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Edited Transcript of CXW earnings conference call or presentation 9-Nov-17 4:00pm GMT

Q3 2017 CoreCivic Inc Earnings Call

NASHVILLE Nov 13, 2017 (Thomson StreetEvents) -- Edited Transcript of CoreCivic Inc earnings conference call or presentation Thursday, November 9, 2017 at 4:00:00pm GMT

TEXT version of Transcript


Corporate Participants


* Cameron Hopewell

CoreCivic, Inc. - MD of IR

* Damon T. Hininger

CoreCivic, Inc. - CEO, President and Director

* David M. Garfinkle

CoreCivic, Inc. - CFO and EVP


Conference Call Participants


* Jordan Neil Hymowitz

Philadelphia Financial Management of San Francisco, LLC - Managing Principal & Portfolio Manager

* Kwan Hong Kim

SunTrust Robinson Humphrey, Inc., Research Division - Associate




Operator [1]


Good morning. This is James, and I'll be your conference operator. As a reminder, this call is being recorded. At this time, I'd like to welcome you to the CoreCivic's Third Quarter 2017 Earnings Conference Call. (Operator Instructions) I'd now like to turn the call over to Cameron Hopewell, CoreCivic's Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.


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


Thank you, James. 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 David 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 third quarter 2017 earnings release and in our various SEC filings. You are also cautioned that any forward-looking statements reflect management's current views only and the company undertakes no obligation to revise or update such statements in the future.

On this call, we will 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 on the Investors page of our website.

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


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


Thank you, Cameron, and good morning, and thank you to everyone for joining our call today. We are also joined here in the room by our Vice President of Finance, Brian Hammonds.

Our third quarter financial performance came in ahead of our initial forecast as we experienced modestly higher revenues across multiple federal and state partners during the quarter.

Normalized FFO of $0.56 per share was $0.02 ahead of the high end of our third quarter guidance, and AFFO of $0.53 per share was $0.01 ahead of the high end of our guidance.

This has allowed us to raise our full year 2017 per share guidance for the fourth consecutive quarter to normalized FFO per share of $2.33 to $2.35, an increase of over 8% in the guidance range from $2.11 to $2.21 per share or $0.18 at the midpoint from the initial full year 2017 guidance we provided back in October of last year.

David will provide a more detailed summary of the drivers of our financial performance and key factors impacting our updated full year outlook at the conclusion of my remarks.

Before I begin to discuss business developments during the third quarter, I'd like to say and take a few moments to recognize the contributions of our Chief Corrections Officer, Harley Lappin, who, after nearly 7 years in the role at CoreCivic, has decided to retire from the position at the end of this year.

Harley's time as Chief Corrections Officer with CoreCivic adds to a highly distinguished 33-year career as a corrections administrator that began with the Federal Bureau of Prisons in 1985.

His leadership experience, insights and knowledge have been incredibly helpful to the executive management team, our Board of Directors and to me personally. For all of his contributions to the company, previous service to his country and to me personally, I'd like to extend my sincere thanks to Harley.

At a time when our company's diversified business offerings are likewise diversifying our operational services, I cannot think of anyone better suited to step into this important role than Patrick Swindle.

Since joining CoreCivic in 2007, Patrick has served in a number of critical leadership roles that have provided him with meaningful company-wide knowledge and experience, while supporting and leading our efforts to grow and diversify our company.

I have really enjoyed working with Patrick during his time with the company, and we are very excited about his move into this position.

Moving next to discuss business developments in the third quarter. I'd like to begin by providing an overview of our response to Hurricane Harvey in Texas in late August and our response to Hurricane Irma in September that affected portions of Florida and Georgia.

Well before Harvey made landfall in East Texas, we proactively worked with our federal and state partners to assess the path of the hurricane and made the decision to transfer all residents out of our Corpus Christi Transitional Center to other CoreCivic residential reentry facilities in Texas that were outside the direct path of the storm. That residential reentry facility received modest damage when the eye of the hurricane made landfall only a few miles northeast of the facility.

We also assisted non-CoreCivic facilities in the path of the storm with transportation and temporary housing of offender populations at our facilities further inland.

As Harvey settled over the area of Houston, delivering historic levels of rain and flooding to the area, our 1,000-bed Houston processing center continued to operate without interruption. That's not to say our staff did not face significant challenges because as you expect, a number of their homes or family members' homes were impacted by the rising floodwaters and many others faced difficulties reporting for work due to impassable roadways. Although the facility never lost power, we were fully prepared with backup diesel generators and had ample food supplies for our ICE detainees and also our staff, who were displaced from their homes or could not return home due to roadway flooding.

Following the hurricane, through our employee-sponsored CoreCivic assistance fund and additional corporate resources, we have made financial assistance available to colleagues whose homes were damaged.

