CXW: Expect Occupancies Trending Up Post-Title 42; Positive Takeaways of Contract Renegotiation
By M. Marin
NYSE:CXW
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Metrics from Syracuse University‘s Data Research and Distribution arm, TRAC, shows that the number of ICE detainees is up more than 40% YTD (as of June 18, 2023). We would expect this has positive implications for CoreCivic (NYSE:CXW) occupancy levels. CXW also recently entered into a new contract for its Davis Correctional Facility. We expect rising occupancies at its facilities, combined with normalizing OpEx. to lead to improving operating leverage and we expect CXW to continue debt reduction / refinancing initiatives. The company has pared debt by more than $1.1 billion since first announcing its deleveraging strategy in 2020 and has no major debt maturities coming due before 2026. We anticipate that CXW will repay portions of this well in advance of the 2026 maturity date.
With ICE populations up post-Title 42 & new Davis contract…
Title 42 ended on May 11, 2023 and detainee populations have apparently increased. According to Syracuse University’s TRAC (Transactional Records Access Clearinghouse) data, the number of ICE (U.S. Immigration and Customs Enforcement) detainees as of June 18, 2023, was up more than 40% compared to January 1, 2023 and more than 25% year-over-year. We would expect CoreCivic’s ICE populations to increase relatively in-line with national trends. We also expect rising occupancies to lead to improving operating leverage. Moreover, the company also expects that OpEx is normalizing. Once Title 42 is lifted, we anticipate a gradual increase in demand for occupancy at CXW facilities, as ICE apparently does not have sufficient supply to satisfy demand. Many (an estimated roughly two-thirds) CXW centers are operated under occupancy guarantees that exceed current actual occupancy levels. Once actual occupancy reaches – and then passes – guaranteed levels, we expect CXW to garner incremental revenue.
By way of background, Title 42 was enacted during the pandemic under the Trump administration to deter immigration into the U.S., with a stated public health justification to deter the spread of COVID-19. Concerns that ICE (Immigration and Customs Enforcement) does not have adequate detention capacity if the flow of people seeking entry into the U.S. rises have led to a delay in lifting this measure in the past.
The company had added staff over the past several quarters in order to have adequate personnel in place for when Title 42 ended. As occupancy levels increase and staffing related costs normalize, the company expects to realize operating leverage and see margins improve, although management has indicated that it does not expect margins to return to pre-pandemic levels before 2024.
Separately, CXW also recently extended its lease with the Oklahoma Department of Corrections for the company’s 1,670-bed Davis Correctional Facility, which we believe is positive for operating results. CXW had a management contract with Oklahoma that was set to end on June 30, 2023 and the two entered into a 90-day contract extension. At September 30, 2023, when the contract extension ends, operations of the facility will transfer to the Oklahoma Department of Corrections under a new lease agreement slated to run from October 1, 2023 through June 30, 2029, with unlimited two-year renewal options. The company expects to generate annual rental revenue at the Davis facility of $7.5 million under the new lease agreement.
… Expect deleveraging measures to continue …
We expect the company’s near-term focus to remain on further strengthening its balance sheet via debt paydowns. The company pared its debt balance by more than $287 million in 2022 alone and reduced debt by more than $1.1 billion since first announcing its deleveraging strategy in 2020, the combination of cash flow from operations and asset sales.
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