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Edited Transcript of CXW earnings conference call or presentation 8-Aug-17 3:00pm GMT

Thomson Reuters StreetEvents

Q2 2017 CoreCivic Inc Earnings Call

NASHVILLE Sep 14, 2017 (Thomson StreetEvents) -- Edited Transcript of CoreCivic Inc earnings conference call or presentation Tuesday, August 8, 2017 at 3:00:00pm 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. - CEO, President and Director

* David M. Garfinkle

CoreCivic, Inc. - CFO and EVP

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Conference Call Participants

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* Jordan Neil Hymowitz

Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager and Managing Member

* Kevin Andrew McClure

Wells Fargo Securities, LLC, Research Division - Senior Analyst

* Kevin Damien McVeigh

Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research

* Michael B. Kodesch

Canaccord Genuity Limited, Research Division - VP and REIT 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's second quarter earnings conference call. As a reminder, this conference is being recorded. At this time, I'd like to turn the conference over to Cameron Hopewell, Managing Director of Investor Relations. Please go ahead, sir.

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

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Thanks, operator. 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 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 second quarter 2017 earnings release and in our SEC filings, including Forms 10-K, 10-Q and 8-K reports.

You are 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.

This call will include a discussion of 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 our Investors page of our website at www.corecivic.com\investors.

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

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

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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 second quarter financial performance came in ahead of our initial forecast, as we experienced modestly higher revenues across multiple federal and state partners in addition to favorable variances and operating expenses across our facility portfolio during the quarter.

Normalized FFO of $0.59 per share was $0.04 ahead of the high end of our second quarter guidance and AFFO of $0.56 per share was $0.03 ahead of the high end of our guidance. This has allowed us to raise our full year 2017 per share guidance for the third consecutive quarter to normalized FFO per share of $2.31 to $2.35, an increase of nearly 8% in the guidance range from $2.11 to $2.21 per share or $0.17 at the midpoint from the initial full year 2017 guidance we provided back in October of last year.

Dave 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.

In terms of an update on our business outlook, I'll begin first with our federal partners. The Federal Bureau of Prisons has continued to see modest declines in the inmate populations through the first half of 2017. This has allowed the bureau to take additional federal inmates out of contract facilities like our Eden Detention Center that was idled at the end of April after expiration of our contract with the BOP.

The agency is in the process of taking additional populations out of other non-CoreCivic contract facilities that were also not awarded new contracts under the CAR XVI procurement.

Today, the BOP has approximately 187,000 federal inmates, down from 189,000 at the beginning of this year and down approximately 33,000 inmates from the bureau's peak population levels about 3 years ago.

The Attorney General recently appointed retired Army Major General, Mark Inch, to be the new Director of the BOP, filling a pivotal leadership role within the agency that has been vacant since January of 2016. We look forward to working with the new director as he takes over leadership of the country's largest corrections system.

As we look ahead, the BOP is projecting their population to increase approximately 2% in fiscal year '18. We, therefore, believe the BOP will have the need for additional contract prison capacity in the future.

Additionally, the fiscal year '17 omnibus appropriation bill included a requirement that the bureau produce a capacity realignment plan to be presented to the House Committee on Appropriations for Commerce, Justice, Science and Related Agencies in August. The purpose of the report is to address ongoing overcrowding in the BOP's medium- and high-security facilities and to ensure that low-security offenders are placed in the most cost-effective facilities.

Population declines in recent years have disproportionately impacted low-security inmate populations, increasing capacity available in low-security facilities owned and operated by the BOP, while their medium- and high-security facilities remain at overcrowded levels.

The committee, in its approval of the fiscal year '18 Appropriations Bill, confirmed its view that contracting is an effective tool for the BOP to meet low-security facility requirements to alleviate overcrowding. It has also expressed concern that the BOP continues to house low-security inmates in more costly environments, where savings could be realized by using available contracted facility capacity.

The committee has expressed its desire for the BOP's capacity realignment plan to ensure that inmates with lower-security classifications, both U.S. citizens and criminal aliens, are being housed in the most cost-effective facilities.

Private contractors currently house approximately 19,000 low-security criminal aliens for the BOP at a cost savings of over 20% versus similar security-level BOP facilities. These savings numbers are based on the latest data issued by the bureau itself, so we believe that the private sector can provide the most cost-effective solution to assist with the realignment plan.

The CAR XIX procurement issued in May is seeking an additional 9,540 low-security beds, and we believe we are well positioned to compete in this procurement and have submitted multiple facilities in response. As a reminder, today we operate only 2 facilities, representing approximately 4,000 beds on behalf of the BOP, making it the smallest of our 3 federal agencies.

Moving next to the United States Marshals Service. The agency has seen a great deal of variability in the level of prosecutions across their federal districts in the first half of 2017. These variations have resulted in prisoner population changes in various districts.

When federal administrations change, it is typical to see wholesale turnover in U.S. Attorneys' Offices across all 94 federal districts. That was the case this year when 93 U.S. Attorneys either resigned or were let go by the incoming administration. U.S. Attorneys serve as the nation's principal litigators under the direction of the Attorney General and lead in the prosecution of criminal cases brought by the federal government.

To date, the administration has nominated 33 of 93 new U.S. Attorneys, which most are awaiting confirmation by the Senate. In the interim, acting U.S. Attorneys have been named to lead the judicial districts, but they have limited ability to enact all the directives of the new administration.

On our conference call in May, I highlighted that the Attorney General had recently announced a renewed commitment by the Department of Justice to pursue criminal and immigration enforcement, and instructed all federal prosecutors to prioritize immigration-related offenses for prosecution.

