CoreCivic, Inc. (NYSE:CXW) Q4 2023 Earnings Call Transcript
CoreCivic, Inc. (NYSE:CXW) Q4 2023 Earnings Call Transcript February 8, 2024
CoreCivic, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Thank you for standing by, and welcome to the CoreCivic Fourth Quarter 2023 Earnings Call. At this time, all participants are in listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Mr. Mike Grant, Managing Director of Investor Relations.
Michael Grant: Thank you, operator. Good morning, ladies and gentlemen, and thank you for joining us today. Participating on today's call are Damon Hininger, CoreCivic's President and Chief Executive Officer; and David Garfinkle, our 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 2023 as well as financial guidance for the 2024 year. We'll also discuss 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 provision 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 2023 earnings release issued after market 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, Mike. Good morning, and thank you for joining us for our fourth quarter 2023 earnings call. On today's call, I will provide details of our fourth quarter financial performance and introduce our 2024 full-year financial guidance. I will also discuss with you our latest operational developments, and update you on the latest developments with our government partners. Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will review our financial results and our 2024 financial guidance in greater detail. He will also provide a more detailed update on our ongoing capital structure initiatives, including debt reduction, share buybacks and our new bank credit facility obtained in the fourth quarter.
I'll now provide a brief overview of our fourth quarter financial results. In the fourth quarter, we generated revenue of $491.2 million, which was a 4% increase compared to the prior year quarter. This increase comes 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 6%, demonstrating strong occupancy and revenue growth from our CoreCivic Safety and Community portfolios. We generated normalized funds from operations, or FFO of $51.3 million or $0.45 per share compared to $49.1 million or $0.42 per share in the fourth quarter of 2022, representing a per share increase of 7%.
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 a combined reductions to EBITDA of $2.3 million from the prior year quarter. We have achieved significant improvements in our attraction and retention rates resulting from our staffing strategies as well as an overall improvement in the hiring environment. That said, labor market pressures have necessitated temporary incentives and related incremental operating expense experienced through 2023, including the fourth quarter. As we leave 2023, we believe that more favorable operating expense trends should continue as the tight labor market continues to loosen.
And as we continue to progress toward pre-pandemic staffing and occupancy levels. As mentioned on the 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 were the right investments to make, and they have enabled us to reduce usage of temporary incentives and comps from the prior year quarter and have positioned us well to manage our customers' higher population needs. In the fourth quarter of 2023, we achieved our highest occupancy rate since the second quarter of 2020, which as you may recall is the quarter immediately following the start of the COVID-19 pandemic response. For the fourth quarter of 2022 to the fourth quarter of this year, occupancy in our Safety segment increased from 72% to 74.7% and occupancy in our Community segment increased from 58.4% to 63.7%.
The increase in occupancy in our Safety segment primarily resulted from higher detention population from our largest government partner, Immigration and Customs Enforcement, or ICE. On May 11, Title 42, a temporary public health order issued by the CDC that had essentially 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 authority granted under Title 42 to deny entry to or quickly remove individuals from the United States. There has been an increase in the number of people in custody of the Department of Homeland Security, or DHS. ICE is one of the two 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. For mid-May 2023 through December of 2023, the number of individuals in the custody of ICE increased 74%. Over the same period, ICE detention populations within our facilities increased 76%, which we believe was possible in part because of our investments in staffing. Because many of our federal contracts include a fixed payment component, the increase in residential populations do not result in a proportionate increase in our financial results as such, facilities until that is clear, the minimum compensated bed [ph] total associated with the fixed payment levels.
Most of our facilities are now at or above that level. The increased occupancy in our Safety segment also resulted from broad-based higher occupancy levels from many of our state government partners notably from the states of Arizona, Georgia, Idaho and Colorado. Now it's in second year under management contract with State of Arizona, our La Palma Correctional Center in Eloy, Arizona continues to show improvements in occupancy as well as operating and financial metrics. During the fourth quarter, we were able to sharply reduce the facilities reliance on temporary labor resources and incentives due to strong local hiring and oversight. The fourth quarter was an exceptionally busy quarter for new contracts as our best-of-class services, demonstrated outcomes and facilities provide a flexible resource to partners requiring our vital services.
During the quarter, we signed and commenced three new management contracts, each of which produced incremental occupancy at already 40 facilities with available capacity. As a reminder, ours is a leveraged business model and higher utilization of our facilities is correlated with expanded margins. In November, we announced a new management contract with the state of Montana to care for up to 120 male inmates at our 1,896 bed or correctional facility in Eloy, Arizona. The initial term of the contract is for two years, and it may be extended by mutual agreement. The total term, including renewals is up to seven years. We completed the intake process for the 120 inmates before year-end. At December 31, 2023, we also care for approximately 875 residents from Hawaii and nearly 600 residents from the State of Idaho at our Saguaro Correctional Facility.
