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Edited Transcript of CXW earnings conference call or presentation 20-Feb-19 4:00pm GMT

Q4 2018 CoreCivic Inc Earnings Call

NASHVILLE Feb 22, 2019 (Thomson StreetEvents) -- Edited Transcript of CoreCivic Inc earnings conference call or presentation Wednesday, February 20, 2019 at 4:00:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Cameron Hopewell

CoreCivic, Inc. - MD of IR

* Damon T. Hininger

CoreCivic, Inc. - President, CEO & Director

* David M. Garfinkle

CoreCivic, Inc. - Executive VP & CFO

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Conference Call Participants

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* Kevin Andrew McClure

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Tobey O'Brien Sommer

SunTrust Robinson Humphrey, Inc., Research Division - MD

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Presentation

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Operator [1]

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Good day, and welcome to the CoreCivic Q4 2018 Earnings Conference Call. Today's conference is being recorded. (Operator Instructions) And I'd now like to turn the conference over to Cameron Hopewell, Managing Director of Special (sic) [Investor] Relations. Please go ahead, sir.

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Cameron Hopewell, CoreCivic, Inc. - MD of IR [2]

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Thanks, Travis. 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 Dave Garfinkle, Chief Financial Officer.

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 fourth quarter 2018 earnings release and in our Securities and Exchange Commission filings, including forms 10-K, 10-Q and 8-K reports. You're 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, we'll also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data that we provide on the Investors page of our website at www.corecivic.com.

With that, it's my pleasure to turn the call over to our President and CEO, Damon Hininger. Damon?

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [3]

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Thank you, Cameron. Good morning, everyone, and thank you for joining our fourth quarter 2018 conference call today. We're also joined here in the room by our Vice President of Finance, Brian Hammonds.

Today, I'll provide a brief overview of CoreCivic for anyone new joining us, followed by a summary of our fourth quarter performance and finally some thoughts on our outlook for 2019 and beyond.

CoreCivic is a diversified real estate investment trust, specializing in delivering government real estate solutions to serve the public good. We are the country's largest private owner of government-leased real estate assets with 104 facilities totaling over 17 million square feet of real estate and a 35-year history of delivering a broad range of solutions to help solve tough government challenges in flexible, cost-effective ways. Our unique diversified portfolio of assets generates a steady, recurring cash flow stream underwritten by investment-grade government tenants.

Each of our 3 complementary business segments provide specialized real estate to government tenants. Our Safety segment focuses on corrections and detention facility ownership and management and includes 51 correctional and detention facilities with a design capacity to safely and securely care for nearly 73,000 people.

Our Community segment is a growing network of residential reentry centers and nonresidential community-based corrections alternatives that help address America's recidivism crisis and includes 26 residential reentry facilities with a design capacity to support 5,214 individuals.

Finally, our Property segment is a quickly growing portfolio of mission-critical, government-leased properties that, as of the end of the fourth quarter includes 27 properties, representing nearly 2.3 million square feet of real estate.

Our financial performance in the fourth quarter was in line with our expectations and were the result of strong top line growth trends across each of our 3 business segments.

Total revenue in the quarter was $482 million, a year-over-year increase of 9.4%. Our CoreCivic Safety segment experienced mid-single-digit growth, while both CoreCivic Community and Properties both generated substantial year-over-year revenue growth of 33% and 84%, respectively.

Our top line growth was carried through to generate growth in cash flows as our fourth quarter normalized FFO of $0.63 per share represented a 5% increase in per share results versus the prior year.

Our adjusted EBITDA in the fourth quarter of $106.7 million also was in the middle of our range of guidance for the quarter and represented an 8.5% increase from the prior year quarter.

Our fourth quarter growth was driven by a combination of organic growth in CoreCivic Safety, illustrated by 7 new contract awards from state and federal partners, representing approximately 4,500 beds as well as accretive M&A transactions to expand our Community and Properties portfolios. These positive developments more than offset the expected decline in average daily California inmate populations, increased interest expenses from our variable rate debt and incremental debt from recent M&A transactions.

We have taken a prudent approach to allocating capital to re-petition the company to grow and diversify cash flows in our CoreCivic Community and Properties segments. We have made these investments in response to evolving challenges and needs of our government partners as well as the deep network of relationships we've made through our safety operations that uniquely position us to operate assets to serve them.

This diversification strategy has enabled us to position CoreCivic to deliver the real estate and services solutions our tenants need today and will need in the future. The Community and Properties segments are not only a meaningful growth driver of current cash flows, but it should benefit the company over the long term through our expanded scope of solutions.

I'd now like to discuss the trends we saw in CoreCivic Safety from our various government partners in 2018 and how we see them shaping up for 2019. I'll begin with our federal partners. We currently have 2 correctional facility contracts with the Federal Bureau of Prisons in our CoreCivic Safety segment, accounting for less than 5% of our revenue in 2018. We are continuing to await an announcement for the BOP's CAR XIX procurement, which is advertised for 9,540 additional correctional beds from the private sector, although it includes the rebid of our Adams County Correctional Center in Mississippi, one of the 2 contracts I just mentioned.