Subsequent to our conference call, the Attorney General issued additional directives to federal prosecutors to change [and] pursue the most serious readily provable offense in all federal cases. As has been widely reported, these directives may lead to increases in the average daily prisoner populations for United States Marshals over the medium- to long-term.

In the short-term, the most non-Southern border districts saw their average daily prison populations increase modestly year-over-year as of June 30. Importantly, the department's directives are likely not to be fully implemented until all U.S. Attorneys have been nominated by the administration and confirmed by the Senate, which most experts believe won't happen until 2018.

Additionally, the U.S. Marshals are operating without permanent leadership and the Department of Justice has not yet appointed a director for the agency. New leadership will be tasked with fully pursuing the priorities of the new administration, and we would expect this appointment to be announced relatively soon. With the appointment of John Kelly to the President's Chief of Staff effective on July 31, the Department of Homeland Security is also without permanent -- a permanent secretary. Both of these positions must be confirmed by the Senate.

In May, I also highlighted that the average daily prisoner populations in the first quarter of 2017 were relatively consistent in most districts, except for declines in the Southwest border states, especially Arizona and Texas, due to a lower number of prosecutions related to immigration offenses. This trend coincided with the historic decline in the Southwest border apprehensions in the first quarter and continued in the first 2 months of the second quarter.

Prisoner populations for U.S. Marshals did not begin to stabilize -- did begin to stabilize, I should say, and increased modestly in June and July. At the same time, prisoner populations in the second quarter in Texas, Arizona and New Mexico were below levels experienced in prior years and negatively impacted the financial performance of our marshal facilities in Arizona and New Mexico.

We expect these declines to be temporary and have seen increasing population trends in June and July, but we believe it could take a period of multiple quarters to fully reverse in some federal districts.

This, combined with a lower-than-expected utilization by ICE at our Cibola County Collection Center, as I will describe in a moment, led to the decision to idle our 910-bed Torrance County detention facility next month and consolidate prisoner populations into our Cibola facility to more efficiently utilize available capacity in our system.

We are working closely with U.S. Marshals and Torrance County on this transition, and we will actively market the Torrance facility to accommodate future needs of the U.S. Marshals or other potential partners.

Now let's turn to recent trends and developments with Immigration and Customs Enforcement. There has been a great deal of focus on the reduction in apprehensions on the Southwest border during the first 6 months of the new administration. Aggregate apprehensions have declined by roughly 2/3 from the elevator grade of apprehensions in the calendar year 2016 to approximately 15,000 per month in the second quarter of 2017.

Historically, apprehension rates have averaged roughly 30,000 monthly over the last 6 years. At the same time, efforts to step up immigration enforcement in the interior of the U.S. has increased interior apprehensions, albeit to a smaller magnitude than the declines in border apprehensions. These trends have allowed ICE to reduce the number of detainees held on a daily basis from historically high levels we saw in the fourth quarter 2016 and early in the first quarter of 2017.

We believe these trends make it unlikely that ICE will have additional detention capacity needs along the Southwest border in the near term, barring a meaningful increase in the rate of border apprehensions. However, interior enforcement efforts could create demand for additional detention capacity in other areas of the country.

While our ICE populations declined from the first quarter to the second quarter as we expected, our ICE populations were nonetheless higher during the second quarter of 2017 compared to the prior year quarter.

At our South Texas Family Residential Center, the number of residents housed at the facility was meaningfully impacted by the reduction in apprehensions relative -- apprehension-relevant activity along the Southwest border in February, March and April as well as the short length of time families stay at the facility.

However, apprehensions in May, June and July increased towards similar levels seen in fiscal year 2015, leading to increased utilization at the facility. It's important to remember that we have a fixed price contract at the South Texas Family Residential Center, so revenue does not fluctuate with the utilization level of the facility or the length of time that families stay at the facility.

At our Cibola County Corrections Center, ICE has not needed as much capacity as they initially expected when we entered into the new contract in October 2016. So as I previously mentioned, we have decided to move our prisoners from the Torrance facility and consolidate within Cibola. Should ICE or U.S. Marshals have a need for additional capacity in New Mexico, we will be well positioned to offer the capacity at our Torrance facility to meet their future needs, as our partners have been very satisfied with our performance at the Torrance facility.

I am very proud of the employees who have served the facility for so many years. And we have offered the employees affected by the consolidation opportunities to continue their employment with CoreCivic at other locations in our portfolio, should they wish to remain with the company, like I hope they will.

As it relates to ICE, we are also closely monitoring the fiscal year '18 appropriation process. ICE requested funding in fiscal year '18 for 48,879 adult detention beds and 2,500 family residential beds for a total of 51,379 beds. That's a significant increase over the fiscal year '17 omnibus funding package that provided ICE with funding for 39,324 detention beds.

We believe the reasons for the request for increased funding of this magnitude are twofold. First, ICE expects the implementation of new policies and executive orders to lead increases in arrest, charging documents and detainers issued, either at the border or in the interior of the country in fiscal year '18. Second, ICE expects the average length of stay for detainees to increase as a result of increased interior enforcement.

The latest data from ICE indicates that the average length of stay for Southwest border apprehensions is approximately 27 days in a detention facility, compared with the average length of stay for individuals arrested in the interior of the country of approximately 52 days. This is because interior cases are typically more complicated and many are not subject to expedited removal proceedings, which can more often be utilized for new border arrivals.