This new contract represents an expansion of our relationship with the State of Montana as we also manage for them the fully occupied company-owned Crossroads Correctional Center in Shelby Montana under a separate management contract. Also in November, we announced a new management contract with the State of Wyoming to care for up to 240 inmates at our 2,672-bed Tallahatchie County Correctional Facility in Tutwiler, Mississippi. This is not our first time partnering with Wyoming as we previously cared for their inmates under a management contract that had not been utilized since 2019. The term of the new contract runs through June 30, 2026. The intake process for the 240 inmates was complete as of December 31, 2023. Finally, we announced a third new management contract during November.
This new contracted with Harris County, Texas to care for up to 360 inmates at Tallahatchie County Correctional Facility. The contract includes the option for the county to access an additional 360 beds at the Tallahatchie facility. The initial contract term began on December 1, 2023, and ends November 30 of this year. The contract may be extended at the county's option for up to four additional one-year terms. We began receiving inmates from Harris County during the fourth quarter of 2023 and we anticipate the intake process to be complete during the first quarter of this year. Also, as an update on our county relationships, at the end of the third quarter, we signed a new major contract with Hinds County, Mississippi for up to 250 adult male pretrial detainees also at our Tallahatchie County Correctional Facility.
We completed the intake of that population during the fourth quarter. While historically, we have focused more on federal and state contracts, it is interesting to note that many large counties throughout the United States have begun to experience capacity constraints as a result of both larger populations and infrastructure problems. Expanded county jail populations typically precedes growth in state prison populations as the jail population is adjudicated and sentenced. Further, we remain in discussions with several additional jurisdictions to help address their challenges in the near to long-term. Now turning to our Community segment, which is comprised of 23 residential reentry facilities, we experienced an increase in occupancy of 63.7% in the fourth quarter of 2023 from 58.4% in the prior year period.
Populations continue to improve across many of our facilities serving both the Bureau of Prisons or BOP as well as states, including Texas and Colorado. 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 66% in the fourth 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 attain in contract renewals. We were also able to reduce temporary staffing incentives just as we did in our Safety segment. We expect the occupancy trend to continue in the community segment now that pandemic-related public health policies have come to an end and as more of our government partners return to these important residential reentry programs that help individuals be better prepared for successfully transitioning back from a period of incarceration into our communities.
Finally, the high performance of our colleagues and the high quality of our facilities continue to be rewarded with long-term commitments from our government partners. We never take for granted renewals of existing management contracts and continue to enjoy a contract retention rate of 95% over the five years through 2023 and including the renewal of all 34 management contracts in our safety and community segments that came up for renewal during the course of the year. As a reminder, we entered into an agreement with the 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 our facility with government employees, effectively converting the facility from one in which we own and operated in our Safety segment to one that we simply lease to the state.
That facility is now named the Allen Gamble Correctional Center and is now reported in our Property segment. We remain pleased to have reached a mutually advantageous contract for this facility, and we value our ongoing relationship with the State of Oklahoma. Looking forward, we remain optimistic in the long-term macro environment for our federal, state and local business. Our governments are facing complex capacity, infrastructure and population 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 by Congress annually. However, the country is still facing significant challenges at the southern border and geopolitical events only enhance the needs for border security. Although we are over through the way into the federal fiscal year, which ends September 30, 2024, the appropriations process for funding the remaining fiscal year remains in flux. Further, a supplemental funding bill proposed by the administration that includes significant funding for DHS and ICE has not been acted upon by Congress. While there is bipartisan recognition of the need to fund DHS and ICE more robustly to address challenges at the Southern border, a funding resolution has not been reached.
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 alternatives to detention. Earlier last year, ICE issued a request for information, or RFI, for release and reporting management services. This RFI is seeking information about monetary technology, participant coordination services, including physical space, participant engagement and interactions and program management and community service 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 of our state partners are reporting increases in their prison populations and 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 as cases are adjudicated, state correctional agencies will certainly be impacted. In summary, while challenges and uncertainties remain, the general macro environment in which we operate continues to improve and our financial results have begun to reflect that improvement.
Our occupancy is at multiyear high, our margin has begun to reflect the operating leverage that comes with higher occupancy, and we are making solid progress against labor-related cost pressures that rose sharply during that COVID-19 period. In our press release, we introduced our 2024 full-year financial guidance. It includes normalized FFO per share forecast, a range of a $1.46 to $1.61, and EBITDA range of $300 million to $313 million. As we have been sharing on these calls for over a year, our lease with the State of California for our California City Correctional Center ends March 31 of this year. That facility has generated slightly over $25 million in EBITDA. So the anticipated absence of that leads for the final three quarters of 2024 negatively impacts EBITDA and is reflected in our guidance.
