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spk00: 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.
spk04: 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?
spk10: 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?
spk09: Thank you, Damon, and good morning, everyone. In the second quarter of 2021, we reported net income of 13 cents per share, or 25 cents of adjusted earnings per share, excluding special items. We generated 46 cents of normalized FFO per share and AFFO per share of 45 cents. Adjusted EBITDA was $101.7 million in the second quarter of 2021, compared with $101.1 million in the prior year quarter. Special items during the second quarter of 2021 include a net gain on the sale of five real estate assets, impairment on a managed-only contract, COVID-19 expenses, and expenses associated with the shareholder litigation settlement disclosed last quarter. Adjusted amounts also include expenses associated with debt repayments and refinancing transactions for the debt repaid in connection with our April bond issuance, as well as the repayment of non-recourse mortgage debt associated with two of the five properties we sold during the quarter. Finance results in 2021 reflect a higher income tax provision under our new corporate tax structure compared with the prior year when we elected to qualify as a REIT. For illustration purposes, in our supplemental disclosure report posted on our website, we have duplicated the presentation of adjusted net income, normalized funds from operations, and AFFO for each quarter and full year of 2020, calculated on a pro forma basis to reflect such metrics applying an estimated effective tax rate of 27.5%. Adjusted net income per share in the second quarter of 2021 of 25 cents compares to 23 cents on a pro forma basis applying this estimated effective tax rate for the second quarter of 2020. While normalized FFO per share in the second quarter of 2021 of 46 cents compares to 47 cents on a pro forma basis for the prior year quarter. And AFFO per share for the second quarter of 2021 of 45 cents compares to 48 cents on a pro forma basis for the prior year quarter. So while there were multiple special items associated with successful transactions completed during the quarter that allowed us to check off several of the goals we established at the beginning of the year, core operating results compared with the prior quarter can be summarized primarily by an increase in facility EBITDA, excluding COVID expenses, of $4.5 million and higher G&A expenses contributing to a net increase in adjusted EBITDA of $0.6 million. The $4.5 million increase in facility EBITDA was net of a reduction in facility EBITDA of $3.2 million attributable to the sale of 42 GSA lease properties that we sold in the fourth quarter of 2020 and the five additional properties sold in the second quarter of 2021. Therefore, excluding these sales, facility EBITDA increased $7.7 million or 6.4% from the prior year quarter. While occupancy in our safety and community facilities continues to reflect the impact of COVID-19 down to 71.6% in the second quarter of 2021 compared to 74.9% in last year's quarter, it is up from 69.9% in the first quarter of 2021. The impact of COVID-19 began in the second quarter last year as populations, primarily ICE, declined sequentially throughout 2020. As the federal and state court systems have begun to return to normal operations and as the numbers of undocumented people encountered at the southern border have increased, we have begun to see those populations return. Operating margins were 26.8% in the second quarter of 2021 compared with 23.5% in the prior year quarter. Although we have excluded the impact of COVID-19 expenses on our adjusted per share results, they are included in the operating margins and per mandate statistics presented in our supplemental disclosure report. Excluding COVID-19 expenses, which included $6.3 million of HERO bonuses to our facility staff in the prior year quarter, the total facility operating margin for our safety and community segments was 27% for the second quarter of 2021, compared with 25.3% for the second quarter of 2020. Our staffing levels reflect lower occupancy compared with the prior year, and most of our facilities remain on restrictive movement because of the pandemic, reflecting the modified services we are able to provide. Turning to the balance sheet, we continue to make significant progress on our debt reduction strategy. During the second quarter of 2021, we successfully completed the sale of five non-core properties, generating $125 million of net proceeds after the repayment of non-recourse mortgage notes associated with two of the properties and other transaction-related costs, which we used to pay down debt. We reported a gain on the sale of these five assets of $38.8 million during the second quarter and defeasance costs on the two non-recourse mortgage notes of $33 million. including the net proceeds generated from the sale of 42 GSA leased properties in the fourth quarter of 2020, we have generated $152.8 million from the sale of non-core assets after the payment of non-recourse mortgage notes and transaction costs, exceeding the goal we set in August 2020 when we announced our intention to revoke our REIT election and revised our capital allocation strategy. As mentioned last quarter, in April, we accessed the debt capital markets, issuing $450 million of unsecured notes maturing in 2026. We used the net proceeds of approximately $435.1 million after the original issuance and underwriting discounts and transaction costs to redeem all of the outstanding $250 million of unsecured notes that were scheduled to mature in 2022, including the make-whole amount, extending our weighted average maturities. In addition, we repaid $149 million of the 350 million unsecured notes scheduled to mature in 2023 at an aggregate purchase price of $151.2 million in privately negotiated transactions. During June, we repurchased an additional $27 million of the 2023 notes at par in a privately negotiated transaction, reducing the outstanding balance of the 2023 notes to $174 million. As of June 30th, we had $163 million of cash on hand and $674 million of availability on our revolving credit facility, which matures in 2023. Our leverage, measured by net debt to EBITDA, was 3.3 times using the trailing 12 months, down from 3.9 times using the trailing 12 months at the end of the third quarter of 2020 when we announced our revised capital allocation strategy and targeted leverage of 2.25 to 2.75 times. including the repayments of the mortgage notes associated with the aforementioned sale of non-core assets, we have reduced our net debt balance by over $300 million in the first six months of 2021. During the second half of 2021, we estimate that we will pay down an additional $100 million of debt with cash generated from our operations. We incurred $24.7 million of maintenance capital expenditures during the first half of the year, leaving $40 to $45 million for the remainder of the year, which is consistent with the estimates we provided last quarter. Without the capital contribution to the Alabama project, as Damon described, we have no other material capital commitments. While we are disappointed with Alabama's decision, without the $100 million of corporate capital we previously modeled for the project, we expect to reach our targeted leverage sooner, at which point we will evaluate opportunities to return capital to our shareholders. The challenges encountered in constructing desperately needed criminal justice infrastructure in the United States, exemplified in Alabama, further demonstrates the importance of the very valuable real estate portfolio of correctional and detention facilities we own across the country. Beyond capital expenditures and debt repayments, we are not yet reinstating financial guidance because of uncertainties associated with COVID-19, the application of the administration's various executive actions and policies related to immigration and criminal justice, as well as the challenging employment market. The country continues to make progress on vaccinations for COVID-19, and our operations were beginning to return to more normal operations. However, we cannot predict the impact of a resurgence in COVID-19 infections in caused by the Delta variant, which likely contributed to the extension by the administration of Title 42, the policy causing the southern border to remain effectively closed to asylum seekers and adults crossing the southern border without proper documentation or authority in an effort to prevent the spread of COVID-19. Disruptions to the criminal justice and immigration systems, including further extensions of Title 42, create challenges in forecasting our residential populations. Further, recruiting and retaining staff has always been difficult in our industry due to the unique and challenging work. However, like many companies, staffing in the current environment has become increasingly difficult. Even though we provided wage increases effective July 1st for most of our staff at the highest levels we've provided in several years, we could be required to incur additional wage adjustments in certain markets to help ensure sufficient staffing levels. We intend to work with our government partners and follow national and local health standards in enabling us to reinstate programs and normal movement within our facilities, requiring higher staffing levels and impacting our margins absent higher occupancy. Conversely, our government partners are experiencing the same staffing challenges, which has contributed to some of the per diem increases we were able to achieve as more budget dollars are allocated to help address rising wages. By successfully signing a new contract with Mahoning County at our Northeast Ohio Correctional Center and expanding the contract with Montana at our Crossroads Correctional Center, we have successfully resolved two of the 2021 contract expirations with the U.S. Marshal Service. The remaining 2021 contract expirations with the U.S. Marshal Service at our 600-bed West Tennessee Detention Facility and at our 1,033-bed Leavenworth Detention Center in Kansas expire in September and December, respectively. We do not yet know if the U.S. Marshals will vacate these two facilities. We continue to work with the U.S. Marshals Service and various government agencies to meet their needs, the solutions of which could be unique for each facility. At this stage of the discussions, it is too early to predict the ultimate outcome or the financial impact to us, if any. We currently estimate our income tax expense to reflect a normalized effective tax rate of 27.5% each quarter, although we estimate our cash taxes to be approximately 20% for the year because of net deductions for special items. Finally, when modeling our financial results for the second half of 2021, it is important to remember the properties we sold in the fourth quarter of 2020 and the second quarter of 2021 generated approximately $30 million of EBITDA in 2020 and $9.3 million of EBITDA in the first half of 2021. As we continue to manage through the impact of COVID-19, return to normal operations, and see how the administration reacts to the dynamic situation on the southern border, it is our current intention to reinstate annual guidance in February 2022. I will now turn the call back to the operator, Casey, to open up the lines for questions.
spk00: Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad now. If you're using a speakerphone, please make sure that your mute function is turned off to allow your signal to reach our equipment. And again, that's star 1 if you would like to ask a question. Our first question will be taken from Joe Gomes with Noble Capital.