It is ultimately up to Congress to determine the actual appropriation for ICE, and the appropriation committees are in the process of marking up their funding bills. However, ICE capacity needs will be determined by the level of activity on the Southwest border and by the rate of apprehensions in the interior.

At the state level, our contracts were stable in the second quarter across the board. As for borders -- or excuse me, partner-specific updates, I'll touch first on California.

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

The fiscal year '18 budget released by the Governor of California indicated that the state intends to remove all offenders from 1 of the 2 remaining out-of-state facilities by June 30, 2018.

Today, we are housing approximately 3,100 inmates at our La Palma Correctional Center in Arizona and approximately 1,300 offenders at the Tallahatchie County Correctional facility in Mississippi. In the first quarter of 2017, we worked closely with CDCR to gradually draw-down populations at our Tallahatchie County facility and consolidate populations to more optimally occupy our La Palma facility.

During the second quarter, populations at both facilities remained relatively stable. Since the implementation of Prop 57 began in May, California's total inmate population has actually increased by approximately 700 offenders. However, more time is required to see the potential impact of Prop 57 on California's inmate populations.

It is because of those facts that our financial guidance assumes populations will begin to exit our Tallahatchie facility in the fourth quarter of 2017. Whether that occurs will be dependent on actual inmate population trends that California experiences throughout their fiscal year 2018.

We have identified multiple partners that have interest in available capacity at our Tallahatchie County facility and we'll provide updates in the future on these marketing efforts.

One final comment on California on the out-of-state contract. California has been a significant and great partner to CoreCivic over the past decade, at one point representing over 20% of our total company EBITDA.

California remains a very important partner to us. However, today, California represents a much lower percentage of our total EBITDA, as California has reformed their prison system, resulting in lower out-of-state need, and we have been successful in utilizing the space that they have vacated.

For example, at our Central Arizona Florence Complex, we have replaced their utilization with federal partners. At our Red Rock Correctional center, which California previously fully occupied, we have expanded the facility to accommodate additional demand from the State of Arizona, who fully occupies the facility today. And where California previously utilized space at our North Fork Correctional Center, we have leased the entire facility to the State of Oklahoma.

So this proves the enduring value of not only our real estate, but also our government solutions to many new or existing partners. But it's also important to note that as we enter 2018, the earnings performance as a percentage of EBITDA from California's out-of-state contract will be in the low-single digits, drastically mitigating this risk, going forward.

In July, we were notified by the Texas Department of Criminal Justice that they selected other operators who responded to the rebid of contracts for management of 3 Texas State jails that we currently operate: the Bradshaw, Lindsey and Willacy State Jails.

While we were disappointed that our bids were not ultimately selected, we submitted responses to this solicitation that would allow us to continue to provide appropriate employee compensation, staffing levels, facility maintenance and adequate return for providing correctional services at these facilities.

This is a consistent approach we've taken with managed-only contracts in recent years, which has resulted in a substantial reduction in the number of managed-only contracts in our portfolio. Managed-only contracts, in many cases, are put out to bid routinely to drive down per diems and in many cases, there are other service providers in the market who are willing to except a lower return than we believe is necessary.

These 3 facility contracts and the Bartlett State Jail, which closed in the second quarter, generated nearly $24 million in revenue for the first 6 months of 2017, but only generated $300,000 in net operating income. We are proud of our long history of providing high-quality services at these facilities for many years, and we're working closely with the state and the new operators to ensure successful transition on September 1.

This month begins the intake process for Ohio offenders at our Northeast Ohio Correctional Center under our new contract to house up to 996 offenders from the Ohio Department of Rehabilitation and Correction, which we expect to be completed by the first quarter of 2018. In advance of the new populations at the facility, we have incurred startup expenses to hire and train additional staff, so we don't expect a financial benefit from the new contract until 2018.

At the local level, in June, we entered into a new 3-year agreement with the City of Mesa, Arizona to house up to 200 jail offenders at our 4,128 bed Central Arizona Florence Correctional Complex. We were pleased to reach this agreement after responding to an RFP from the city nearly 5 years ago.

The agreement has allowed the city to save nearly 30% from the per diem they had previously paid to a county jail to house their offenders, and we began to transfer offenders into our facility in early July. This is a very notable agreement as it gets us established within one of the fastest-growing, top-15 metropolitan areas in size in the United States. And with that, we believe other surrounding communities in Phoenix area have similar needs as Mesa.

We continue to actively pursue additional opportunities with several states. Including the new contract with the State of Ohio, we continue to have the potential to absorb over 8,000 beds or more than 10% of the total company's owned beds in the next 12 months, with new contracts with state customers in both idle and active facilities.

We are pleased with the execution of our acquisition strategy to build out a nationwide residential and community reentry facility network. In the second quarter, we completed the acquisition of residential reentry facilities in Oklahoma operated by Center Point Inc., a California-based nonprofit organization, for $7 million.

We consolidated a portion of Center Point's operations into available capacity within our system in Oklahoma and also assumed ownership of the Oklahoma City Transitional Center, a 200-bed facility.

Subsequent to the end of the second quarter, we completed the acquisition of 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 facilities containing 92 beds for $6.4 million.

Upon completing these acquisitions, CoreCivic now owns 29 residential reentry facilities across 7 states, representing 5,600 beds. In the last 4 years, the company has invested over $270 million in acquisitions to further our mission to provide high-quality, rehabilitative programs to help address the nation's recidivism crisis.

We continue to pursue attractive acquisition targets in the residential reentry market that will complement our existing portfolio and be immediately accretive to FFO per share.