In addition to the Adams County facility, we submitted a number of our idle facilities for potential new contracts and believe an award announcement could be made in the second quarter.

United States Marshals Service is our second largest federal customer, accounting for 17% of our revenue in 2018. Throughout the year, the agency experienced growth in our average daily prisoner population. The Marshals prisoner populations nationwide grew from approximately 52,000 average daily prisoners at the beginning of the year to nearly 59,000 by year-end. This resulted in increased utilization by the Marshals across essentially all of our facilities under contract with the agency and led to a new 1,350-bed contract award over the summer at our Tallahatchie County Correctional Facility in Mississippi.

Our expectation is the United States Marshals populations will continue to rise in 2019. Our current Marshals facilities have a modest amount of available capacity, and we're in the process of expanding our Otay Mesa Detention Center in California to meet their long-standing needs in the region of the country. We also have available capacity in our idle facilities that could be activated for Marshals should their capacity needs continue to grow.

And finally, our third federal partner, Immigration and Customs Enforcement saw modest increases in utilization throughout 2018. Over the summer, we entered into a new contract with ICE at our La Palma Correctional Center utilizing available capacity at the facility that was no longer utilized by the State of California. We are anticipating utilization of ICE facilities to remain consistent throughout 2019. However, the rate of border apprehensions in 2019 are well above 2018 levels, so ICE could have emerging needs as the year unfolds. We have capacity and flexibility to address any emerging needs from the agency should they arise.

And let me state again as I have in the past, that none of our immigration facilities previously, or currently, house unaccompanied minors. Our South Texas Family Residential Center, which was opened at the express request of the Obama administration, does house mothers with their children for 3 weeks or less to have the process of their asylum claim initiated.

Moving next to our state partners. The majority of our contracts that saw stable occupancy rates throughout 2018. We experienced growth in the state portion of our Safety business due to 5 new state contracts we were awarded or were in the process of activating in 2018.

In addition to the 2 new federal contracts we were awarded in 2018 that I previously mentioned, these new contracts more than offset the impact of declining populations from the State of California throughout the year.

We began 2018 with approximately 4,300 inmates from California in our system. And today, they are down to approximately 1,600 inmates at our La Palma Correctional Center, with the expectation that the remaining populations will be returning to California by the end of the second quarter of 2019.

The gradual decline in California out-of-state program has consistently impacted our earnings since 2015 when we were housing approximately 9,000 inmates across 5 facilities. That said, our work with the state has been a wonderful example of the flexible solutions we can deliver to our government partners.

Starting back in 2006 when we initially entered our contract with California for the out-of-state program, we started with just 80 beds. Over time, that grew to over 11,000 beds and helped the state as part of its efforts to drastically reduce overcrowding and improve medical care. As California was able to reduce its overcrowded situation, they began to gradually reduce the out-of-state program, and they now appear to be on a path to no longer needing out-of-state capacity. They were able to accomplish this without using taxpayer funds to build new prison capacity, which they would now need to idle.

Along the way, we broadened our services offerings with the state of -- with the state, excuse me, through our CoreCivic Community and CoreCivic Properties segments with the State of California as a supplement to the out-of-state program. California serves as the great case study for the 3 diversified solutions we can offer our government partners be those short-term or long-term solutions.

Because the safety space is all about addressing changing needs, we already successfully marketed the 5 facilities California exited over the past 4 years and have new contracts with other government partners in place at each of the 5 to use the capacity to help meet their challenges.

We continue to see a number of state-level opportunities across our 3 business segments, and I would like to briefly touch on a few of those opportunities. We continue to pursue a new contract opportunity with the government of Puerto Rico, which has been pursuing efforts across all departments to improve its efficiency and reduce expenditures, resulting in an initiative to transition a portion of its inmate populations off the island to generate cost savings.

Additionally, a number of the correction facilities sustained severe damage from 2017 hurricane season and are in need of significant capital for repairs.

Working with CoreCivic would offer a solution that provides ongoing cost savings and allows Puerto Rico to use their limited capital for other infrastructure investments the island needs. We are actively engaged with the Department of Corrections and Rehabilitation of Puerto Rico in this process and believe a potential contract award could come at any time.

If a new contract with Puerto Rico is awarded this year, it will likely come with start-up and upfront transportation expenses in 2019 and normalization in 2020. We are also actively communicating the value of our out-of-capacity, particularly in states that have significant prison infrastructure need like Colorado, Kentucky, Minnesota and Oklahoma. 6 of our 8 idle correctional facilities are located in these states and could offer immediate solutions to their infrastructure needs.

Last year, we successfully activated our Lee Adjustment Center in Kentucky to assist the state in easing overcrowding in their correctional system, and we believe that, that successful activation can be replicated in these states.

While our CoreCivic Safety business has many opportunities in 2019, we are also seeing opportunities come to market for CoreCivic Properties -- Property solutions for aging infrastructure, prison -- at the state level, excuse me, and also at the local level.