Obviously, we are focused on a solution to the pending lease expiration with the State of California at California City. Finding a positive solution for this facility, which is in a great location and is comprised of further replicate beds is a top priority for CoreCivic. I'll now turn the call over to Dave Garfinkle, our CFO, who will provide a more detailed look at our financial results in the fourth quarter. He will also discuss in detail our financial guidance for 2024 as well as progress on our capital markets activities and further details about our new bank credit facility and capital allocation strategy, including debt reduction, and share buybacks. Over to you, Dave.
David Garfinkle: Thank you, Damon, and good morning, everyone. In the fourth quarter of 2023, we reported GAAP net income of $0.23 per share compared to $0.21 per share in the prior year quarter. Adjusting for special items, adjusted EPS during the fourth quarter of 2023 was $0.23 compared to $0.22 per share in the prior year quarter. Normalized FFO per share was $0.45 during the fourth quarter of 2023 compared with $0.42 in the prior year quarter. As we disclosed last year, adjusted and normalized figures in the fourth quarter of 2022 included the impact of certain tax credits we were entitled to under the CARES Act. These credits were reflected as a reduction to operating expenses and favorably impacted per share results by $0.02 in the prior year quarter, net of related expenses resulting from the credits.
The increase in adjusted EPS and normalized FFO per share resulted from higher occupancy from federal and state populations, the continued normalization of our operating expense structure and lower interest expense partially offset by an increase in G&A expenses. The trend of increasing ICE detention populations nationwide continued during the fourth quarter, albeit at a slower pace than the second and third quarters, following the expiration of Title 42 on May 11, 2023. Title 42 is a policy that had been used since March 2020 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. At December 31, 2023, ICE detention populations nationwide were up to 37,131, a 5.2% increase from September 30th.
Average daily ICE detention populations within our facilities increased by 2023 residents or 23% during the fourth quarter of 2023 compared with the third quarter. Note that due to fixed payments at certain of our facilities, increases in populations do not always result in incremental revenue and compensated occupancy, because increases can occur at facilities where population models were already included in our compensated population. Our average daily compensated population from ICE was up 7.5% from Q3 to Q4. Higher sequential ICE populations combined with new contract awards and a continuing normalization of operating expenses, contributed to the increase in normalized FFO per share from Q3 of $0.35 to $0.45 in Q4, an increase of 29% and adjusted EPS from Q3 of $0.14 to $0.23 in Q4, an increase of 64%.
Operating margins in our safety and community facilities improved to 24.4% in the fourth quarter of 2023 compared to 24.1% in the prior year quarter and 21.3% in the third quarter of 2023. Excluding the impact of the aforementioned tax credits, margins were 22.6% in the prior year quarter. The increase in our operating margins was due to the increases in occupancy, per diem increases we have been successful in obtaining the continued normalization of operating expenses and the successful transition of the Allen Gamble Correctional Center to a lease in our property segment. Compensated occupancy in our safety and community facilities was 74% in the fourth quarter of 2023 compared to 71.1% in the prior year quarter and up from 72% in the third quarter of 2023.
The increases in occupancy enabled us to leverage incremental revenue over our fixed operating expenses. The increase in revenue resulting from the increases in occupancy was amplified by per diem increases we have been able to obtain, which increased 5.5% over the fourth quarter of 2022. During the fourth quarter, we were able to continue reducing certain incremental labor-related expenses such as registry nursing, temporary wage incentives and travel, despite inflation and labor market pressures that have been steadily easing over the past several quarters. These three expense categories declined by $6.3 million from the fourth quarter of 2022 and $1.8 million from the third quarter of 2023. The successful transition of the Allen Gamble Facility effective October 1, 2023, improved operating margins in the fourth quarter of 2023 and will continue to provide a stable return in our property segment going forward.
Turning next to the balance sheet. As previously disclosed, during the fourth quarter, 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 into the previous facility of $100 million to $125 million extended the maturity date to October 2028 from May 2026 and relaxed certain covenants while maintaining a similar pricing structure. We remain focused on paying down debt and continue to make progress on our debt reduction strategy.
Our debt reduction strategy resulted in a decrease to interest expense of $1.9 million from the fourth quarter of 2022 and a decrease in interest expense of $12 million from the full-year 2022. During 2023, we repaid $157.8 million of debt or $130.3 million net of the change in cash. During 2023, we repurchased $27.9 million of our unsecured notes in the open market, including $6.9 million in the fourth quarter. With clear visibility of reaching our targeted leverage ratio of 2.25x to 2.75x. During the fourth quarter, we repurchased 872,000 shares of our common stock under our share repurchase program at an aggregate cost of $12.5 million, bringing our 2023 totals to 3.5 million shares at an aggregate cost of $38.1 million or an average price of $10.97 per share.