We have a long runway of attractive acquisition targets in this market and we are continuing to aggressively execute our growth strategy here. And I feel that by the end of 2019, by continuing our goal of closing an acquisition every quarter, we will have approximately 10% of our company's EBITDA on a run-rate basis coming from our CoreCivic community portfolio. We are also very encouraged by our process in promoting the value proposition of CoreCivic properties.

There are 5 states publicly considering a privately financed solution to address their aged prison infrastructure needs, and we are having dialogue with a number of those jurisdictions to educate them on the potential benefits of a privately financed solution. In Kansas, 1 of those 5 states, we are pursuing the opportunity to replace the state's 150-year-old prison in Lansing.

On July 25, the state issued its formal RFP for the facility's replacement. Final proposals are currently scheduled to be submitted to the state by September 22, and a notice of award to the successful respondent is scheduled for October 20. We were honored to be 1 of the 3 organizations that were selected to respond to the RFP and are working diligently to submit a compelling response.

With our progress in growing our CoreCivic community portfolio and also the near-term opportunities to grow our CoreCivic properties portfolio, we believe we will have nearly 20% of company 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 increased stability to our shareholders.

As I wrap up my prepared remarks, let me stress that CoreCivic brings more than 3 decades of industry experience as it works with government at the federal, state and local levels to relieve pressure and enhance conditions in some of our country's most challenged prison systems.

Stark, widespread and social challenges face our nation's correctional systems, including high recidivism rates, escalating costs and overcrowded and aging facilities. We are proud that CoreCivic is helping our government partners solve these problems in innovative ways that are both humane and cost-effective for taxpayers.

We promote safer communities nationwide by enrolling thousands of inmates in daily reentry programs. These programs help ensure that inmates have a greater chance of successfully returning to society and not returning to prison.

When I reflect upon the valuable services CoreCivic provides, I always remember that our achievements are only possible through the hard work of our chaplains, teachers, principals, counselors and correctional officers serving each day in the communities across the country. And it is to those thousands of employees that I would like to say, thank you very much for what you do. You are having a profound impact on the lives entrusted in our care.

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

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

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Thank you, Damon, and good morning, everyone. In the second quarter, we generated $0.38 of EPS and $0.39 of adjusted EPS compared to our guidance range of $0.35 to $0.36 and $0.03 ahead of consensus estimates. Normalized FFO totaled $0.59 per share compared to our guidance range of $0.54 to $0.55 and $0.04 ahead of consensus estimates. AFFO totaled $0.56 per share, ahead of our prior guidance range of $0.52 to $0.53 and $0.03 ahead of consensus estimates.

Our per share results exceeded our forecast, as revenues and operating expenses were both better than anticipated, with revenues beating forecasts by a little more than expenses. The beat in revenue was spread pretty evenly between federal and state customers and among several facilities and geographic locations. Adjusted EBITDA was $4.2 million higher than the midpoint of our guidance for the second quarter, reflecting strong operating performance.

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 Immigration and Customs Enforcement, or ICE, at our South Texas Family Residential Center effective in November 2016 and expected lower U.S. Marshal populations in the Southwest region of the country.

These declines were partially offset by higher detainee populations from ICE when compared with the prior year quarter; higher inmate populations under a new 1,000-bed contract with the State of Arizona at our newly expanded Red Rock Correctional Center completed in January 2017; 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 5 acquisitions with an investment totaling $57 million for 11 residential reentry centers from the beginning of the second quarter of 2016 through the end of the second quarter of 2017, including 3 acquisitions during 2017 for $14.1 million.

These 5 acquisitions generated annualized returns that met or exceeded our targeted returns and contributed about a $0.01 per share in the current year quarter after interest expense incurred to finance these acquisitions. So we are very pleased with the FFO per share accretion generated from these acquisitions.

Our balance sheet remains strong, with leverage of 3.3x and fixed charge coverage of 6.4x used in the trailing 12 months. Based on our updated guidance for 2017, which does not assume EBITDA from any new contracts, future M&A activity or the impact on leverage for any capital markets transactions, our total leverage peaks at 3.6x.

At June 30, we had $47 million of cash on hand and $482 million of availability on our $900 million revolving bank credit facility and no debt maturities until 2020. 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.

Moving next to a discussion of our guidance. As indicated in the press release, adjusted EPS guidance for the third quarter of 2017 is a range of $0.33 to $0.35. Normalized FFO per share guidance for the third quarter is $0.52 to $0.54, while AFFO per share guidance is a range of $0.50 to $0.52.

For the full year, adjusted EPS guidance is a range of $1.52 to $1.56, up from $1.50 to $1.56 from our prior guidance. Full year normalized FFO per share guidance is a range of $2.31 to $2.35, up from $2.27 to $2.33 from our prior guidance, or an increase of $0.03 per share at the midpoint. Full year AFFO per share guidance is $2.22 to $2.26 compared with $2.18 to $2.24 in our prior guidance, also an increase of $0.03 per share at the midpoint.

The increases in our annual guidance reflect the Q2 beat, partially offset by lower federal populations at our Torrance County Detention Facility and at our Cibola County Correction Center. As a result of these lower populations, we plan to consolidate offender populations in the third quarter from the Torrance facility into our Cibola County facility in order to take advantage of efficiencies gained by consolidating the populations into one facility.

These population reductions and the anticipated transaction negatively impacted our third quarter and annual guidance by $0.02 per share. However, we believe these actions will improve the collective financial performance, going forward, of these 2 facilities.

