CXW: Positive Trends – Rising Occupancy, Normalizing OpEx, Debt Reductions – Lead CXW to Raise Guidance
By M. Marin
NYSE:CXW
READ THE FULL CXW RESEARCH REPORT
CoreCivic (NYSE:CXW) reported 2Q23 results this week. As anticipated, the termination of Title 42 has led to higher occupancies at CXW facilities, while at the same time the company continues to pursue cost containment efforts, debt reductions and other balance sheet strengthening measures. Reflecting rising occupancies, the apparent growing demand for capacity and ongoing discussions the company is having with existing and potential partners plus its own efficiency improvements, CXW raised 2023 guidance.
2Q23 Takeaways
▪ CXW raised 2023 guidance
▪ Occupancies at CXW facilities are up
▪ Company continues debt reductions / balance sheet strengthening measures
Title 42 ended on May 11, 2023. ICE detention populations at CXW facilities have increased by ~45% since then (through July 31, 2023). The company’s discussions with existing & potential partners also would appear to have positive implications for further occupancy increases. We expect rising occupancies to lead to improving operating leverage. Combined with continued debt reductions – CXW has pared debt by more than $1.1B since 2020 – this has positive implications for the share price multiple, in our view.
CXW reported 2Q23 total revenue of $463.7 million, up from $456.7 million. Net Income was $14.8 million or $0.13 per share, compared to $10.6 million and $0.09, respectively. Largely reflecting tight labor market conditions, operating expense advanced 3.7% year-over-year to $362.0 million. Nevertheless, the company expects that OpEx is normalizing. CXW also has cut some labor-related costs as labor market conditions improve. CXW believes it has put sufficient staff in place to support the rising populations the company began to see in 2Q23 and which it expects will continue.
New Davis Correctional Facility Agreement; 94% Contract Renewal Rate
CXW’s renewal rate over the past 5-years on owned and controlled facilities is 94%. The company 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. The company expects margins will be consistent with the average roughly 75+% operating margin the company’s Properties segment generates.
Deleveraging measures continue …
CXW’s balance sheet and refinancing measures have led to substantially lower debt levels over the past couple of years. In 2Q23, CXW repurchased $21.0 million of its 8.25% senior notes that are scheduled to mature on April 15, 2026, through open market purchases. The company has also extended maturities through refinancings. Following recent balance sheet measures, the company has no major debt maturities coming due before 2026. At this point, CXW has reduced the 8.25% senior notes outstanding balance to $593.1 million.
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