A few weeks later, Hurricane Irma displaced many people and left large portions of Florida and Georgia with extensive property damage and without power. We operate 2 facilities in the northern portion of Florida and we own 5 facilities in the southern half of Georgia. So we very quickly found ourselves, again, planning ahead of a hurricane with multiple federal and state partners.

Given the path and expected strength of the hurricane winds, there was no need to relocate any of the inmates and detainees across the 7 affected facilities. However, we did have to bring in extra diesel fuel for backup generators, work with our food service and pharmacy providers to ensure additional supplies were in hand in case of disruption of normal delivery schedules, and operations had to implement staffing plan alternatives in case the hurricane disrupted regular scheduled shift changes. While few facilities experienced periodic power outages that required the use of backup generators and some various minor cosmetic damage to exterior buildings, no meaningful disruptions occurred.

I'd once again like to thank all CoreCivic employees that took part throughout these hurricanes and helped deliver the high quality of service our government partners have come to expect from CoreCivic. On August 31, I flew down to Houston along with other members of our management team to personally thank all of the hardworking, dedicated CoreCivic employees and meet with the facility management staff to ensure all appropriate resources were available to the facility and staff.

Every story I heard from our facility administrators and staff fills me with great pride and acknowledge that our company is out there everyday doing what is right for our customers and for the individuals that are entrusted into our care.

Looking next at new contracts within CoreCivic Safety. In July, we began receiving offenders from the City of Mesa, Arizona at our Central Arizona Florence Correctional Complex under a 3-year contract. Our facility predominantly houses detainees from the United States Marshals and Immigration and Customs Enforcement, but the new contract with Mesa has CoreCivic caring for an additional 100 and 200 offenders. While this is a relatively small contract, we are excited to have reached an agreement because we believe there could be additional cities in the region that are interested in a similar solution.

On August 15, we began receiving offenders from the State of Ohio at our Northeast Ohio Correctional Center under a new agreement to house up to an additional 996 offenders. We currently care for approximately 450 offenders from the State of Ohio at the Northeast Ohio Correctional Center, in addition to approximately 625 prisoners from the United States Marshals Service and 275 detainees from ICE. And we anticipate the ramp of additional offenders from Ohio to be completed by the end of the first quarter of 2018.

In September, we entered into a new contract with Cibola County, New Mexico to house a minimum of 120 offenders at our Cibola County Corrections Center. As we've discussed previously, last year, we entered into a contract with ICE to house up to 1,100 detainees at this facility. But their anticipated demand in the region has not materialized. We worked with ICE to adjust the contract to make the unused capacity available to other partners. Today, we are housing approximately 235 detainees from ICE, 235 prisoners from the United States Marshals Service and 120 offenders from Cibola County.

And in October, we entered into a new contract with the State of Nevada to house up to 200 offenders at our Saguaro Correctional Facility in Arizona to help alleviate overcrowding Nevada is experiencing in their correctional system. The new contract has an initial term of 2 years and is renewable for additional periods by mutual agreement. We expect to begin receiving offender populations this quarter, and we are excited to work with Nevada for the first time since 2003.

Just this week, we finalized a new contract with Hamilton County, Tennessee to continue management of our Silverdale Detention Facility. That's a contract we've held since 1985, so we are very excited to have been selected as the winning respondent to the RFP.

The initial term of the contract is 4 years, and it is renewable for an additional 4-year period. The original RFP was also seeking a potential county jail addition to the existing facility in order to replace the county's existing jail in downtown Chattanooga. The new contract incorporates a development agreement, providing the county's ability to negotiate the construction of their replacement facility for the county jail and the Silverdale Detention Center.

We see multiple opportunities for CoreCivic Properties as across the country there are over 200,000 beds in correctional facilities that were constructed over 75 years ago and are in desperate need to be replaced in the near future. Add to that countless county jails and other key criminal justice infrastructure and collectively, we estimate $15 billion to $20 billion of required investments are desperately needed for these type of properties. Governments are struggling to find room in their budgets to finance large, capital-intensive infrastructure projects like this. However, these projects are also competing with the needs in education, transportation and utility infrastructure, all of which are routinely prioritized over correctional infrastructure.

As we have seen this solution begin to resonate with many jurisdictions nationally, we have added resources under the development side of CoreCivic Properties to aggressively pursue these opportunities.

We are also engaged with the Kansas Department of Corrections in response to an outstanding RFP to replace their 150-year-old, 2,400-bed Lansing Correctional Facility. We believe Kansas is still on schedule to make an official ward announcement before the end of the year, and our response offers a compelling solution. This could ultimately be a significant milestone for the industry as it would represent the first time in our industry's history that a government entity will have entered into an agreement with a private company to finance and construct a correctional facility that is to be leased and operated by the government.