This is a critical infrastructure problem across the country, and we believe the solutions offered by CoreCivic Properties shown in our solutions signed in 2018 for the State of Kansas are the key to addressing these long-standing challenges. There are also meaningful societal benefits when jurisdictions choose to address their aging, outdated correctional infrastructure.

To once again focus on our development project in Kansas as an example, which by the way, is replacing a Civil-War-era complex that new facility will provide more space for rehabilitative and reentry programs provide for a safe to workplace for correction staff, provide more living and recreational space for inmates and a more environmental-friendly environment, all the while saving taxpayer dollars from no longer operating in an outdated, inefficient facility.

These are new -- there are numerous jurisdictions actively reviewing models for privately financed infrastructure projects, and we believe that it's likely that multiple formal procurement process could commence this year.

In fact, just last week, the Governor of Alabama announced a plan to proceed with a formal procurement to build 3 large regional prison facilities costing upwards of $1 billion to replace many of the state's outdated and overcrowded male facilities. The procurement is expected to be released in the coming months, and the CoreCivic's Property model of privately owning facilities that are then leased and operated by the government is one of the solutions to be considered.

The state's goal is to award contracts prior to end of this year in order to start construction in 2020. We are pleased to see that another state is taking bold action to address their long-standing prison infrastructure challenges, and we believe we can offer multiple potential solutions to address these challenges.

We also continue to pursue opportunities to expand our portfolio of real estate assets and complementary services through accretive acquisitions. While market conditions have tempered the pace at which we can pursue attractive acquisition opportunities in the Community and Properties segments, we continue to execute selective -- on selective transactions, as evidenced by our acquisition of the recovery, moderate solutions in December of 2018.

This acquisition further expanded our CoreCivic Community platform for providing nonresidential community-based correctional alternatives to all levels of government and is the second acquisition during 2018 of a company providing electronic monitoring and case management services.

We know that need for these services is one of the fastest growing in the criminal justice arena as government agencies seeks to increase evidence-based programs and services to reduce recidivism and better prepare offenders for reentry and, in some cases where appropriate, provide offenders an alternative to incarceration.

Turning now to our initial 2019 financial outlook. We included in yesterday's earnings report the initial guidance for our full year 2019. We currently expect to generate normalized FFO per share of $2.36 to $2.44 or a 2.1% to 5.6% increase versus our full year 2018 results. This guidance reflects the positive momentum we've gained through our successes in 2018 across all 3 business segments, which we believe position CoreCivic for accelerated incremental growth.

As always, our guidance does not include any assumptions for potential new contracts or accretive M&A transactions. However, there are market opportunities to provide government partners with more than 10,000 incremental beds that could materialize and lead to additional growth in our CoreCivic Safety segment. And we are still actively pursuing our growth and diversification strategy expanding our CoreCivic Community and Properties portfolios through accretive M&A transactions and new development opportunities.

We also have 2 meaningful development projects coming online in late 2019 and early 2020 that will provide for additional momentum expanding beyond our 2019 financial guidance.

Progress on the construction of our 2,432-bed Lansing Correctional Facility is on schedule and is to be completed in January 2020, at which point our 20-year lease with the State of Kansas will commence. This facility will expand the total square footage of CoreCivic Properties portfolio by over 17%. We are also expanding our Otay Mesa Detention Center in San Diego. The expansion is on schedule for completion in the fourth quarter of 2019, bringing the total design capacity of the facility to 1,994 beds in a location with a history of high demand from our federal partners that utilize the facility.

Dave will provide more details on our 2019 financial guidance during his remarks, but we are pleased with how we position the company to grow and diversify our cash flows while generating long-term shareholder value.

Now before I conclude, I'd like to take a moment to acknowledge and applaud the passage of the First Step Act in December, important legislation we very much supported publicly.

I've said for years that America's high recidivism rates are a tragic and unacceptable national crisis. One of the most encouraging dynamics to me personally is the positive change in tone and dialogue surrounding the needed investment to help people who are incarcerated in our country, so they are better prepared once they are released from prison.

At CoreCivic, we are proud of the role that we have been playing through unprecedented commitments to strengthen reentry programs in our facilities and to advocate at all levels of government for policies aimed at reducing recidivism.

We have invested hundreds of millions of dollars in building the national network of residential reentry centers that help thousands of people every day get ready with skills and opportunities needed to succeed after prison. We have never been better positioned to be part of the solution to one of the most costly, complex and long-standing challenges our country faces.

At this time, I'd like to turn the call over to Dave to provide an overview of fourth quarter results and also initial 2019 financial guidance. Dave?

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [4]

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Thank you, Damon, and good morning, everyone. In the fourth quarter, we generated $0.40 of adjusted EPS compared to our guidance range of $0.39 to $0.41 and in line with first call consensus estimates.

Normalized FFO totaled $0.63 per share compared to our guidance range of $0.61 to $0.63 and a penny ahead of first call consensus estimates.

