CoreCivic, Inc.

Good morning. My name is Casey, and I will be your conference operator. As a reminder, this call is being recorded. I'd like to welcome you to CoreCivic's second quarter 2021 earnings conference call. All lines 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 star, then the number one on your telephone keypad. If you would like to withdraw your question, press star two. Thank you. At this time, I would like to now turn the conference over to Cameron Hopewell, Core Civics Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

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. The call today will focus on our financial results for the second quarter, and we'll provide you with general business updates. 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 second quarter 2021 earnings release issued after market yesterday and in our Securities and Exchange Commission's 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. On this call, we will also discuss certain non-gap measures. A reconciliation of the most comparable gap measurement is provided on 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 us today for our second quarter 2021 earnings conference call. Going to our agenda for the call, we will provide you with a breakdown of our second quarter financial performance, discuss business development opportunities, and the latest developments with our government partners. We will also provide you with an update of our continued response to the COVID-19 pandemic, particularly relevant due to the emergence of the latest Delta variant. Following my remarks, I will turn the call over to our CFO, Dave Garfinkel, who will review our financial results in greater detail. Our second quarter revenue of $464.6 million represented only a 2% decline over the prior year quarter, despite the continued impact of the COVID-19 pandemic on Oxy within our safety and community segments. the sale of 47 non-core real estate assets within our property segment in multiple transactions between December 2020 and June 2021, and our decision to exit two managed-only contracts with local governments in the state of Tennessee. And in the year since we announced the change in our capital allocation strategy, we have meaningfully improved our credit profile. reducing our net debt balance by almost $550 million during a time of unprecedented challenges. We are maintaining our target of reaching a total leverage ratio or net debt to adjusted EBITDA of 2.25 times to 2.75 times. Using the trailing 12 months into June 30 of 2021, our total leverage ratio was 3.3 times. At the same time last year, our total leverage ratio was 3.9 times, so we have made significant progress. We continue to believe our capital allocation strategy is the most prudent approach to positioning the company to generate long-term value through a stable capital structure and continue to cost-effectively meet the needs of our government customers with less reliance on outside partners. We continue to see criminal justice-related populations decline, mostly due to a reduction in new intakes rather than early releases. Governments have acted faster to transfer certain residents assigned to our reentry facilities to non-residential statuses, such as furloughs, home confinement, or early releases to create additional space for enhanced social distancing within facilities. The year-over-year rate of decline in Oxy in our safety and community facilities has slowed because the prior year quarter was also impacted by the COVID-19 pandemic. Our safety segments Oxy was 72.5% in the quarter, down 330 basis points versus the prior year quarter, and our community segments Oxy was 58.1%, down 420 basis points. However, our safety OXY increased 120 basis points over the first quarter of 2021 and our community segment OXY increased by 650 basis points versus the first quarter of 2021. Normalized funds from operations or FFO for the second quarter was 46 cents per share, a decline of 18% compared with the second quarter of 2020. However, this decline was primarily driven by our decision to convert to a taxable seed corporation effective January 1, 2021, from a REIT. We have added disclosures in our second quarter supplemental financial information document available on our website, which provides our pro forma results of 2020 reflecting income taxes spent by applying our estimated tax rate to pre-tax income in the prior year. Comparing our second quarter 2021 normalized FFO of 46 cents per share to our pro forma second quarter 2020 normalized FFO of 47 cents per share, it shows a decline of just 2%. Our adjusted EBITDA of $101.7 million was also resilient, increasing 1% compared to the second quarter of 2020. Our GAAP results included some larger than average special items, including $52 million in expenses related to debt repayments and refinancing transactions. These charges were the result of the repayment of our $250 million in unsecured bonds due in October 2022, the partial repayment of our $350 million in unsecured bonds due in May of 2023, and the repayment of non-recourse mortgage notes associated with the recently sold GSA lease assets previously in our property's portfolio. These charges were partially offset by a $39 million gain we recognized from the sale of five GSA