Our innovative proposed solution would allow Kansas to address their correctional infrastructure and program needs without negatively impacting the state's budget and their ability to address other critical infrastructure needs. And we look forward to the announcement of this RFP by the end of the year.

Staying with CoreCivic Properties, we are also pursuing near-term lease opportunities with 2 additional state partners. In September, the Colorado legislature Joint Budget Committee authorized additional funds to allow the Department of Corrections to lease a privately owned correctional facility to relieve crowded conditions in the state prison system that has been developed because of inmate population growth over the last year. We currently have 2 idle facilities in the state, but we identified our 752-bed Huerfano County Correctional Center as the ideal solution because the state indicated they are currently in need for additional beds. We have submitted our Huerfano facility as an option to the lease, and we are awaiting their final decision.

We also continue to be engaged in discussions with the Department of Corrections in Oklahoma for a potential lease of our 2,160-bed Diamondback Correctional Facility. While the need for additional correctional facility capacity persists with the Department of Corrections, the state legislature has struggled to reach a revised budget agreement for the current fiscal year as state tax revenues have fallen short, which is causing the legislature to make cuts to various parts of the state budget. This situation has slowed the pace of our discussions for the lease agreement for our Diamondback facility, but the state's need for capacity continues and we believe the lease agreement we have proposed presents a compelling solution for the state.

We are also excited for the continued expansion of our CoreCivic Community platform. We continue to execute our acquisition strategy to build out a nationwide residential and community reentry facility network.

In the third quarter, we completed the acquisition of 2 residential reentry centers. On August 1, we acquired New Beginnings Treatment Center, a Tucson, Arizona-based community corrections company that provides residential reentry services for the Federal Bureau of Prisons for male and female adults in a facility containing 92 beds for $6.4 million.

On September 15, we acquired a portfolio of 4 properties, including the 230-bed Augusta Transitional Center leased to the Georgia Department of Corrections.

Subsequent to the end of the third quarter, we completed the acquisition of Time to Change, a Colorado-based community corrections company that provides residential reentry services for Adams County, Colorado in 3 facilities containing 422 beds for a purchase price of $13.2 million, with the potential for additional contingent consideration estimated to be about $9 million.

Upon completion of these acquisitions, CoreCivic now owns 33 residential reentry facilities across 8 states, representing nearly 6,300 beds, including 26 that we own and manage and 7 that we leased to a third-party operator.

In the last 4 years, the company has invested nearly $300 million in acquisitions to further our mission to provide high-quality rehabilitative programming to help address the nation's recidivism crisis. We have a long runway of attractive acquisition targets and we are continuing to aggressively execute our diversification strategy here, and our target is to have approximately 10% of the company's EBITDA, on a run rate basis, come from our CoreCivic Community portfolio by the end of 2019.

With the encouragement from many of our investors, we have looked at the potential for making additional investment via acquisition in mission-critical government real estate asset classes outside of our traditional correctional detention and residential reentry facilities. And on September 15, the acquisition of a portfolio of 4 properties was our first as a company, and that was the acquisition of properties leased to a federal agency through the General Services Administration or GSA. The 3-facility GSA-leased assets represents an aggregate of 30,000 square feet of real estate.

We believe expanding our portfolio into other government-leased assets with a bias towards those that are mission-critical offers synergistic benefits as we leverage our extensive real estate management capabilities that already have us maintaining nearly 100 facilities, representing over 70 million square foot of real estate, and our extensive history working with and developing real estate solutions for federal, state and local governments.

Between the real estate assets leased by the federal government through the GSA and similar real estate leased by state and local government agencies, we believe the addressable market for potential acquisitions is very substantial in the billions of dollars.

As mentioned earlier, we are currently expanding our in-house staffing for the development side of CoreCivic Properties, but we are also adding staff to provide more expertise and resources on scoping, acquiring and managing these type of properties. We are building a very robust acquisition pipeline, and by the end of this year, we hope to acquire more of these type of properties. And next year, we will provide guidance to the market on how many CoreCivic properties we look to acquire each quarter.

With the progress in growing our CoreCivic Community portfolio as well as the near-term opportunities to grow our CoreCivic Properties portfolio through both acquisition and development, we believe we could have approximately 20% of the company's EBITDA by the end of 2019 on a run rate basis coming from these 2 business lines. This is tremendous progress in diversifying our cash flows in a short period of time in our effort to bring not only long-term value, but also stability to our shareholders.

Next, I'd like to provide an update on current trends and updated outlook for our key federal and state partners, starting first with the Federal Bureau of Prisons.

The bureau continues to project a need for additional bed capacity for the private sector and is progressing through the process as part of the CAR XIX procurement. We expect the BOP to be in a position to make an award announcement in the second half of 2018.

We currently operate 2 prison facilities for the BOP, which represents approximately 5% of the company's total revenue. At its peak, the BOP represented over 13% of the total company's revenue. So at 5% today, we are much less exposed to downside risk from the federal inmate population changes that could occur in the future.