AFFO totaled $0.59 per share compared to our guidance range of $0.59 to $0.61. Q4 2018 adjusted amounts exclude charges of $6.1 million for contingent consideration associated with the acquisition in 2017 of a residential reentry service provider based on financial performance that was better than estimated, and $0.8 million of M&A expenses, while Q4 2017 adjusted amounts exclude $4.5 million for charges associated with the enactment of the Tax Cuts and Jobs Act in December 2017 and $1 million of M&A expenses.

For the full year, normalized FFO was $2.31 compared to our most recent guidance range of $2.29 to $2.31 and a penny ahead of the first call consensus estimate of $2.30.

As we discussed on last quarter's call, despite a decline in populations from the State of California at our La Palma Correctional Center in Arizona and at our Tallahatchie County Correctional Facility in Mississippi, we retained elevated staffing levels of these facilities in anticipation of a new contract award from Puerto Rico, more to utilize our available capacity under existing contracts.

While we have not yet been awarded a contract from the government of Puerto Rico as we had hoped, we continue to remain optimistic about a new contract award.

Because timing is difficult to predict, our guidance does not include this contract award. Puerto Rico notwithstanding, occupancy increased at La Palma from 80% in Q3 to 91% in Q4, and increased at Tallahatchie from 39% in Q3 to 68% in Q4 as a result of higher federal populations and our successful execution of new state contract awards, which together more than offset the financial impact from the California decline.

FFO per share increased from the prior year quarter by $0.03 or 5% and AFFO increased from the prior year quarter by $0.06 or 11.3%. Adjusted EBITDA increased $8.3 million or 8.5% from the prior year quarter.

Facility net operating income increased across all 3 business segments by $9.2 million or 7%, most notably in our CoreCivic Properties segment, which increased $7.3 million or 112%.

Financial results in our CoreCivic Properties segment were favorably impacted, most notably by the acquisition in the third quarter of 2018 of the 541,000-square-foot SSA-Baltimore property.

Our CoreCivic Properties portfolio, comprised of 27 properties aggregating 2.3 million square feet, was 99.7% leased during the fourth quarter, with very stable cash flows from fixed monthly rents.

Although the expected decline in inmate populations from the State of California in our Safety segment created a headwind throughout 2018, including in Q4 where the average daily population declined by almost 2,500 offenders from the prior year quarter, higher U.S. Marshals populations across our portfolio and, as I mentioned, our successful execution of new contract awards, more than offset the financial impact from the California decline.

During June and July 2018, we were awarded 2 new federal contracts at our Tallahatchie and La Palma facilities. At December 31, 2018, we cared for over 1,600 federal offenders at our Tallahatchie facility, replacing the 1,300 California inmates that were at this facility in December 31, 2017, who were transferred back to the state during the first half of 2018.

We also cared for inmates from the states of Vermont and South Carolina at the Tallahatchie facility pursuant to 2 additional contracts awarded during 2018 as well as inmates from Wyoming under an existing contract that had not been utilized in almost a decade.

Financial results in our Safety segment also reflected the activation of our Lee Adjustment Center in Kentucky and higher populations from the states of Ohio at our Northeast Ohio Correctional Center and Nevada at our Saguaro Correctional Facility in Arizona pursuant to 3 new state contract awards from these respective states.

We believe these new contracts reflect not only the flexible capacity we can provide our customers with urgent demand but also the value proposition we provide to states with correctional capacity and programming needs. Over the past 5 years, we have maintained an average contract retention rate of 95% at our own facilities, which we believe reflects the long-term durability of our solutions and the quality of services we provide.

Net operating income in our CoreCivic Community portfolio increased $0.9 million from the prior quarter or 14% and reflected the operating results from $50 million of M&A transactions since the end of the third quarter of 2017.

As mentioned in the press release, during the fourth quarter of 2018, we acquired Recovery Monitoring Solutions Corporation for $15.9 million. This is the second company acquired in 2018 that provides nonresidential correctional alternatives, including electronic monitoring and case management services, which expands the scope of services we provide to government and further diversifies our cash flows.

During the fourth quarter of 2018, our CoreCivic Property segment generated 13% of our adjusted EBITDA and our CoreCivic Community segment generated 6.9%.

At December 31, we had $53 million of cash on hand and nearly $575 million of availability on our revolving credit facility in addition to a $350 million accordion feature under our credit facility. We have no debt maturities in 2019 and only $400 million of floating rate debt.

Our 2019 capital expenditure forecast, which is included in the press release, includes $90 million of ongoing capital expenditures for construction of the new Lansing Correctional Facility in Kansas, which began around this time last year and is on schedule for delivery in the first quarter of 2020. This project has a total estimated cost of $155 million to $165 million. $59 million of which has been incurred through December 31 under a guaranteed maximum price contract with the developer. The project will be 100% financed with a previously disclosed private placement and is drawn in quarterly installments to align with construction expenditures.

