CoreCivic, Inc.

Good morning. My name is Casey, and I will be your operator for today's call. As a reminder, this call is being recorded. At this time, I would like to welcome you to CoreCivic's second quarter 2020 earnings call. All alarms have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press the star key followed by the one key on your telephone keypad. If you would like to withdraw your question, you may press star two. Thank you. I would now like to turn the call over to Cameron Hopewell, Core Civics Managing Director of Investor Relations. Mr. Hopewell, you may begin.

Thanks, Casey. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Heiniger, President and Chief Executive Officer, and David Garfinkel, Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammons. On the call today, we'll focus on our financial results for the second quarter, yesterday's announcement of our intentions to change our corporate structure and institute a new capital allocation strategy, and an overview of the evolving impacts of the COVID-19 pandemic. During today's call, our remarks, including our answers to your questions, will include forward-looking statements pursuing 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 2020 earnings release, issued after market yesterday and in our Securities and Exchange Commission's filings, including the form's 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. On this call, we will also discuss certain non-GAAP measures, A reconciliation of the most comparable gap measurement is provided in our corresponding earnings release and included in the supplemental financial data on the investors page of our website, CoreCivic.com. With that, it's my pleasure to turn the call over to our President and CEO, Damon Heinegger.

Damon? Thank you, Cameron. Good morning, everyone, and thank you for joining our second quarter 2020 conference call today, but also joining us on a day of great historical significance for our company. With last night's announcement noting our plan to convert to a taxable C corporation, we are putting our company in a better position over time to improve our already strong financial position and ultimately move our share price back to levels that reflect our strong fundamental business. By doing so, we will be able to build on our unprecedented leadership in supporting life-changing reentry programs, policies, and services that address America's recidivism crisis and help those in our care succeed with their next step in life. So for today's call, Dave and I will provide an overview of our second quarter financial performance, Yesterday's announcement of our intention to revoke our re-election and become a taxable seed corporation in 2021, including its implications on our forward-looking business and capital allocation strategy, and our ongoing response to evolving developments resulting from the COVID-19 pandemic. First, I will briefly touch on our second quarter financial performance. On the top line, our revenue in the second quarter was 472.6 million, which was a decline of 3.6% over the prior year quarter. The majority of this decline was experienced in our core civic safety segment. Normalized funds from operations, or FFO, was 56 cents per share in the second quarter, which represented a 19% decrease from the prior year quarter. The largest impact on our revenue and normalized MSO in 2020 has been due to lower utilization levels from our largest government partner, Immigration and Customs Enforcement, primarily due to the COVID-19 pandemic. While current utilization levels by ICE are well below historic averages, the second and third quarters of 2019 were already going to present a difficult comparison because in those periods last year, ICE reached historically high utilization levels. If you look at our financial performance sequentially, compared with the first quarter of 2020, our normalized FFO per share increased by 4% in the second quarter of 2020. Dave will discuss our financial results in great detail after I wrap up my comments. But before I turn things over to him, let me take a moment to appreciate our tremendous CoreCivic professionals. I've dedicated nearly three decades of my career to our company, starting as a frontline correctional officer in Kansas at the Ludmore Detention Center in 1992. I won't say I've seen it all, but I've seen a lot. COVID-19 is unprecedented in every way. For settings like correctional facilities, the pandemic puts forward a unique set of challenges. Fortunately, at CoreCivic, we prepare for these type of situations all the time, and we acted early. But none of that matters without our people in the field. They have a tough but rewarding job that has been made even more demanding. I've had the opportunity to get out into our facilities to see how they're doing and how we can help. Let me tell you that our core civic professionals are an inspiration to me every day, but never more so than now. During our first quarter earnings report, I talked about the hero bonus and extra paid day off that we provided to say thanks to our people in the field. But as we all know, COVID-19 has required the same level of vigilance in recent weeks as it did in the beginning. That's why, last month, we were pleased to again show our gratitude to our field employees with mid-year raises. These base salary adjustments, which nearly match what we did in the first half of the year, will bring our full-year additional investment in our people to $15 million. The board and the management team know that this is the right thing to do to take care of our people right now and to