Moving next to the United States Marshals Service. Detainee populations continue to gradually increase throughout the third quarter. This was a trend we began seeing in June and July and I highlighted on our Q2 call in August. The process for nominating and receiving Senate confirmations for new U.S. attorneys continues to move forward.

These individuals, of course, are the nation's principal litigators that operate under the direction of the Attorney General. As the Department of Justice continues to receive these additional resources, most expect case volumes will return to normal levels.

While this process plays out over the balance of the year and into 2018, the average daily prison populations for the Marshals Service are expected to continue to gradually increase.

And wrapping up my discussions of federal partners, I'll provide a brief update on the current trends we have seen from the Immigration and Customs Enforcement.

Throughout the third quarter, we experienced a sequential increase in occupancy across our -- essentially across all of our ICE facilities as we expected. It appears that Southwest border apprehensions have returned to levels that are in line with historic trends, following the unprecedented reduction in activity across the border that we saw in the spring of this year.

On a year-over-year basis, our financial performance was significantly impacted by the renegotiated contract for our South Texas Family Residential Center. However, utilization of that facility was near capacity throughout the quarter.

Continuing with ICE. The agency issued a request for information for either new or existing detention capacity of up to 3,000 beds to assist the ICE's mission in 4 different regions: Chicago, Detroit, St. Paul and Salt Lake City.

For new contracts to be awarded, ICE will likely have to issue a formal request for proposal, but more importantly, ICE will likely also need Congress to increase their annual appropriations for detention and removal operations.

ICE is currently funded for approximately 39,000 adult detention beds under the current continuing resolution that funds the federal government through the end of the calendar year.

ICE has requested funding for nearly 49,000 adult detention beds for 2018, and various markups for potential budget bills have indicated funding levels in 2018 will be above the current continuing resolution.

The appropriation process, of course, is ongoing in Congress, and it is too early to definitively predict funding levels for ICE.

Through October and the first week of November, we have continued to see increased occupancy levels from ICE. If this trend continues for the balance of the fourth quarter and into 2018, it is likely ICE will have additional detention capacities for interior enforcement efforts as well as in traditional Southwest border regions. At the state level, our contracts were, once again, very stable sequentially in the third quarter. On a year-over-year basis, we experienced revenue growth in Tennessee and Arizona due to a full quarter impact of the new and expanded contract with those states, in addition to higher occupancy rates at facilities housing offenders from Colorado and Hawaii. Partially offsetting the increases to revenue on a year-over-year basis was the expiration of managed-only and underperforming contracts with Texas and the District of Columbia.

I'll now provide some additional details on our out-of-state contract with California as our expectations from this contract have changed from last quarter's update.

As of the beginning of August, all aspects of Proposition 57 were in effect. Prop 57 creates a parole -- creates parole considerations process for non-violent offenders who have served the full term for their primary criminal offense in state prison and authorizes a CDCR to award credits earned for good behavior and approved rehabilitative or educational achievements.

The FY '18 budget released from the Governor of California indicated that the state intends to remove all offenders from one of the 2 remaining out-of-state facilities by June 30 of 2018.

At the time we released our second quarter financial results in August, our financial guidance assumed that the approximately 1,300 California offenders housed at our Tallahatchie County Correctional Facility in Mississippi would fully exit in the fourth quarter of 2017.

Today, we continue to house approximately 1,250 California offenders at this facility, and our expectation is that the CDCR will wait to see if the offender populations decline further before they take back offenders from our facility in Mississippi.

Our updated full year 2017 guidance assumes that California populations will remain at approximately 3,100 offenders at the La Palma Correctional Center in Arizona and approximately 1,250 offenders at the Tallahatchie facility.

California's future demand for out-of-state capacity will be dependent on the direction of their overall inmate populations. Those populations have declined modestly in the last month but are up approximately 1,700 year-to-date. Similar to the Federal Bureau of Prisons, our out-of-state contract with California at one point represented 13% of total company revenue. But our exposure to this contract has been reduced to now over -- just over 5% of total revenue as we continue to diversify the business, significantly mitigating this risk going forward.

In terms of upcoming contract renewals outside of our Adams contract being rebid under CAR XIX, we don't see any material federal or state contract at risk or up for competitive rebid in the next 12 months.

Now before I turn the call over to Dave, I'd like to briefly discuss last week's announcement of our new nationwide initiative to begin advocating for a range of government policies aimed at helping former inmates successfully reenter society and stay out of prison.

As part of the initiative, we will apply our government relations resources and expertise to advocate for the following policies: one would be ban-the-box proposals to help improve inmates' chances of getting a job, a practice, where allowed by contractual obligations, that CoreCivic already exercises in the hiring process for our own employees; second would be to reduce legal barriers to make it easier and less risky for companies to hire former inmates; third is to increase funding for reentry programs in areas such as education, addiction treatment, faith-based offerings, victim impact and post-release employment; and finally, social impact on pilot programs that tie contractor payments to positive outcomes.