Our 2019 capital expenditure forecast also includes $29 million of capital expenditures for the 512-bed expansion of our 1,482-bed Otay Mesa Detention Center in California, which is currently utilized by both the U.S. Marshals and ICE under a contract that expires in June 2023 inclusive of extension options, which we have held since 1998. This facility has had long-standing demand from both federal partners in a strategic location with limited capacity. We expect expansion to be complete in the fourth quarter of 2019 at a total estimated cost of $43 million, including $14 million incurred through December 31, 2018.

Moving next to a discussion of our earnings guidance. As indicated in the press release, adjusted EPS guidance for the first quarter of 2019 is a range of $0.36 to $0.38, normalized FFO per share guidance for the first quarter is $0.58 to $0.60 and AFFO per share guidance is $0.56 to $0.58. For the full year, adjusted EPS guidance is a range of $1.45 to $1.54, full year normalized FFO per share guidance is a range of $2.36 to $2.44 and full year AFFO per share guidance is $2.31 to $2.39. At the midpoint, our first quarter guidance reflects an increase over Q1 2018 adjusted EBITDA of 12%, growth and normalized FFO per share of 11% and AFFO per share growth of 14%.

Adjusted EBITDA guidance for the first quarter is $102.5 million to $103.5 million and for the full year is $414.5 million to $423.5 million. About half of the full year growth in adjusted EBITDA from 2018 to 2019 is generated from organic growth and half is generated from acquisitions completed in 2018.

Compared to the fourth quarter of 2018, Q1 is seasonally weaker because of 2 fewer days in the quarter and because approximately 75% of our unemployment taxes are incurred during the first quarter, resulting in a collective $0.04 per share decline from Q4 to Q1.

Although the current budget for the State of California contemplated returning to the state all of the California inmates we care for by January 2019 because of higher-than-expected populations in the state system, the state has been unable to return the populations held at our 3,060-bed La Palma Facility. Our forecast assumes they will all be returned by June 30, 2019, consistent with the state's draft budget for fiscal 2019 to 2020 released last month.

We currently care for 1,600 inmates from the State of California, down from 2,000 at December 31, 2018. We have several prospects to utilize this space expected to be vacated by California, and our forecast assumes a range of assumptions for the second half of 2019.

Our guidance does not include any new contract awards beyond those previously announced because the timing of government actions on new contracts is always difficult to predict. Any new contract awards could also come with start-up costs that are not included in our guidance. Our guidance also does not include any M&A activity. Although we have an active pipeline and continue to identify opportunities in both our Properties and Community segments, we intend to be judicious into deploying our capital considering leverage of 4x and what we believe is an undervalued stock price.

The adjusted EBITDA guidance in our press release enables you to calculate our estimated effective income tax rate of 4.25% to 5.5% for the first quarter and provides you with our estimate of total depreciation and interest expense for the first quarter and full year 2019. We expect G&A expenses to be approximately 5.5% to 6% of total revenue, which is consistent with 2018.

I will now turn the call back to Damon for closing comments before opening the lines for questions.

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [5]

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Thank you, Dave. So before we turn it over for Q&A, I would like to take a moment to highlight some of the notable accomplishments of our reentry programs in 2018. Thanks to the dedication of CoreCivic teachers, counselors, case managers, chaplains and other company professionals, in 2018, we were nearly able to get 6,500 offenders to receive their high school equivalency or career technical education certifications. Our Crowley County Correctional Facility led the State of Colorado in GED completions for the second year in a row.

Our newly activated Lee Adjustment Center in Kentucky, we coordinated with the Department of Corrections to offer a 10-month online information support and services computer program to offenders. Upon completion, offenders will receive a base National Occupational Competency Testing Institute credential. Over 2,000 offenders completed the evidence-based substance abuse recovery and treatment programs, a 10% increase from 2017.

And finally, we expanded our Go Further reentry program from 5 to 13 CoreCivic facilities. This program supplements our facility reentry programs by adding a proprietary cognitive behavioral curriculum and encourages staff and offenders to take a collaborative approach to assist in the reentry preparations. This is only a small sample of the programming accomplishments achieved in CoreCivic facilities in 2018, and I am very proud of the real lasting impact these programs have for the men and women entrusted in our care.

I invite you to look at the reentry section of our website, which is constantly being updated with information -- with information on, and accomplishments of, the programs and services we offer. Our commitment to reentry through these programs is making a difference in reducing recidivism in America.

So with that, I'll turn it over to Travis to open it up for Q&A. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) First question comes from Tobey Sommer, SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

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Damon, I wonder if you could talk a little bit about CAR XIX and BOP inmate population forecast, both from an overall perspective as well as, more specifically, the criminal-alien subset. What kind of signs are you seeing that CAR XIX, the process is proceeding kind of behind the scene? And then what's your expectation for both of those populations and the trajectory this year and into next?