leased real estate assets, which we have excluded from our adjusted results. Dave will provide greater details about our second quarter financial results, including reconciling between our GAAP and normalized results, following the remainder of my comments. We'll start our operational and business development discussion with an update on the impact of COVID-19 pandemic and our ongoing response. Last quarter, I spoke about two trends. the increasing availability of the vaccine, and the substantially lower rate of positive cases across the country, which were leading many correction systems to beginning moving towards normalizing their facility operations over time from the various protocols enacted in response to the COVID-19 pandemic. These protocol changes included returning to classroom-based learning and rehabilitation programs, in-person visitation, and reduce mask requirements for vaccinated staff and inmates, just to name a few. With the current rate of positive cases now increasing across the country, the emergence of the Delta variant, and changing guidance from leading health experts, it is likely that the pandemic protocols will remain in place longer in order to mitigate the risk of virus transmission. Throughout the pandemic, we have worked diligently to collaborate with our government partners while being guided by leading health experts to proactively respond to the changing conditions within our facilities. Throughout the second quarter, the number of active cases within our facilities remain low and we continue to expand the doses of vaccine administered to our staff and resident populations. Our latest data shows we have administered approximately 27,000 doses. Today, the vast majority of our positive cases are in ICE facilities, and most of these individuals arrive at our facility COVID positive. We do testing during our intake process so we can identify these individuals before they join the facility's general population. Proactive testing and quarantining protocols have helped us to reduce the potential for wider spreading of the virus. We are also following closely the recent vaccination mandates issued by various government and private entities to their employees. While we have made vaccinations available to our employees and there is currently ample community access to free vaccinations, until recently we had not taken the position of mandating vaccinations. In recent weeks, various government partners across the country have begun communicating new vaccine mandates and COVID-19 testing requirements for our staff, which we are diligently working to fully comply with. For our inmate, detainee, and resident populations, we do not have the ability to mandate vaccinations. Just as we've seen in our communities, there has been some hesitancy for many to accept the vaccine. We continue to provide educational resources to all our employees and residents in order to encourage getting vaccinated. I will move next to discuss some recent federal and state-level business development updates and discuss some of the emerging needs in the market. We are continuing to evaluate the impact of the executive order signed by President Biden issued in January that directed the Attorney General to not renew Department of Justice contracts with privately operated criminal detention facilities. Two agencies of the Department of Justice utilize our services, the Federal Bureau of Prisons, or BOP, and the United States Marshal Service, or USMS. As a reminder, the BOP takes custody of inmates who have been convicted for federal crimes, and the USMS is responsible for prisoners who are awaiting trial in federal court. The BOP has experienced a significant decline in inmate populations since 2013 and simply does not have as much as the need for prison capacity from the private sector. The decline in BOP populations has intensified by COVID-19. We currently have one prison contract with the BOP accounting for approximately 2% of our total revenue. Martial service populations have remained relatively consistent in recent years, so their capacity needs remain unchanged. In fact, the nationwide martial population has increased. We continue to believe that the marshals do not have sufficient detention capacity to satisfy their current needs without much of the capacity we provide. We began the year with four contracts with the marshals that expire in 2021, the first of which was our 2016 bed Northeast Ohio Correctional Center. In May, we entered into a new three-year contract with Mahoney County, Ohio, to utilize up to 990 beds at our Northeast Ohio Correctional Center. This new contract served as a replacement to the previous direct contract with the United States Marshal Service for up to 992 beds to house federal detainees. Mahoney County is responsible for its own county inmate populations as well as federal detainees and the county is using the Northeast Ohio facility to address their population needs. We continue to own and operate the Northeast Ohio Correctional Center under the new contract with Mahoney County and an existing contract with the state of Ohio that currently runs through June of 2032. Our second Marshalls contract set for expiration was for 96 beds at our 664-bed Crossroads Correctional Center in Montana. In July, we