We believe our support of these policies is further evidence of our commitment to make reentry a day 1 priority for every employee and deliver the best reentry programming of any correctional system, public or private.

The successful reentry services being provided inside our facilities will only be bolstered by removing the embedded societal barriers they may face when they return to their communities. We are very proud to announce this new initiative and join with many others to push forward these policy changes that could make a meaningful difference in the lives of millions if enacted.

With that, I'd like to turn the call over to Dave to review our third quarter 2017 financial results and provide additional details on our updated full year 2017 financial guidance. Dave?


David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [4]


Thank you, Damon, and good morning, everyone. In the third quarter, we generated $0.35 of EPS and $0.36 of adjusted EPS compared to our guidance range of $0.33 to $0.35. Normalized FFO totaled $0.56 per share compared to our guidance range of $0.52 to $0.54 and $0.02 ahead of First Call consensus estimates. AFFO totaled $0.53 per share ahead of our prior guidance range of $0.50 to $0.52.

Our per share results exceeded our forecast as revenues exceeded expectations, aided by a higher-than-expected revenue from the U.S. Marshals Service and Immigration and Customs Enforcement or ICE. Adjusted EBITDA was $2.4 million higher than the midpoint of our guidance for the third quarter.

Our per share results were lower than the prior year quarter as a result of the previously disclosed renegotiation and extension of a contract with ICE at our South Texas Family Residential Center effective in November 2016, which contributed to a reduction of approximately $0.10 per share and the expiration and nonrenewal of 2 contracts with the Federal Bureau of Prisons in April 2017 and October 2016, which resulted in an additional $0.03 reduction in earnings per share from the prior year quarter. Following these expirations, CoreCivic Safety revenue from the BOP or revenue generated from 2 remaining BOP facilities comprised 5% of our total revenue for the third quarter of 2017. These declines were partially offset by higher inmate populations under our new 1,000-bed contract with the State of Arizona at our newly expanded Red Rock Correctional Center completed in January 2017, higher inmate populations from the State of Colorado and higher inmate populations from the State of Tennessee and a reduction in expenses at our Trousdale Turner Correctional Facility, where populations were ramping in the prior year under a new contract that commenced in January 2016.

Financial results also included 6 M&A transactions this year through the third quarter, with investment totaling $28 million for 5 residential reentry centers and 3 GSA-leased properties or properties leased to the General Services Administration of the Federal government.

Off these 8 properties, 3 were residential reentry centers that we own and operate under our CoreCivic Community portfolio and 5 properties were real estate-only transactions, meaning we are the landlord of the properties operated by third-party tenants under our CoreCivic Properties portfolio. Our CoreCivic Community portfolio generated 6.1% of our adjusted EBITDA during the third quarter of 2017, which, as of September 30, comprised of 23 residential reentry centers we owned and managed, with a total design capacity of 4,792 beds in 6 states. Our CoreCivic Properties portfolio generated 8.1% of our adjusted EBITDA during the third quarter of 2017, which, as of September 30, comprised of 12 properties leased to third parties, totaling 1.1 million square feet in 5 states.

The CoreCivic Properties portfolio, again comprising 8.1% of our adjusted EBITDA, is 100% leased with very stable cash flows under leases with fixed monthly rents. We plan to continue to execute additional M&A transactions in the CoreCivic Community and CoreCivic Properties portfolios that will diversify our cash flows, supplementing the strong cash flows we generate from our CoreCivic Safety portfolio.

In order to position our balance sheet for future growth and to take advantage of favorable debt capital markets, last month, we completed the issuance of $250 million of 10-year senior unsecured notes with an interest rate of 4.75%. The terms of this successful issuance reflect the strength of our creditworthiness and continued stability in cash flows over multiple economic cycles and governmental administrations that will span the 10-year term of the notes. We used the net proceeds to pay down a portion of our $900 million revolving credit facility. As a result of this refinancing transaction, we reduced our exposure to variable-rate debt, extended our weighted average maturity and increased the availability of borrowings under our revolving credit facility.

At September 30, we had $43 million of cash on hand, and pro forma for the refinancing transaction, we had $722 million of availability on our $900 million revolving bank credit facility and no debt maturities until 2020.

As a tool to manage our leverage as we borrow from our revolver to complete additional M&A transactions, we also have an ATM equity offering sales agreement from which we may sell shares of common stock having an aggregate gross sales price of up to $200 million. We have no material capital commitments and are in excellent position to grow our cash flows through the utilization of idle bed capacity and have the flexibility to take advantage of M&A and other growth opportunities that require capital deployment.