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [3]

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Very good, Tobey. Thank you very much. So couple of answers there. Let me first say with the government shutdown, it did slow down some of the kind of regular communication we have with the BOP. Notably, I think I've shared with you that the BOP to their credit, they twice a year meet with the industry at ACA Conferences to give a full forecast of not only populations but also budget and then procurement activity, along with some kind of shared interest on kind of operational changes or emerging issues within the facilities. So with ACA, it happened right in the smack middle of the government shutdown. So during ACA, BOP didn't actually have any officials there. So we missed our kind of early year report that we usually get from the BOP. So I share that. The last data point we have with the BOP kind of formally as they communicated to the industry was going into fiscal year 2019, they expected a continued kind of decline in populations through their first part of the year kind of bottom out and then start seeing increases towards the end of the fiscal year of 2019. And if you look at the numbers, kind of the most recent numbers, that appears to be pretty accurate. If you look at kind of the first couple of months into this fiscal year, so that appears to be pretty accurate based on kind of that last forecast they gave to the industry. But I guess, more informally also we talk to the BOP on a regular basis. We do know that with the First Step Act and also some of the activity around the implementation of the budget, we do know that they're kind of working behind the scenes to kind of get a full and accurate kind of forecast for rest of this year. So I think in the coming days and weeks, especially with the government shutdown and then this week with the President Day holiday, we'll get probably little more clarity of kind of how to think in the rest of the year. I guess, the final part of your question was about CAR XIX. We did hear late last week that they're still indicating an award on the procurement in the second quarter. So we're thinking probably April, May of this year. I don't know, anything to add to that, Dave?

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [4]

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That's right, yes.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [5]

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And if you could refresh me on CAR XIX, I know you have one of your facilities up for recompete as part of that. Of the total procurement, how much of it represents sort of incremental capacity, potentially new contracts for the industry, essentially?

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [6]

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Yes, I think -- make sure I get the math here right, Dave. But I think, yes, if you look at 9,500 beds of that total Adams County is part of a rebid of that total. So if you subtract that, which would be about 2,200 beds, then I'd say that kind of the net increase for the industry would be about 7,000. Is that about right, Dave?

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [7]

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Yes, and there are a couple contracts that are under extension that could use about 5,000 of those beds that could be awarded under...

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [8]

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Under short-term agreement.

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [9]

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Under short-term agreement.

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [10]

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They can get long-term agreement. Yes, that's under CAR XIX, yes. Yes, so let me restate that last point, Tobey, because it's an important one. But there are a couple of agreements in place today very short-term in nature that bureau is using. It could be the case where they get awarded a new contract under CAR XIX that could be out there for a longer term. So that, obviously, could impact the net increase to the industry and to the company.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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Okay. Thank you for that clarification. And then with respect to your comment on the U.S. Marshals population, kind of thinking that, that might be rising -- continuing to rise this year. How do we think about the relationship and the timing difference between U.S. Marshals populations rising and a later effect on BOP populations?

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [12]

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Yes, good question. And it's not precise, but I think if you would have -- if you ask the bureau and the Marshals too, of course, I think they would generally say a kind of about 6- to 12-month lag. So from the time you start to see a meaningful increase in Marshal population as they go through the court process through the various federal districts around the country, it's usually 6 to 12 months. It could be a little longer, again depending kind of the location and the kind of complexity of the individual cases obviously, but that's probably a pretty good number. So I think if you see the increases that we talked about in 2018 in Marshal Service and then you got there bureau talking about kind of incremental demand that they hopefully will have satisfied through CAR XIX that would be about 12 months, maybe a little longer, maybe about 18 months if you kind of start from the beginning of the increase of Marshals development timing of when the BOP awards and activate those contracts. Anything add to that, David?

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [13]

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That's right, yes.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [14]

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Okay. I'll just ask couple more, and I'll get back in the queue. With respect to your better guidance for profit in '19, how do you assess the dividend payout and kind of where you want that to be now that you got an upward trajectory in EBITDA?

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [15]

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Yes, great question. So actually timing wise, tomorrow actually is our first of the year board meeting here in Nashville, and that will be a natural conversation that we will have with the board. So yes, now that guidance has been fully communicated to the market, that will be a topic for the full board. And I think it will be indicated that, yes, we talk about the dividend, obviously, every quarter, but obviously given a little more discussion as we get the full year guidance out for the full year and give the board a kind of full wholesome view of kind of all the dynamics throughout the company and our forecast. Anything to add to that, David?

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [16]

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Obviously, Tobey, they look at a number of factors, including trajectory of our cash flows, forecasted AFFO payout ratio we guided to around an 80%, AFFO payout ratio. Leverage levels, which we're on the high end of our leverage policy and then opportunities to deploy capital into new investments. So some of these factors lean toward a dividend increase, such as the trajectory of our cash flow and the AFFO payout ratio. On the other hand, we see a lot of opportunities to deploy capital into new investments with attractive risk-adjusted returns, they'll further diversify our cash flow. So it's going to be a robust discussion, I'm sure, and we'll make an announcement following the meeting tomorrow.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [17]

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Okay. And then last question for me, I'll get back in the queue. Damon, could you maybe of your idle facilities, which ones are the most desired as reflected by your customer conversations and not to say, you don't like them all, but which one may be the least desired?