Other than these population reductions, our forecast for the third and fourth quarters contemplates stable to rising federal populations consistent with our prior guidance and following the trend that we have begun to experience in June and July.

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. Over the next couple weeks, we expect the state to begin transferring offenders to the Northeast Ohio facility, which we project will continue through the first quarter of 2018. There has 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.

During the second quarter of 2017, we provided care for an average population of 4,300 offenders from the State of California, which was consistent with our forecast. Our guidance continues to reflect the full utilization by the State of California through the third quarter of 2017 of our 3,060-bed La Palma Correctional Center in Arizona and 1,250 beds at our 2,672-bed Tallahatchie County Correctional Facility in Mississippi, with a phaseout of the Tallahatchie facility beginning in October through year-end.

This reduction is based on the state's budget signed by the governor earlier this year, which anticipates reduction in the state's inmate population as a result of Proposition 57, as Damon described. Even though the state's inmate population has increased by about 1,600 since the beginning of this calendar year, full implementation of Proposition 57 was expected to take some time.

Accordingly, we have not altered our population assumptions from our prior forecast. Although we are marketing the beds, our guidance does not include a replacement population.

As indicated in the press release, we've been notified by the Texas Department of Criminal Justice that we were not selected for the continued management of 3 managed-only facilities owned by the state, following notification in March that the state would be closing a fourth facility we managed for them, which did in fact close in June, due to the state's tight budgetary constraints.

These 4 facilities were subject to a competitive rebid of the contracts that expire in August. We knew this solicitation would be extremely competitive, and although disappointed, we are content with the outcome as these contracts were awarded at per diem levels that failed to meet our risk-adjusted return thresholds.

These 4 facilities, comprising 5,129 beds, generated $23.8 million in revenue for the first half of 2017, but only produced $0.3 million of net operating income before depreciation, demonstrating the challenges associated with certain aspects of the managed-only business. Therefore, the loss of these 4 managed-only contracts did not have a material impact on our per share prior guidance.

Our 2017 guidance includes $0.05 per share net of interest expense generated from the 5 acquisitions of 11 residential reentry centers we have completed over the past 5 quarters, which essentially remains unchanged from our previous guidance.

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.

The magnitude and timing of our M&A activities is difficult to predict and, therefore, we will update our guidance on a quarterly basis if and when we successfully complete such transactions. Further, we continue very active discussions with potential customers at both the federal and state level to utilize our idle facilities and available capacity like at our Northeast Ohio facility.

However, our guidance does not include any new contract awards beyond those previously announced, as the timing on government actions on new contracts is always difficult to predict. Any new contract awards could also come with additional startup costs that are not included in our guidance either.

The adjusted EBITDA guidance in our press release, which was increased by $2 million 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 third quarter and full year 2017. We expect G&A expenses to be approximately 6% of total revenue for each period.

I will now turn the call back to the operator, Kassie, to open the lines for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We'll take our first question from Michael Kodesch with Canaccord Genuity.

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Michael B. Kodesch, Canaccord Genuity Limited, Research Division - VP and REIT Analyst [2]

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I guess, just to start off with guidance. You gave a lot of good color behind some of your expectations there. But I was wondering if you could just expand upon it a little bit. What gave you guys some confidence? What are you seeing in numbers in terms of the increases in the ability to sustain that throughout the rest of the year in order to hit guidance?

And what are your kind of -- can you kind of marry both your expectations and maybe the range of guidance as it relates to ICE and the United States Marshals?

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [3]

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Sure, Michael, I'll take that. I guess, I'll go back to February. In February's call, we had seen a large surge of ICE populations in the fourth quarter. We continued to see a very large ICE population in the first quarter, which, when we had our call in February and reiterated in May, we didn't expect those populations to be sustainable.

So our forecast reflected declines in those populations beginning at the end of the first quarter, basically through the summer months, and then slowly and gradually increasing in the third quarter and fourth quarter.

We had anticipated that some of those populations had been accelerated around the inauguration -- or before the inauguration, before the President's new policies on immigration could take effect. And it appears that that's turned out somewhat true. Those populations have come in very close, in fact a little bit above, what our expectations reflected in Q1 and Q2.

So our forecast, aside from the declines at our Cibola facility and the consolidation of U.S. Marshals from Torrance as we discussed, is basically the same as what we were predicting in February and, again, in May. What gives me some confidence that those projections are accurate, not only that they've been accurate for a couple quarters in a row now, that we have begun to see population increases in both U.S. Marshals and Immigration and Customs Enforcement in June and July.

So we're pretty comfortable with the range of the guidance that we set forth. Obviously, it is a range of guidance, and if they don't escalate as gradually as we anticipated, we'd expect to be toward the low end of that guidance. And if they accelerate faster than what we have, we'd be toward the high end of that guidance.

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Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [4]

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And I'd add one more thing, Michael, this is Damon, that it's not definitive. It won't be really determined until we get to October 1. But with a budget request of 51,000 detention beds going into next fiscal year, again, it's going to work its way thru Congress, and the actual number is going to be something different likely.

But I think that with ICE pushing pretty hard for a higher funding level next year, marry that up with some of the populations that we've seen kind of over the summer months where it's kind of modestly improved, gives us also some comfort as we go into late this year and early next year.

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [5]

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And one final point on that, as Damon mentioned in his comments, prepared remarks, as some of the U.S. Attorneys are confirmed and put into place and execute policies of the new administration, we would expect that to contribute to increasing populations as well. Timing has been slower than expected on that, but that could have an impact on the back half of the year as well.