retain them over the long term. Now, I would like to spend a little time discussing our announcement from yesterday, which is the conclusion of our process to evaluate corporate structure and capital allocation alternatives. Our board of directors unanimously approved and plan to revoke our election as a real estate investment trust, or REIT, and convert to a taxable seed corporation. This election will be effective January 1st in 2021, as we are confident our year-to-date dividend distributions are already sufficient to ensure we qualify as a REIT for the 2020 tax year. To be abundantly clear, we have not been satisfied with the trading multiple of our stock. For the past several years, our trading multiple, whatever metric used to measure it, has steadily declined, even as our earnings have grown like they did in 2019. Continuing to pay a dividend yield in excess of 15% is simply not sustainable, and recent trading multiples below 10 times, and certainly the current multiple of 5 times, is not acceptable. It translates to a higher cost of capital, inhibiting our ability to execute our business plan. As a REIT, because we are required to distribute a substantial portion of our cash flows as dividends, we need to have continuous access to capital at reasonable prices to make investments at higher returns than our cost of capital. With many investors incorrectly categorizing CoreCivic as a non-ESG investment, and despite unprecedented leadership in support of ranching programs and public policies designed to keep people out of prison for good, the cost of our capital has increased. Revoking our re-election will provide us more flexibility in how we allocate our substantial free cash flow. We believe the change in corporate structure will improve our overall credit profile, in turn lowering our cost of capital. This change in corporate structure will also give us with significantly more liquidity, which will enable us to reduce our reliance on the capital markets and reduce the size of our bank credit facility. Following our first priority on debt reduction, with a target total leverage of 2.25 times to 2.75 times, we expect to allocate a substantial portion of our free cash flow to returning capital to shareholders, which could include share repurchases and future payments of dividends. As detailed in our press release, We will also have more flexibility to pursue attractive growth opportunities, not at all which will require capital deployment. We're also evaluating the sale of lower-yielding non-core real estate properties outside our corrections portfolio. These mission-critical, primarily single-tenant, government-leased properties were billed to suit according to stringent government requirements. The quality of these properties combined with long-term in-place leases and top-notch credit quality of our government tenants is a clear difference among other REIT classes, particularly in a current environment which is frothy for government lease assets. So it has resulted in significant inbound interest in this portfolio. Selling these properties, which are more properly owned by non-taxpaying entities, could enable us to delever accretively while accelerating our capital allocation strategy. With our 2013 conversion, the restructure was the right structure at the right time for CoreCitage, and it remains a great structure for many companies. But we have to recognize the limitations the structure imposes on CoreCivic in this economic and political environment, but also recognize the opportunities being a C-Corp affords us, and with that, adapt to the most appropriate structure that enables us to execute our business plan, further de-risk the balance sheet, and create the most long-term value. Finally, as many of you know, we were a C-Corp for about 12 years prior to our re-election in 2013. So we know this structure will work extremely well with our mission and business growth strategy. Now, in our last conference call in May, we spent a majority of our time detailing our response to the COVID-19 pandemic. I'd like to provide you with an update on our operational response, particularly highlighting developments that have occurred throughout the second quarter. Since the beginning of the pandemic, we have been working closely with our government partners to develop and implement facility-specific COVID-19 medical action plans. Our operational plans follow guidelines by leading health experts from the CDC and the World Health Organization, as well as those guidelines have been updated, too. And we've also incorporated those into our medical plans. During the second quarter, we saw an increase in positive cases across a number of our facilities consistent with the general public and across nearly every correction system in the United States. Our protocols and procedures for addressing positive cases or suspected cases is well established for both our employees and individuals entrusted to our care. However, positive tests for employees can present operational challenges from a staffing perspective. We have successfully navigated these challenges by utilizing available staff from other nearby facilities without positive cases when necessary. In coordination with our government partners, our facilities continue to manage to make movement, in-person visitation, and other interactions in order to reduce the spread of COVID-19. During the second quarter, many of our government partners have expanded testing of inmate and detainee populations beyond testing guidance from the CDC. This more broad-based testing has varied in results in terms of the rate of positive