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [18]

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Yes, good question. So let me kind of go from east to west here. So the 2 additional facilities we've got in the State of Kentucky, obviously, Kentucky would be the most interested in those. And I think the activity we've seen in the last 18 months with the new contract at Lee and our effort to make sure we really had a great start-up there, an activation, by all counts, everybody feels really good about that. Then, I think it positions us very well for incremental opportunity there in the State of Kentucky. So I feel good about those opportunities within that state. And then going out west, in Oklahoma, there we got the Diamondback facility still vacant within Oklahoma just south -- or excuse me, northwest of Oklahoma City. And Oklahoma continues to have challenges that you see from some of the recent press clips here in the last few months about kind of the need they have within their own department but also potential additional capacity. So we're going through a change with the new governor, just got inaugurated here in the last 60 days. So we're educating him and his administration along with the department on kind of what the opportunity could be there with that state. But I also would say with that facility being centrally located in the United States, it is, I think, a great facility for solutions either from another out-of-state partner or federal government. So I feel good about opportunities within that facility to provide some really great solutions if it's dealing with overcrowding or dealing with infrastructural issues or like say with a new opportunity like Puerto Rico that we talked about earlier, that could be a great solution too. So I feel good about that facility just because of its location and the demand both in and out of state. And then New Mexico, we've got a facility near Albuquerque. That facility has, I think, opportunities within the southwest border, primarily with the federal government, so I don't see the kind of in-state as an opportunity. I think, with ICE and Marshals that they have emerging needs within south of border and being a good location for the demand there, I think that could be an opportunity for those agencies. And then kind of going just south from there to Texas, you've got Eden. That facility is in CAR XIX. I think, we've said that before that would be a great solution for incremental demand for the BOP if they do need additional capacity through the CAR XIX procurement and also actually for southwest border needs for ICE and Marshal Service. And then going up north, then you've got 2 in Colorado. Those 2 facilities have potentially some demand in Colorado. We, obviously, see some demand from time-to-time in the kind of the northwest, places like Idaho. Wyoming, of course, signed a contract for Tallahatchie last year. So that could be a good solution for some needs kind of out-of-state based on location, those 2 facilities. Federal demand maybe not as much. I'd say it's probably more kind of a state demand either in state or out of state for those 2 facilities. And then going further north up to Minnesota with the Prairie facility, that could -- again, we think it could be a good solution for the State of Minnesota. That's another state that's going through changes with a new governor and I'll say new administration here in the last 60 days. Could be some federal demand in addition to Minnesota and, like I said with kind of higher -- or northern Midwestern states, could be some opportunities there. What did I miss on the list there, Dave?

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [19]

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You just mentioned Prairie. So that's all.

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [20]

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So I think -- keep me honest here. But, yes, I think I got all of them. So hopefully, it gives you a little more color.

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Operator [21]

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(Operator Instructions) Our next question comes from Kevin McClure, Wells Fargo Securities.

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Kevin Andrew McClure, Wells Fargo Securities, LLC, Research Division - Senior Analyst [22]

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So the border security bill that was just passed provided more funding on average for detention beds. And I'm curious your thoughts on where you see ICE deploying that capacity? Alternatively, they also have an RFI out there for up to 3,000 beds they issued about 2 years ago. I'm wondering if the enhanced funding prompts them to kind of resurrect that RFI and turn it into RFP. And where do you see those beds going?

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [23]

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Thanks for your question. So the short answer is, it's going to be a little bit of a wait and see on what ICE does. As you know, I've said it just got signed last week. And with the President Day holiday this week, we really haven't gotten any kind of direction or thoughts from additional needs from ICE here near term. But I think in the coming days or weeks that will manifest itself I'm sure through conversations with the company and through maybe other forms for the industry. But I don't think anything to add to that, David?

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [24]

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No, we've got probably a couple thousand beds available for either U.S. Marshals or ICE. So we'll see I would expect that they would utilize existing contracts before they enter into new contracts, if that's the route they take, but we're positioned well with available capacity.

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Kevin Andrew McClure, Wells Fargo Securities, LLC, Research Division - Senior Analyst [25]

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Got it, okay. And then Puerto Rico, thanks for the color there. You maintain elevated staffing levels at Tallahatchie in anticipation of the contract. I'm wondering how much do you estimate that cost you in terms of just inefficiency during the quarter. And how long would you be willing to continue with those staffing levels while you await a contract before you decide to look for other customers?

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [26]

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Dave and I are go tag-team on this. So I'll have Dave kind of answer part of your question, and then I'll give you little more color on Puerto Rico itself.

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [27]

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Yes. I guess, I'd say we did maintain elevated staffing levels in the third quarter as well. We announced that we're going to maintain higher staffing levels in the fourth quarter for either the government of Puerto Rico or utilization of existing contracts. And I think that turned out to be a smart decision because we're able to accommodate additional federal populations, not only at Tallahatchie but at Tallahatchie and La Palma as well. So we're in the same situation today. We're able to utilize staff at those facilities. Sometimes, we transfer staff to other facilities if there's not a need at that facility and we have a need at another facility. That's the -- one of the benefits we provide as we can provide flexible staffing solutions as well. But sitting here today, I wouldn't say we have excess of staff going into 2019 in the first quarter here because of the increase in the populations that we've seen from the federal government at both those facilities.