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Michael B. Kodesch, Canaccord Genuity Limited, Research Division - VP and REIT Analyst [6]

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Great, that's really good color. And then kind of along the same vein, at Northeast Ohio, you guys have, I think, 3 different populations. You've got Marshals, ICE and state as well. Can you kind of talk to the ramp of each of those and sort of your expectations for the ramp of each of those?

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [7]

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Yes, we've seen a little bit higher populations, the federal populations there, primarily due to interior enforcement. So that's contributed to higher ICE populations. We are projecting the State of Ohio, as I mentioned, to begin ramping that facility in the next couple weeks. It's a very slow ramp. It's a higher-security inmate population, and they want to be very thoughtful and measured in how they ramp up that facility.

So it's up to about 1,000 inmates, and we expect that not to be completed until, really, the end of the first quarter of 2018. So it's a very slow ramp that does have an impact on the third quarter for startup expenses of probably about $0.01 per share.

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Michael B. Kodesch, Canaccord Genuity Limited, Research Division - VP and REIT Analyst [8]

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Great, that's helpful. And then, while we're on the topic of states, can you talk a little bit about appropriations and the processes at certain states? And have you seen that become a headwind in certain -- in procurements in certain states? Or have you seen that kind of reverse, budgets being settled where we might actually see some more procurements come out?

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

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Yes, we're -- this is Damon, again. Michael, this has really been a good year for us, legislatively. We've gotten good budget numbers coming out from respective states all over the country. So yes, versus 4, 5, 6 years ago, where we were giving a lot of detail to kind of review to the investment community on kind of some of the challenges or headwinds we had. As they go through the budget process, we're in a really good environment now.

We've had some nice -- modest, but nice little incremental increases on pricing around the country to accommodate for maybe some additional labor costs that we have or something else within the business. So we're in a good environment right now in the state side. And with that, to your question, we think that either public or nonpublic, there will be -- continue to be meaningful opportunities to secure additional beds within the private sector, we think, here in the near term.

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Michael B. Kodesch, Canaccord Genuity Limited, Research Division - VP and REIT Analyst [10]

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Great. And then just one last one from me, and then I'll jump back in the queue with anything else. But I was wondering if you guys looked at the 3M APAC Electronic Monitoring deal that got done. I was aware there was a public process, but wondering what your thoughts were on that. And any additional interest in potentially getting into a diversified business like electronic monitoring?

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

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Well, let me answer the last part first. Yes, the big mantra here in the organization is: diversify our cash flows. And so we have built a really nice team here internally to do a lot of targeting of potential targets. Notably, as you know, with the reentry side, growing it to 29 facilities. So they've been very aggressive on that front, and we've got a well-oiled machine kind of continuing to look at targets.

So we're always kind of looking at what the opportunities are within the business. We did take a look at 3M. I'd say, kind of at a high level the thing that created pause for us to where we didn't really make a run at it was it's a big concentration of business, internationally. In fact, I think they're doing business, like, 34 different countries. And so we've been really focused on U.S. operations, as you know, for 10, 15 years, and that's going to continue to be our focus. I'd say that was the thing that, at a high level, that shied us away from that company.

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Operator [12]

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And we'll take our next question from Tobey Sommer with SunTrust.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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I wanted to ask your perspective on the scenario that investors and the stock might have reflected more optimism, say, 6 months ago for more rapid utilization of idle capacity. And contrast it with today. Is there a basic change into kind of a multiyear outlook? Or would you describe it more as a function of timing, having the pieces of -- the cogs of government kind of work?

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Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [14]

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I think it's the latter, Tobey. This is Damon. Yes, government, it takes a -- it's not for the weak-kneed. Working with government, you've got to be very persistent and very patient. And so as I mentioned earlier, notably on the federal side, you've got so many vacancies with the U.S. Attorneys, and they're really leading the prosecutions that drive the demand for the marshal service and, ultimately, the BOP. So I think it's really a timing issue, to your point.

And again, government, just, you have to be very patient, very persistent. I highlighted the contract with the City of Mesa, that took 5 years. A lot of persistence, a lot of meeting with stakeholders within the community, but we're really excited about that opportunity because we think it's a foot in the door in a community that has greater needs, going forward.

So I think yes, very much timing. And I think, with the administration change and this is, I think, by most experts' analysis, a little slower relative to kind of getting key positions filled not only at the secretary level, but also some of these key agency heads and also with these U.S. Attorneys. So I think timing is the key part of the issue this year. Anything you want to add to that, David?

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [15]

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No, that's very true. Most opportunities do not take 5 years. But this one has taken -- we have a number of opportunities that we've been looking at, as you know, that are, actually, publicly known that we're as frustrated as I'm sure our investors are at the pace of getting those transactions completed. But we still feel very confident that they'll get done. They just don't get done on the time lines that we'd like to see. So we'll continue to work hard to get them across the finish line.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [16]

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Okay. And then you mentioned some goals for diversification. I was wondering if you could maybe comment on the key variables to either achieving greater percentages or smaller percentages over the next couple years as you see it.

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

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Great question. So let me talk about CoreCivic community first. And I feel really good about that goal. Like I said we, in a very short period of time, have built a really nice portfolio of about 29 facilities of about 5,600 beds. And so our goal -- and the team feels really good about this, on closing one of those a quarter, we feel it's very achievable for the next few years. So we feel good about that front.

Again, we've got very well-oiled process on sourcing potential target companies, doing the diligence and closing quickly. I mean, we are a very good buyer just because no financing contingencies, so we're able to close very quickly.