entered into an amended contract with the state of Montana to utilize all the capacity at the Crossroads facility, including the 96 beds recently vacated due to the expiration of our previous contract with the Marshalls. The amended contract was extended through June of 2023 with additional extension options by mutual agreement through August of 2029. Our remaining two contracts with the Marshals with expiration dates this year are our 600-bed West Tennessee Detention Facility and our 1,033-bed Leavenworth Detention Center, expiring in September of 2021 and December of 2021, respectively. We do not know if the Marshals will ultimately relocate the federal detainee populations we care for at these facilities, but we continue to explore various options that would enable the Marshals to continue to fulfill its important mission while maintaining access to our facilities. But we are also evaluating options for other government agencies. Our third federal partner is Immigration Customs Enforcement, or ICE, which is not impacted by the previously mentioned executive order. They continue to be the government partner with the most significant impact from COVID-19 on their capacity utilization. However, recent heightened activity along the southwest border has caused significant volatility in their utilization levels. Nationwide, ice detainee populations have doubled since the start of the year. We have experienced a similar impact at our facilities under contract with ICE, but our facility utilization levels remain materially below historical averages. The largest driver of their lower utilization levels has been the enactment of Title 42 since March of last year. which prevents nearly all asylum claims at the country's borders and ports of entry in order to prevent the spread of COVID-19. Instead, Title 42 allows for individuals apprehended at the Southwest border to immediately be expelled to Mexico. Administrative changes and court decisions have occurred since the original enactment of Title 42, which have enabled unaccompanied minors and some family units to enter and remain in the United States while their immigration cases are adjudicated. These changes have little to no impact on the demand for our services by ICE because we do not house unaccompanied minors in any of our facilities. We have one facility in Dilley, Texas, opened during the Obama-Biden administration in 2014, which has a family mission. However, we provide that facility to ICE on a fixed price basis. We primarily provide ICE with strategic capacity for adult populations, and it is unclear when Title 42 will no longer be applied to adults. Certain factors, such as criminal histories or previous deportations, may compel the government to keep individuals in custody instead of applying Title 42. These situations appear to be the primary driver of the increase in ICE utilization we have experienced in the first half of this year. The emergence of the Delta variant of the COVID-19 virus has likely extended the use of Title 42. Given the rapidly changing trends and government responses to this variant across the country, we are not currently in a position to opine on the potential timeline for a reopening of the southwest border. Whenever that time comes, we believe there will be a significant surge in the need for detention capacity. Our facilities support ICE by providing safe, appropriate housing and care for individuals as the agency works through the various processes associated with the individual's immigration case, deportation order, or initial processing. While we have no involvement or influence on anyone's immigration-related case, we know these matters are often quite complex and typically cannot be adjudicated in a few hours. This results in a need for various solutions and a diverse portfolio of real estate across the country to provide housing and care for individuals while they're in ICE custody. Our facilities serve as a critical component of the real estate infrastructure needed by ICE to help them carry out their mission. Just after the second quarter ended, we entered into a new two-year contract extension with ICE at our 300-bed Elizabeth Detention Center in New Jersey. This was our first contract extension or renewal with ICE in 2021, and this facility is particularly critical for ICE due to recent losses of most of its detention capacity in the region. The Elizabeth Detention Center has successfully served ICE for multiple decades, and we are pleased to continue to provide that service into the future. Moving now to state-level developments and opportunities, I will begin with a recent contract renewal resulting from a competitive rebid with the State of Hawaii. On July 1st, we received a notice of award from Hawaii to care for up to 1,800 inmates at our 1,896-bed Saguaro Correctional Facility. The contract will have a three-year term. We are deeply honored and grateful to be able to continue our multi-decade partnership with the State of Hawaii. Hawaii also continues to determine the best approach to replace its Oahu Community Correctional Center, the largest jail facility in the state. The existing facility has exceeded its useful life, and the state is in need of a new, modern facility to meet its current and future needs. We remain actively engaged