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CXW: Operating Improvements Continue, View Credit Facility Extension, Expansion as a Positive

By M. Marin



Positive takeaways include rising occupancies, improving margins, bank credit facility amendments …

We believe CoreCivic’s (NYSE:CXW) 3Q23 results underscore organic improvements as occupancies rise and costs normalize. The termination of Title 42 has led to higher ICE demand for capacity at CXW facilities, while other government entities, including federal, state, and local agencies, have also registered higher demand for occupancy. At the same time the company continues to pursue cost containment efforts, debt reductions and other strengthening measures. Reflecting recent operating improvements and ongoing discussions the company is having with existing and potential partners plus its own efficiency measures, CXW tightened 2023 guidance even against the backdrop of a difficult labor market and inflationary pressure and the interest rate environment.

3Q23 Takeaways

▪ Occupancies at CXW facilities are up

▪ Continued debt reductions / balance sheet measures contribute to substantially lower interest expense

▪ CXW has executed or renewed several contracts in recent months

Occupancies up, debt reductions continue…

Average compensated occupancy was 72.0% in 3Q23, up from 70.1% in 3Q22. CXW has also cut some labor-related costs, such as registry nursing, wage incentives and travel, and believes it can reduce these expenses further as labor market conditions improve. The 3Q23 operating margin of 7.7% was up compared to 6.5% in 3Q22. As occupancy levels increase and staffing-related costs normalize further, the company expects margin improvement to continue.

Balance sheet continues to strengthen…

CXW’s balance sheet and refinancing measures have led to substantially lower debt levels over the past couple of years. Interest expense was $17.9 million in 3Q23, down from $20.8 million in 3Q22. CXW has reduced debt by more than $1.1 billion since first putting the deleveraging strategy in place in 2020, through the combination of cash flow from operations and asset sales.

The company has no major debt maturities before April 2026 when $593.1 million of 8.25% senior notes are scheduled to mature. As we have seen CXW do with other approaching debt maturities, it would not surprise us to see the company begin to reduce the balance in advance, depending on the interest rate environment.

… Amended credit facility: larger, with extended-maturity, less restrictive …

CXW recently amended its bank credit facility, which we view positively. The company increased the facility to $400.0 million, up from $350.0 million before. The new facility boosts the company’s access to capital and also extends the maturity from May 12, 2026, to October 11, 2028. The company now has available borrowings under the revolving credit facility of $275.0 million, up from $250.0 million. The term loan has increased to $125.0 million, up from $100.0 million. In addition, financial covenants are less restrictive following removal of the prior $100.0 million limit of netting unrestricted cash and equivalents when calculating the consolidated total leverage and secured leverage ratios. The revolver remains undrawn, except for $17.4 million in outstanding letters of credit.

The company’s recent capital allocation focus has been on further strengthening its balance sheet via debt paydowns but, depending on market conditions, we would anticipate further share buybacks, particularly given that the company’s leverage ratio is now nearly at the targeted leverage range. With $104.7 million of cash at the end of 3Q23 and no borrowings outstanding under its revolver, the company has substantial liquidity to maintain these measures, in our view.

Renewal rates avg 94%; new / renewed contracts with multiple government entities over past few months …

Over the past 5-years, renewal rates on owned and controlled facilities has averaged 94%. Management attributes this to the limited supply of and older state of many government owned correctional facilities, programs the company offers inmates and the cost effectiveness of its services, among other factors. In recent months, the company has signed a number of new or renewed management contract, including with (in 3Q23) Hinds County, Mississippi, the state of Montana, the U.S. Marshals Service, ICE, the Texas Department of Criminal Justice, and the Oklahoma Department of Corrections, among others.

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