On the CoreCivic property, that one is a little more variable because we've got some great opportunities near term with Oklahoma at our Diamondback facility, but also, as I mentioned, and as you know, Tobey, we've got a lot of development projects going on right now, notably, with the procurement in Kansas.

So we think if we get a couple of these across the finish line, kind of really show from a development perspective that this could be a very good solution, that we could have really increased demand, not only at the state but also at the local level.

The other thing, too, and you and I've talked about this, but it'd be interesting to the rest of the people on this call, is that we've got a little bit of pipeline we're starting to build, where you've got these, what I'd say, mission-critical properties that are privately owned and are leased, say, to the federal government through the GSA.

And so we're starting to get a few people kind of knocking on our door, saying, I own this mission-critical property. We've got a nice long-term GSA lease and maybe it fits nicely into your portfolio.

So what we've said to the investors here recently is, don't be surprised, say, 6 months from now, where we have an announcement where we've got, again, a property that's being leased to an agency that has maybe a mission-critical component to it that's serving some type of agency.

So we don't have a number out there yet. We want to get kind of that pipeline built and maybe get a couple of transactions done, but I think that also could be a catalyst to grow the CoreCivic property side.

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Tobey O'Brien Sommer, SunTrust Robinson Humphrey, Inc., Research Division - MD [18]

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Okay. And then, could you comment on any managed-only business that may be coming up for renewal in the next year or 2? The company has kind of leaned its portfolio as you have profitability thresholds that you want to achieve for yourselves and shareholders and just kind of want to assess that outlook over the near term.

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Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [19]

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Yes, I think, Dave, we'll have only about 3%, 4% by next year for NOI coming from managed-only, so it's a very small percentage.

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [20]

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Less than that.

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Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [21]

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Yes, it's -- as you know, Tobey, back in 2000, we had 25%. So we've really whittled down that portfolio and have made very thoughtful decisions, kind of case-by-case, as those contracts come up for renewal.

So I think about -- as I think about the kind of remaining portfolio, I think we're in good shape. We've got still kind of a pending process with Hamilton County, down in Silverdale. But I'd say the rest of the portfolio is stable as we think about the next few years.

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Operator [22]

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And we'll take our next question from Kevin McVeigh with Deutsche Bank.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [23]

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A little more philosophical, it may be hard to answer. But any sense of, of those ICE beds, how many relate to interior enforcement versus the border in terms of kind of currently, based on -- it sounds like it bottomed somewhere around 34,000. Then the target's 44,000 in terms of where the budget is. Any sense, directionally, what it is today and what that mix should look like to the extent they hit the 44,000?

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Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [24]

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Kevin, this is Damon. That's a good question, and I don't think I have a good answer for you. They really haven't opined. I don't think they've said anything publicly, and I don't think we've heard anything from our people that work the relationship with ICE about kind of either a target or where they expect that to go.

But it is very clear, and one thing that we look at on a regular basis is that the activity within the interior, clearly, has increased year-over-year. So we are seeing not only resources being deployed but actual activity.

So I don't think -- they probably are not going to have, probably not, say, a goal, but at least a target of what they're going to try to achieve, Southwest border versus interior. But it is clear that we're seeing additional activity in interior. And with that, is it's driving some demand.

Dave talked a little bit earlier about Ohio and our Youngstown facility. That new contract at Northeast Ohio has been nice location for them to kind of support their efforts kind of in the middle to the northeastern part of the country. So we think that additional demand could manifest itself as they continue to kind of ramp up their efforts with interior enforcement.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [25]

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Got it. And to follow up on that, it sounds like it's definitely a longer stay in terms of interior. But is that more profitable for you, given the fact that maybe it boosts utilization at facilities outside of the border? Or is it kind of apples-to-apples in terms of profitability on it?

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

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Yes, relative to scope and kind of services and profitability, it's all the same. So really, there's not a variance there based on location or the type of individual if they're, again, apprehended on Southwest border versus the interior.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [27]

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Got it. And then just one last one last one for me on the managed-only. I mean, is it kind of less tolerant to kind of dilute the margin given all the other growth opportunities? Or is it just somebody getting more aggressive in terms of the way they're bidding those contracts?

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

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Yes, it's the latter. We've got these facilities, especially in Texas and in the Southeast, where we just have had continued competition for labor. And one thing that's a non-negotiable for us is that we want to make sure we could safely operate the facility day in and day out for not only our partner, but our employees and the people entrusted in our care.

And so if we just don't feel like we get the ability to do that through a re-bidded contract, then we'll make those tough decisions. But yes, I'd say, there's some providers out there that are willing to do it at a lower margin than we feel comfortable doing.

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Kevin Damien McVeigh, Deutsche Bank AG, Research Division - Head of Business and Information Services Company Research [29]

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Got it. And then just my last one. When you alluded to the pricing, was that at the state level? Because I know you've pretty good escalators at federal, so is it you're able to kind of layer in some incremental price at the state level as well?

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Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [30]

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Absolutely. Yes, that's exactly right. I was talking about state level. And I think what's also modestly impacting that in a positive way, too, is that we're seeing kind of demand from different fronts.

And so the states that really need capacity within a respective state to deal either with overcrowding or maybe closing of older facilities, it's not lost on them on some of the demand that's coming out of the federal government for ICE and, potentially, in Marshal service, too. So I think that's also driving it a little bit.

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Operator [31]

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And we'll take our next question from Kevin McClure with Wells Fargo Securities.