with the state regarding various solutions we could deliver and anticipate a competitive procurement in 2022 to replace the current facility. Recently, the state of Arizona issued a request for proposal for up to 2,706 beds for medium and close security inmates. The state intends to close its oldest prison facility in Florence due to its outdated condition, operational and maintenance cost concerns. Instead of deploying taxpayer funds to build new capacity, the RFP will allow the state to evaluate alternative capacity available from the private sector. We will respond to the procurement with our best option and believe the State Department of Corrections rehabilitation and reentry is poised to move quickly on the procurement. My final state level update comes from Alabama. As a reminder, in February of 2021, we entered into two 30-year lease agreements with the state for the development of two correctional facilities, which was subject to the successful completion of financing we were pursuing for these projects. Shortly after the close of the second quarter, we received notice from the state of its decision to terminate the leases effective August 6, 2021. As a result of the lease termination, during the third quarter, we expect to report asset impairment charges of $4 to $6 million for pre-development activities. Of course, we were very disappointed to receive this news. However, it is clear that a crisis continues to exist in Alabama's prisons today. That crisis has brought forth a range of well-meaning solutions aimed at addressing the needs of those impacted. To that end, CoreCivic was proud to put forward a real and immediate solution that would have delivered desperately needed modern curricular infrastructure to replace dilapidated aging facilities originally designed with one purpose in mind, to warehouse prisoners, not to rehabilitate returning citizens. And while it is clear that our proposal would provide a meaningful and immediate solution, we understand that alternatives have been put forth and respect the state's decision to pursue those as they work to address the needs of the individuals in their care and the dedicated employees who watch over them every day. For nearly 40 years, we've been providing meaningful solutions to over half of the states in our nation. Like Alabama, many of those states' correction systems were facing humanitarian crises and court interventions over the conditions of confinement for the people in their care. As always, we stand ready to assist the state of Alabama in any way we can and are grateful to the leaders of the state for their thoughtful consideration of our solution. I close out my comments expanding what I mentioned earlier, and that is discussing the progress we made during the second quarter towards our capital allocation strategy of reducing overall debt, and along with that, the sale of certain non-correctional real estate assets. In the second quarter, we sold three large and two small government leased real estate assets, representing over a million square feet for a combined total gross proceeds of $328.7 million. The three large assets were acquired only three years earlier at $293.6 million and were sold for an aggregate price of $326 million or a cap rate of 6.2%. The sale of these assets allowed us to accelerate our debt reduction strategy while also better aligning our portfolio of real estate assets with our strategic decision to revoke our REIT status at the start of this year. As a C-Corp, we viewed ourselves as no longer being in a competitive position to own these type of assets, and the ability to recycle the capital we have invested presented a unique opportunity. There is currently a really strong, robust market for government-leased real estate assets with many buyers, which has increased the value of these assets over time. The buyers of these type of assets are either REITs, or other organizations in a tax-advantaged position similar to REITs. The combination of high valuations plus competing buyers paying no federal taxes made exiting this market a very attractive option. Upon closing the sale of these assets, we were able to fully repay $161.9 million in non-recourse mortgage notes associated with two of the assets and generate net cash proceeds of $125 million after mortgage note repayment premiums and transaction-related costs. The net cash proceeds were used to pay down a portion of the draw balance on our revolving credit facility and fund $27 million of additional open market purchases of our unsecured bonds due in 2023, our closest dated bond maturity. So as mentioned earlier, with all of these actions, we were able to take our leverage ratio down to 3.3 times for the 12-month ending June 30, 2021. One final comment. I would really like to express my deep appreciation and gratefulness to our CoreCivic team, both here in FSC and around the country. Their passion and heroic effort supporting the individuals in our care during this pandemic has been inspiring to see, and for that, I remain thankful and deeply honored to work alongside them. I'll now turn the call over to Dave to provide a more detailed look at our financial results in the second quarter of 2021, as well as factors that could affect our business for the remainder of this year. Dave?