We have a strong balance sheet, with leverage of 3.5x and fixed charge coverage of 6x using the trailing 12 months.

Moving next to a discussion of our guidance. As indicated in the press release, adjusted EPS guidance for the fourth quarter of 2017 is a range of $0.35 to $0.37, normalized FFO per share guidance for the fourth quarter is $0.55 to $0.57, while AFFO per share guidance is a range of $0.53 to $0.54.

For the full year, adjusted EPS guidance is a range of $1.52 to $1.54 compared with $1.52 to $1.56 in our prior guidance. Full year normalized FFO per share guidance is a range of $2.33 to $2.35, up from $2.31 to $2.35 from our prior guidance. We're up $0.01 at the midpoint.

Full year AFFO per share guidance is $2.24 to $2.26, up from $2.22 to $2.26 in our prior guidance, also up $0.01 at the midpoint.

I'll comment on a few changes to our updated guidance compared with our previous guidance.

First, getting the necessary approvals to transfer offender populations from our Torrance facility to our Cibola facility in New Mexico to maximize operating efficiencies, which was finally completed at the end of October, took longer than expected. This delay, along with lower projected populations from the U.S. Marshals Services at the Cibola facility in the short term is expected to have a negative impact on the fourth quarter of almost $0.02 per share compared with our prior guidance.

Second, the aforementioned refinancing of short-term variable rate debt with 10-year fixed-rate debt results in additional interest expense amounting to $0.01 per share in the fourth quarter. The negative impact of these items was partially offset by a change in our assumptions pertaining to California populations. As you may recall from our discussions in the prior quarter, our guidance anticipated full utilization of our 3,060-bed La Palma facility in Arizona and 1,250 inmates at our 2,672-bed Tallahatchie facility in Mississippi through the third quarter with the removal of all California inmates from our Tallahatchie facility beginning in October through year-end.

This guidance was based on the state's budget signed by the governor earlier this year, which anticipates a reduction in the state's inmate population as a result of Proposition 57. However, to date, we have not experienced the declines previously anticipated as our average daily population of offenders from California actually increased by about 100 offenders in the third quarter and remains at about 4,350 today, with 3,100 at our La Palma facility and 1,250 at our Tallahatchie facility. Therefore, we are now projecting consistent populations from California through the end of the year.

The continued occupancy of the California inmates forecasted at Tallahatchie resulted in an improvement to our forecast by about $0.01 per share. Full implementation of Proposition 57 was expected to take some time, so it is too early to predict inmate populations in the out-of-state program for 2018. We expect to update our population assumptions when we announce our fourth quarter earnings and issue 2018 guidance early next year.

Other than these population assumptions, our forecast for the fourth quarter contemplates stable-to-rising federal populations consistent with our prior guidance and following the trend we experienced late in the second quarter through the third quarter and so far into the fourth quarter. Our guidance continues to reflect a gradual increase of offenders from the State of Ohio under a contract we signed in April for up to 996 offenders to be cared for at our Northeast Ohio Correctional Center. The state began transferring offenders to the Northeast Ohio facility in the third quarter, which we estimate will continue through the first quarter of 2018. There's been essentially no change to our updated guidance for this new contract, which we expect to generate $0.05 per share for a full year.

Our 2017 guidance includes $0.02 per share net of interest expense generated from 7 acquisitions of 8 residential reentry centers and 3 GSA-leased assets we have completed this year, including the 3 additional residential reentry centers we acquired just last week in connection with the acquisition of Time to Change. On a full year basis, these acquisitions are expected to generate approximately $0.04 per share net of interest expense used to finance these acquisitions.

Although we continue to pursue a number of attractive investment opportunities, specifically in the reentry space that are accretive to earnings and FFO per share using our long-term weighted average cost of capital, our guidance does not include any new M&A activity beyond those already announced.

Further, we continue very active discussions with potential customers at both the federal and state level to utilize our idle facilities and available capacity. Those publicly known at the state level include Kentucky, Colorado and Oklahoma as well as several opportunities we are pursuing that are not publicly known.

At the federal level, future needs include ICE demand of up to 3,000 beds pursuant to a request for information ICE just published last month, the BOP CAR XIX solicitation for 9,540 beds as well as increasing demand that could be manifested in the short term through higher utilization of existing contracts from both ICE and the U.S. Marshals Service.

However, our guidance does not include any new contract awards beyond those previously announced as we don't expect any Federal awards for the remainder of this calendar year and because the timing of state government actions on new contracts is always also difficult to predict.

Any new contract awards could also come with startup costs that are not included in our guidance either.

The full year adjusted EBITDA guidance in our press release, which was essentially maintained at the midpoint compared with our prior guidance, enables you to calculate our estimated effective income tax rate of 5% to 6% and provides you with our estimate of total depreciation and interest expense for the fourth quarter and full year 2017. We expect G&A expenses to be approximately 6% of total revenue.