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [28]

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And I'll just add. I was down in San Juan recently and met with the team that we've got working on the highland for this solution. And I walked away kind of incrementally more encouraged about the opportunity to provide a solution to Puerto Rico. It's clear that the challenges continue and persist, which is the fiscal situation and also some of these facilities are just really challenged from a fiscal plan perspective. So as I kind of went around San Juan and met with various stakeholders, the message was clear that our solution provided safe, humane with a very robust program solution to Puerto Rico was very attractive to all stakeholders. And I think kind of near term, what the Commonwealth is doing is just putting a little more clarity on exactly what they would do on kind of the back end for consolidation of facilities on the island for inmates that are vacating that capacity and moving to CoreCivic facility. So more to come on that front, but it's clear the conditions continue to persist on the island and our solutions are broadly accepted and very much supported by various stakeholders.

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [29]

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And one final point to make, Kevin, we do get that contract award depending on how many inmates they want to send to the mainland and how quickly. We could need additional staff, and we've offered the government of Puerto Rico that we would be happy to take some of the staff that they currently are using in Puerto Rico since they've -- they're obviously familiar with the population.

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Kevin Andrew McClure, Wells Fargo Securities, LLC, Research Division - Senior Analyst [30]

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Got it, okay. California, so they're down to one facility now, La Palma, about 90% occupied. Just out of curiosity, do they have first right of refusal to use that facility? Can you remind me how many beds they can theoretically have a claim on? And the reason I ask is, say, populations don't decline as quickly as they forecast. And at the same time, you have growth or demand from federal customers. Can the federal customers supersede California since they have communicated the desire to draw down their population? Or do they have a claim on a certain number of beds?

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [31]

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Let me start first, Damon. I'd say they have a contract that expires in June. Right now, their budget calls for them to reduce their populations completely by the end of June. And that would be a conversation we have. I don't think we get into a spat over who has claim to which bed. They've been a very good partner as we work for them -- work with them over the years and transferring populations in some cases to different facilities. And so that's a conversation we'd have at the appropriate time. But right now, we're -- they reduced from 2,000 to 1,600 as of yesterday. It looks like they're going to exit that facility by the end of June. If they don't, we're there for them. We will not abandon them, and we'll work with them as well as the federal partners. As I mentioned, we've got capacity at other facilities even in the Arizona where the California population resides today. So we'd be able to work -- we believe we'd be able to work with both partners in order to satisfy any demand that's needed.

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [32]

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Yes, and let me just add, it's a great question. Let me just add. We look at kind of the trends within the State of California. And their most recent report indicates that they are at 133.9% within their facilities in the State of California. And so just to give you a number, that means there are about 3,000 vacant beds below the cap, which is, obviously, an important number for them to kind of keep an eye on that. Obviously, they want to make sure they're well below that cap. So -- and I think if you also go back -- I was looking at this yesterday, if you go back to August of last year, the weekly reports for populations, I think, of all those weeks since August 1 to today or this week, they've only increased, I think, 3 weeks out of that whole period. So most of the weeks are showing a week-over-week decline. So all indications is they'll be out by June. Obviously, Dave's point is an important one, obviously we want to be sensitive to any issues that may arise in California, but I think the trends are pretty clear that they probably are going be out by the end of -- in the second quarter.

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Kevin Andrew McClure, Wells Fargo Securities, LLC, Research Division - Senior Analyst [33]

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Okay. Final question for me, and then I'll hop back in the queue. Any thoughts on your 2020 notes taking them out early? Take some of the refi risk off the table? Or are you kind of content to address them next year?

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David M. Garfinkle, CoreCivic, Inc. - Executive VP & CFO [34]

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That's something on the forefront of my mind, Kevin. Obviously, those $325 million mature in April 2020. They do have a make whole through December 31, I believe, it is of this year. Bond market is, it's improving, but probably not at a place where we'd be interested in doing something opportunistically at this point. We've got a few quarters yet before we need to pull the trigger on that. I think another avenue at least more likely depending on where bond markets go between now and the end of the year, we got the $350 million accordion on our credit facility. So we could execute term loan, either term loan A or term loan B. So that would be the back-up plan or the number one plan depending on where the bond market -- if the bond market is not there, I'd expect we'd be looking at a term loan.

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Operator [35]

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(Operator Instructions) We have no further questions in the queue at this time.

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Damon T. Hininger, CoreCivic, Inc. - President, CEO & Director [36]

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Thank you very much. And to our investors, we're very grateful for your investment. We're excited by the important work that we're doing in our facilities. We are making, obviously, a big, big impact on the people entrusted in our care. So we're grateful for your investment, so we can make those changes in people lives. So we will have another call in May and give you an update on our results for the first part of the year. Thanks so much. Have a good day.

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Operator [37]

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Thank you, ladies and gentlemen. This concludes today's teleconference. You may now disconnect.