Going forward, we expect to allocate our free cash flow towards both paying down debt and repurchasing shares, maintaining discipline on our targeted leverage ratio. Our leverage measured by net debt to EBITDA was 2.8x using the trailing 12 months ended December 31, 2023. As of December 31st, we had $122 million of cash on hand and an additional $257 million of borrowing capacity on our revolving credit facility, providing us with total liquidity of $379 million. Moving lastly to a discussion of our 2024 financial guidance. We expect to generate EPS of $0.58 to $0.72 and FFO per share of $1.46 to $1.61. Our guidance reflects growth in state and local residential populations largely attributable to the new contract awards obtained during the second half of 2023.
Intakes under those contracts are substantially complete. Our state populations also reflect higher utilization expected under existing contracts that we began to experience in 2023. Our guidance further reflects an increase in our average daily federal populations in 2024 compared with 2023, mainly due to the expiration of Title 42 in May. We expect these federal populations to remain stable throughout 2024. The most significant factor impacting detention utilization by our federal partners has historically been funding levels approved by Congress for ICE as the detension capacity is insufficient to meet the demand at the southern border. Funding under a continuing resolution for the Department of Homeland Security, including ICE, expires March 8th.
If Congress provides higher funding levels for detention beds or at the highly publicized supplemental funding bill is approved to include additional funding for border security, there could be upside to our guidance. Our guidance contemplates the continuation of an improving hiring market for labor with less reliance on temporary incentives, but resulting in higher staffing costs as we continue to progress towards pre-COVID staffing levels. Our guidance contemplates the expiration of the lease with the State of California at our California City Correctional Center effective March 31, 2024. This facility generated $31.1 million in revenue and $25.5 million in EBITDA during 2023 and is expected to result in a reduction to EBITDA of approximately $23 million to $24 million in 2024, including carrying costs such as maintenance, property taxes, and insurance that we will continue to incur after the lease expiration.
Our guidance does not include any other contract losses or any new contract awards not previously announced because the timing of government actions on new contracts is always difficult to predict. While we are encouraged by the strength of our margins in the fourth quarter, sustained margins at this quarter's level are likely to require higher populations as our staffing continues to return to pre-COVID levels. For modeling our quarterly results, as a reminder, compared to the fourth quarter Q1 is seasonally weaker because of one fewer day in the quarter, higher utilities and because we incur approximately 75% of our unemployment taxes during the first quarter, resulting in a collective $0.04 per share decline from Q4 to Q1 and negatively impacting our operating margins.
Moving now to our capital allocation strategy. Since our Board authorized the share repurchase program in May 2022 through December 31, 2023, we repurchased 10.1 million shares of our common stock at an aggregate cost of $112.6 million, leaving $112.4 million under the board authorization. We will remain opportunistic in repurchasing shares of our common stock and expect to repurchase additional shares in 2024, taking into consideration our leverage earnings trajectory, stock price, liquidity, and alternative opportunities to deploy capital. Our guidance includes a range of repurchase scenarios at various amounts and at various assumed prices. We also expect to use our cash on hand and cash flow from operations to continue paying down debt, which could include additional open market purchases or partial redemptions of our 8.25% senior notes, which are scheduled to mature in 2026 and become redeemable at 104.125% of par on April 15, 2024.
We continue to monitor the debt capital markets and could issue additional debt securities to refinance portions of our existing debt to extend our weighted average debt maturities if and when we determine that market conditions and the opportunity to utilize the proceeds are favorable. Given the strength of both our balance sheet and cash flows, we have tremendous flexibility in how we deploy our liquidity and free cash flow and balance our capital allocation strategy between debt repayments and share repurchases. Again, our guidance contemplates a range of scenarios associated with debt reduction and share repurchases. We expect AFFO, which we consider a proxy for our cash flow available for capital allocation decisions to range from $158.3 million to $175.3 million or $1.42 to $1.57 per share.
We expect our normalized effective tax rate to be 27% to 29%, and the full-year EBITDA guidance in our press release provides you with our estimate of total depreciation and interest expense. We are forecasting G&A expenses in 2024 to be consistent with 2023. We plan to spend $62 million to $66 million on maintenance capital expenditures during 2024, in line with $64 million incurred during 2023 and $7 million to $9 million for other capital investments compared to $4 million in 2023. I will now turn the call back to the operator to open up the lines for questions.
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