I will now turn the call back to James to open up the lines for questions.


Questions and Answers


Operator [1]


(Operator Instructions) And we'll take our first question of the day from Tobey Sommer with SunTrust.


Kwan Hong Kim, SunTrust Robinson Humphrey, Inc., Research Division - Associate [2]


This is Kwan Kim on for Tobey. First, it looks like CoreCivic has made small one-off acquisitions such as the 3 properties in Georgia and North Carolina leased with those governments. Is there a target portfolio of properties you are aiming to build out through these acquisitions and what may that look like?


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


Thank you for your question. This is Damon. And the short answer is yes. So what this did for us, those acquisitions we did earlier this fall of the 3 GSA properties, I think it woke up lot of folks that own these assets or brokers that sell these assets. So we actually have had a lot of inbound interest here in a short period of time. We've probably looked at probably 20 or 30 properties that have been on market or maybe off market for transactions. So we are building a really robust pipeline, starting to scope these properties. As I said earlier, we're adding resources on the real estate side to make sure that we can not only scope and do the diligence, but also maintain these assets going forward. So as I said earlier, we're going to build this pipeline and give some guidance next year. But to your question specifically, yes, we have actually had some inbound interest on some portfolios. So we have had some of those companies that have -- some that are public, some that are private, maybe not necessarily focused purely on government-leased assets, but looking at maybe selling some of these assets as a portfolio of multiple properties. So we're taking a look at those also, and that could be an opportunity here in the near term.


Kwan Hong Kim, SunTrust Robinson Humphrey, Inc., Research Division - Associate [4]


Got it. And in terms of where CoreCivic shares are trading now compared to levels earlier this year, what is your view on what the market may be missing or misinterpreting on your valuation?


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


Well, you probably never heard a CEO say that their shares are overvalued. I think, clearly, our shares are undervalued. And if I look at just one being a REIT, primarily, in our case, obviously exclusively working with government, with $17 million -- or 17 million in square footage, I mean, we are one of the largest, if not the largest, government REIT out there. And so I look at other publicly traded REITs that are 1/3 the size of the company and are trading on FFO multiples of 15, 16, 17x and we're at 11x, I think, yes, definitely, you could make the case we're undervalued. So here is what I'm hearing from investors, and what we're trying to do our darnedest is to try to make sure we are talking about some of their issues or concerns, risks that they're seeing. So the number one, which we keep talking about regularly, and I made this point in my remarks, and that is we think we really have moved the ball down the field on issue risk, on issues and opportunities or contracts that we've had in place that have been volatile in the past. So notably, California, as I said earlier, that was about 13% of our revenue a couple of years ago, and that is now 5%, if you looked just at our state contract. We, also with California, the facilities they vacated like North Fork and like Red Rock in Arizona, we have found alternative customers that we think are longer-term solutions for those facilities. The Bureau of Prisons is the next one. The Bureau of Prisons at one time was about 13% of our revenue a couple of years ago. It's now 5%. And in places like Cal City, with the lease of California, where the BOP was there once upon a time, and also more recently, BOP being at Youngstown, which has now got a contract in place of Ohio, we've done, we think, great work on filling that vacated capacity for the BOP and again, making it as a very small, we think, lower-risk percentage of our overall revenues. But also for the first time in probably several years, we do not have one contract that makes over 10% of our total revenues. So we have got California now at 5%, you've got BOP now at 5%, 2 partners that have had some volatility in the last few years, and then also no one single contract over 10%. We think we have diminished the risk that maybe worried investors here in the last couple of years. Next thing I would say is that our balance sheet is very strong. Again, if I look at these other REITs that are publicly traded, look at our balance sheet and how conservatively we've managed it, and then we've got a lot of dry powder and knowledge for development, but also to kind of withstand any kind of ups and downs with the market, I think we look really, really good. So we continue to kind of make that point that we've got not only development opportunities in front of us, but also, we continue to have a very conservative view of how to manage the balance sheet. And next thing I would say is that central occupancy rate of 80%, we clearly want that to be higher. But I will tell you, I've never been more confident that we've got opportunities to fill that vacant capacity. And I feel that for a couple of reasons. One of which is I just look around and see what's going on with these jurisdictions with either growth or overcrowding. But we've really come to appreciate here in the last 12 months, there is a lot of old, antiquated facilities out there that need to be replaced. Oklahoma is the best example. The North Fork lease we signed last year, that allowed the state to close some really old facilities and gain a lot of more efficiencies. So we've got now facilities like the one in Colorado we mentioned earlier that are very attractive to Colorado just because we have this new solution in market, which is they operate it and we lease it to them. So it makes that capacity that we've got vacant, we now have a couple of ways to market it and it's attractive maybe for jurisdictions for different reasons. So I feel really good about kind of near-term prospects on available capacity, either where we own and manage, or release it back to respective jurisdictions.

