350 million to $400 million. The new bank credit facility increases available borrowings under the revolving credit facility, which remains undrawn, from $250 million to $275 million and increases the size of the term loan from an initial balance under the previous facility of $100 million to $125 million extends the maturity to October 2028 from May 2026 and relaxes certain covenants, while maintaining a similar pricing structure.
The larger size provides us with additional flexibility in paying down our unsecured debt, while increasing liquidity. Moving next to a discussion of our capital allocation strategy. Our capital strategy has resulted in a reduction to interest expense of $10.1 million during the 9 months ended September 30, 2023, compared with the same period in the prior year, while we have repurchased 9.2 million shares of stock for a total purchase price of $100 million at an average price of $10.86 per share since our Board authorized the repurchase program in May 2022. These repurchases include 2.6 million shares repurchased during 2023 for a total purchase price of $25.6 million at an average price of $9.84 per share. We did not repurchase any shares in the third quarter, but considering the progress we have made on debt reduction, we expect to be opportunistic and repurchasing additional shares in future quarters, while further progressing toward our targeted leverage of 2.25x to 2.75x.
We have approximately $125 million of share repurchases remaining under the board authorization. We have no debt maturities until April 2026, when $593.1 million of our 8.25% senior notes mature following the open market purchase of $21 million of these notes in the second quarter. In the future, we could elect to use our free cash flow to purchase additional senior notes in open market transactions, privately negotiated transactions, or otherwise. We could also use our effective shelf registration statement to issue additional debt securities when we determine that market conditions and the opportunity to refinance a portion of our debt are favorable, though current market conditions are not sufficiently attractive for such an opportunistic transaction.
Given the strength of both our balance sheet and cash flows, we have tremendous flexibility and how we deploy our free cash flow and balance our capital allocation strategy between debt repayments and share repurchases. Moving lastly to a discussion of our 2023 financial guidance, we expect to generate adjusted EPS of $0.54 to $0.60, up from our previous guidance of $0.52 to $0.59, and normalized FFO per share of $1.40 to $1.46, up from our previous guidance of $1.37 to $1.45. We have updated our guidance to reflect the $0.01 beat in Q3 through to the full year, Higher Federal and State population is expected to be sustained throughout the first quarter, partially offset by higher interest expense for new borrowings on the Term Loan A. Our guidance also contemplates a continued moderation of our operating expense structure.
Our guidance does not include any new contract awards because the timing of government actions on new contracts is always difficult to predict. While we could execute on one or more of these opportunities this year, which would be upside to our guidance that would be more impactful in 2024, we expect AFFO to range from $150 million to $160.8 million, or $1.34 to $1.40 per share, up from $149.8 million to $159.3 million, or $1.31 to $1.39 per share in our previous guidance. We expect our normalized effective tax rate to be 28% to 29%, and the 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 about 3% to 4% higher than 2022. We expect to incur $66 million to $69 million in capital expenditures during 2023, including $61 million to $63 million of maintenance capital expenditures unchanged from our prior guidance and $5 million to $6 million for other capital investments, down slightly from our prior guidance.
We remain focused on managing to our leverage target of 2.25x to 2.75x and have not included any additional share repurchases in our forecast. However, as previously mentioned, we will remain flexible and will continue to be opportunistic in repurchasing shares. I will now turn the call back to the operator to open up the lines for questions.
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