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Kevin Andrew McClure, Wells Fargo Securities, LLC, Research Division - Senior Analyst [32]

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I apologize if I missed this, but could we just go back to the increase in ICE population year-over-year. I understand why population would be down sequentially, but I'm a little surprised why the populations were up when you comp against the prior year. That can't all be related to interior enforcement, can it?

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [33]

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No, definitely not. Well, we've signed a couple of new contracts, 1 at our Northeast Ohio facility, another 1 at our Cibola County facility. So when you look at ICE populations, I'd say most of the -- well, it's hard to tell. But my guess would be most of those increases were from border apprehensions. So an increase from the prior year, but down sequentially.

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Kevin Andrew McClure, Wells Fargo Securities, LLC, Research Division - Senior Analyst [34]

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Okay. Because that was -- what I was getting to, the border patrol statistics would seem to indicate that the apprehensions are lower on a year-over-year basis as well.

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [35]

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I think we were capturing some market share at our Cibola facility and at our Northeast Ohio facility.

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Kevin Andrew McClure, Wells Fargo Securities, LLC, Research Division - Senior Analyst [36]

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Got it. And then, Congressional appropriation for ICE, how aggressively can they expand or ramp up or accelerate interior enforcement once they have this appropriation?

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Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [37]

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Yes, good question. I think it's going to take a little more time just because they've got kind of well-established resources and infrastructure in Southwest border, so I think they can kind of scale up the operations quickly if there is more demand down there. But I think it's going to take a little more time to kind of put in place those resources nationwide.

And again, it's clear to us, based on kind of both some of the numbers we're seeing, but also the feedback we're getting from our federal partners, that they're making those big investments. But it's probably going to take a little more time than, say, if there's increased activity on Southwest border.

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Kevin Andrew McClure, Wells Fargo Securities, LLC, Research Division - Senior Analyst [38]

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Got it. And then, final question for me. What are your updated thoughts on maybe lengthening your weighted average maturity schedule, considering the tower you have in 2020 and the blank space you have in the out years?

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [39]

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Yes, that's a great question, Kevin. It's something we're keeping an eye on. The debt capital markets are quite attractive right now, but we do have plenty of capacity under our revolving credit facility, plenty of liquidity.

So obviously, can't -- it would be challenging to refinance those, the outstanding unsecured notes. They have make whole provisions which would be very expensive. But when it comes to new capital markets transactions, if we're able to identify some opportunities to grow the company through M&A, for example, that require capital deployment, the debt capital markets are very attractive. So it's something we're monitoring.

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Operator [40]

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(Operator Instructions) We'll take our next question from Jordan Hymowitz with Philadelphia Financial.

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Jordan Neil Hymowitz, Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager and Managing Member [41]

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I have a question. ICE's contracts are ramping up about 9,000 to 10,000 over the next 2 years in terms of availability. And at the same time, the number of apprehensions across the border are going down somewhat. But it seems like because most of your contracts have fixed minimums in it, you're much more sensitive to the upside on increased overall volumes than you would be to the downside on decreased numbers per facility, does that make sense?

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [42]

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Yes, if I understand your question properly, you're absolutely right, in that, utilization or maximum utilization of existing contracts is likely going to have a larger impact than entering into a new contract, particularly if you're entering into a new contract for an idle facility where you're having to ramp up staff and so forth.

So where our population stands today, there's plenty of capacity to maximize existing contract utilization. So that's actually more impactful than new contracts, even though I know the market looks for expanding through new contract awards. Is that what you're asking?

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Jordan Neil Hymowitz, Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager and Managing Member [43]

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That was sort of -- the other side of it is because there's utilization minimums in most contracts that if there's another 10,000 people that come in and even the facilities, if they're 70% filled, you get paid for 80% or 90%. So the bigger thing is the absolute number of total beds needed as opposed to them all being filled, correct?

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [44]

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Yes, yes. So not all of our facilities have that guaranteed population or a fixed monthly price. Most -- many of them do. So to the extent where you're already getting compensated and they're not maximizing the guaranteed occupancy, then, yes, that's not upside until they hit that level.

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Jordan Neil Hymowitz, Philadelphia Financial Management of San Francisco, LLC - Portfolio Manager and Managing Member [45]

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Okay. And my other question is the interior opportunity, most of your idle facilities seem to be in the interior, unless you consider the Canadian border a different border, which I guess it is. But I mean, Minnesota and Oklahoma and Kansas, those seem to be very well suited for the opportunity set that's presented itself.

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Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [46]

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That's correct. Yes, so we have virtually, I think, every facility that has vacant capacity, either the facility is completely vacant or partially utilized. We have given an overview from ICE and, in many cases, they have actually toured. So you're exactly right. We feel like where we've got available capacity could be very attractive based on their activities on interior enforcement.

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David M. Garfinkle, CoreCivic, Inc. - CFO and EVP [47]

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But we're not depending on demand from ICE for interior enforcement to utilize a lot of our idle capacity. As we've talked about in the past, a lot of that utilization will come from state customers, and then, there's the BOP procurement that's out there as well. So not dependent on it.

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Operator [48]

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(Operator Instructions) And there's currently no questions in the queue at this time. I'd like to turn the conference back over to today's speakers.

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Damon T. Hininger, CoreCivic, Inc. - CEO, President and Director [49]

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All right. Thanks, again, to everyone joining on our call today. We look forward to reporting to you again on our third quarter results in early November. Thanks again.

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Operator [50]

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And this does conclude today's conference. Thank you for your participation. You may now disconnect.