Another thing I would say is on the property side, we've got to -- continue to demonstrate that this is a value-added solution to government partners. But on the development side, knowing that we've got 200,000 beds nationwide, we think that's about $15 million to $20 million -- $15 billion to $20 billion in needed investment to replace these antiquated facilities. We think there's tremendous opportunity for development. And so we're adding resources, we're seeing jurisdictions show interest like Kansas, where they actually have done a procurement. So we think we've got to continue kind of show and demonstrate that this is not a valuable solution to our partners, but also investors seeing this could be a real catalyst for growth for the company for the foreseeable future. The other thing is that the market we just entered into, the acquisitions of these government assets that are primarily mission-critical, leased through GSA or leased to state properties, again, we're adding resources there. We think we've built a pipeline there. I think investors will then also see that as a great corridor for growth for the course -- for the company going forward. The last thing I would say and have David maybe add anything to this, is that one part of our business has been not only volatile but also is creating some challenges and headline risks for the company, and that's our managed-only business. We have been in a very thoughtful way through either expiration, or somewhat difficult conversations with partners, divesting out of that business. We have some managed-only already today that is already -- or still in a portfolio that is very attractive. The one in Silverdale is managed-only, but we -- it's a very good contract for us. But we have been very thoughtful over the last 7 years to divest in a very thoughtful way that business. So that, from an earnings perspective, is only about 3%. The managed-only business is only about 3%. And that compares to probably 10-plus years ago, that was 25% of our earnings, was coming from that book of business. So we think the headline risks of that business has been diminished drastically just because we have divested out of that and again, in a very thoughtful and a meaningful way. So let me see if you have anything to add to that, Dave?


David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [6]


No, I'll just reemphasize what I said in my comment. I actually said twice in my comments that we generated 8.1% of our adjusted EBITDA to the CoreCivic Properties portfolio that's 100% leased, with very stable cash flows that I think commands a higher multiple. So I think that's an underappreciated fact, along with everything else that you just said as well, Damon.


Operator [7]


(Operator Instructions) We'll now hear from Jordan Hymowitz with Philadelphia Financial.


Jordan Neil Hymowitz, Philadelphia Financial Management of San Francisco, LLC - Managing Principal & Portfolio Manager [8]


Just a couple of quick questions. Was the Hamilton County, Tennessee a new contract or the existing contract with an expansion? I wasn't clear.


Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [9]


It's a new contract. It's basically a follow-on an existing contract we've had for many years. So it is a new contract. But it does have a feature where the county can engage us on potential consolidation at our existing facility with the new contract, where we could expand it and would allow them to close some facilities that they've got in downtown in Chattanooga.


Jordan Neil Hymowitz, Philadelphia Financial Management of San Francisco, LLC - Managing Principal & Portfolio Manager [10]


But that has not been approved yet, it's just the opportunity?


Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [11]


The contract's been approved. It's in force. I'd say, the provision to allow for potentially a consolidation that's a part of the agreement, but that has not been undertaken yet.


Jordan Neil Hymowitz, Philadelphia Financial Management of San Francisco, LLC - Managing Principal & Portfolio Manager [12]


Okay. Second question is you said you had hoped to have up to 20% of your beds in this new expanded government entity. Is that in addition over the next few years of your existing portfolio or instead of? In other words, is it a replacement of one asset with another? Or arguably, it would be 20% less, that's in 2 years?


Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [13]


Yes, to make sure I follow your question, so today, between CoreCivic Community and CoreCivic Property, we're about 14% our EBITDA coming from those 2 lines of business. Our goal is to take that 14% to 20% in 2019. So we think we've made great progress, and we think that goal is achievable to get 20% of the earnings coming from those 2 portfolios.


Jordan Neil Hymowitz, Philadelphia Financial Management of San Francisco, LLC - Managing Principal & Portfolio Manager [14]


Right. But my question is, will it be a replacement or did the balance sheet expand, where the -- you know what I'm saying, or the government contracts expand?


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


To make sure I understand your question. The -- what we're looking at, to make sure I'm following your question, if you could repeat it for me?


Jordan Neil Hymowitz, Philadelphia Financial Management of San Francisco, LLC - Managing Principal & Portfolio Manager [16]


I'll follow up after because maybe I'm a little confused. And my last question is what is the next time that a state will likely make a decision as probably Kansas will act as this year?


Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [17]


Yes. It's our understanding we're trying to get that procurement awarded by Christmas.


David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [18]


And Jordan, just to provide additional color with what I think the earlier question, in order to go up to 20% of our adjusted EBITDA, we'd be generating an additional $25 million of EBITDA on a run rate basis.


Operator [19]


At this time, we will conclude today's conference call. We do thank you for your participation. You may now disconnect.