cases, but the overall performance of our facilities has been admirable. Also consistent with broad-based testing performed at government-operated facilities is the higher rate of asymptomatic positive test results. Many health experts have highlighted the challenges presented by asymptomatic positive individuals because they have the potential for spreading the virus without knowledge. This was particularly relevant before businesses and governments implemented hygiene, social distancing, and PPE protocols in March and April. The broad-based testing being performed across inmate and detainee populations has been a helpful tool to potentially reduce the spread of the virus but testing does have its limitations and cannot replace the need to follow proper hygiene, distancing, and PPE protocols. We will continue to be responsive to the COVID-19 pandemic and will work closely with our government partners to implement best practices as they evolve. COVID-19 is certainly on the top of everyone's mind, but our government partners continue to face challenges that predate the pandemic that have presented us with new opportunities to serve their needs. For example, in July, we commenced the lease of our previously idle 656-bed southeast correctional complex with the Commonwealth of Kentucky Department of Corrections. We originally entered into this lease agreement in December of 2019, which has an initial lease term of 10 years and includes five two-year renewal options. This is a great solution for the Commonwealth, which has had a significant need for additional correctional capacity, and we are pleased we could quickly deliver a solution in-state with our idle capacity. Many states are facing budgetary challenges from lost tax revenues due to business closures in response to COVID-19. It is still too early to tell the full economic impact of the pandemic will be and how quickly the U.S. economy can recover. There is also still the potential for federal aid to provide assistance to help state and local economies facing challenges as a result of the pandemic. These matters will take time to develop, but we have already seen a number of states looking to trim their budgets, including corrections budgets. In July, we agreed with the state of Oklahoma to close our 1,692-bed Cimarron Correctional Facility in order to generate budget savings. While we were disappointed for our dedicated staff members at Cimarron, all of whom have been provided opportunities to stay with the company at other facilities, we recognize that tough, budget-driven decisions have to be made when facing a significant budget shortfall. Although Oklahoma's prison population has declined as a result of COVID-19, the state continues to face challenges in their corrections infrastructure and could very well utilize Cimarron the Cimarron facility once their budget challenges subside. We have had discussions with a number of other state partners about ways to continue to generate taxpayer savings in response to budget challenges, and we are sure those discussions will continue. The COVID-19 pandemic has changed the typical playbook for corrections departments to respond to budget challenges because of the need for more physical space to ensure social distancing. There also remains a number of market opportunities as correction systems look to address their infrastructure challenges. The state of Alabama is continuing its RFP process to partner with the private sector to build three large-scale correction facilities to modernize its system and enclose approximately 15 outdated facilities. An initial award of the first facility for this procurement is expected in the next few months, with subsequent awards being announced next year. And the state of Nebraska is actively pursuing a similar path for a new correctional facility, but they are not as far as loan in the procurement process. We anticipate similar opportunities will continue to come to market because nearly every state has a significant portion of their correctional infrastructure that has reached the end of its useful life. Modern facilities provide significant operational cost savings due to thoughtful, efficient design that cannot be retrofitted for older prison facilities. This is particularly relevant today with the threat of budget cuts forcing government agencies to become more efficient. Also relevant today is the limitation older facilities have presented to systems responding to the COVID-19 pandemic, including limited medical facilities, concentrated housing areas, and centralized HVAC systems hampering the ability to prevent the spread of airborne illnesses. We expect that there will be growing appreciation for the need to modernize correction systems, especially after the COVID-19 pandemic decides. Let me also make a comment on the thorough side of the safety segment. We were just awarded this week a new 10-year contract with ICE at our T. Don Huddle Residential Center in Taylor, Texas. This is a renewal of a contract we've had in place for many years with ICE at this facility. We also expect, in the next few days, a similar award from ICE for our Houston Processing Center, which will also be a new 10-year contract, and again, a renewal of a long-held contract we have had with ICE at this facility. And ICE is expected to make millions of dollars in investments in renovating the physical plant of each facility, which reinforces their intention to use the facilities over the long term. I'd now like to pass the call over today to provide a more detailed look at our financial results in the second quarter and other recent trends. Dave?