spk06: Good morning, gentlemen. Thanks for taking my questions. Morning, Joe. I kind of want to start off a little bit on the population. You know, it's... kind of running story here on ICE and the guaranteed contract minimums. I mean, if I'm looking at the overall population for all of your facilities, you can see them starting to increase quarter over quarter here. So I was wondering, where do we stand on the ICE and the contract minimums? minimums. Have any facilities met those? How far below are we in other ones? Any additional detail, that would be great.
spk10: Joe, thanks for your question. This is Damon, and I'll tag team with Dave a little bit on the answer here. Let me just first talk globally about ice marshals and then actual POPs for our system, and then Dave can talk a little bit about your question on where we stand relative to our fixed monthly payments based on OCCC levels within those contracts. So at a high level, Marshall Service has been kind of between 66,000 and 64,000 nationwide in their populations, and that's an increase from where they were last summer of about 56,000. So to give you kind of a sense of where they were versus where they are today. Switching over to ICE, as I mentioned, you know, they've almost doubled. So they were, I think, right around 14,000 Towards the end of last year, early this year, today, there were right around, I think, 28,000 or 29,000 nationwide. And then specifically for CoreCivic, as of the, I guess it's probably as of Friday of last week, we were about 8,000 within our system with ICE. and then about 9,200 with the Marshall service within our system. So again, that gives you kind of high level numbers for both ICE and Marshalls and then specifically for CoreCivic, what we've got in our facilities. But I'll let Dave talk a little bit about kind of where that compares to where we are in fixed payments that are tied to Oxy levels.
spk09: Yeah, thanks, Damon. During the second quarter of 2021, we were about 3,200 detainees below the guarantee levels. As of Friday, that number had been reduced to about 2,200.
spk06: Okay, great. Thank you. Thank you for that. And on the two facilities on the U.S. Marshals, and hopefully we were able to work out a solution for them, here in West Tennessee and Leavenworth. Is there nearby available capacity if they declined to renew there that they could easily switch? Are we back into kind of the same situation where we were in Northeast Ohio where there really wasn't an excess amount of capacity nearby that facility that they could put the detainees in. I was just wondering how much capacity is available around those two facilities that if they decided not to renew that they could move inmates to.
spk10: Yeah, Joe, good question. This is Damon again. And so in both those locations, West Tennessee, which is in Mason, Tennessee, in the western part of the state, and then Leavenworth, which is up in the northeast part of the state of Kansas, we've been in both those communities for about 30 years. And so we have a pretty good sense of what the available capacity is kind of locally, both in eastern Kansas and western Missouri for the Leavenworth facility and then west Tennessee for that facility. And our general view is that, yeah, capacity is pretty, pretty limited for various reasons, one of which is, you know, just certain systems maybe just are at capacity or maybe over capacity, so they don't have any additional capacity. But one other kind of recent, and this is an obvious example, but an important one, and that is COVID. And that's affected a lot of local systems, how they think about kind of Oxy kind of near term, not only with the past 18 months, but also how it's affected their populations and their Oxy with the Delta variant. So our general view continues to be that there are pretty limited alternatives locally where we provide capacity for the marsh service in those two locations. But I guess what I'll also say, you know, the review and analysis we did and engagement we did with various partners with both Northeast Ohio and Montana, I mean, we're very pleased about the outcomes on both those locations. And as you know, the solutions that we did on both those locations were very different. But we continue to talk to various other partners and also maybe some new partners about that capacity if ultimately the Marshall service find maybe alternatives in those respective areas that allow them maybe to take the population down or completely out at both facilities. But I don't know anything you can add to that, Dave.
spk09: I don't, Damon. That should cover it.
spk06: Great. Thanks on that. You know, so you guys were mentioning in your prepared remarks that you know, how, let's just take a look at the safety segment, you know, net operating income margin, you know, increased, you know, 300 basis points in a quarter. I know some of that's less COVID expenses, some is per diem increases. I was wondering if you could give us a little more color or detail as to, even though you had declining populations, how you're able to show improved net operating margins there.
spk10: Yeah, I'll tag team with Dave again on this one, Joe. But one thing I would say, and Dave alluded to this a little bit, but we really have been really grateful for our state partners as they went through their respective legislative sessions around the country where there was deep appreciation both by the governors and legislators about this labor market and how it's made a challenge not only for public sector facilities, but also private sector facilities. So with that, there's been... pretty meaningful increases that we saw on our per day rates on various state contracts around the country, which we were able to quickly turn around and deliver as salary increases for our employees. So some of that obviously is cost, but also I think there's just a general appreciation to some of the work that we do within our facilities and the value we provide our government partners. So I think just general recognition for all that work was noted around the country, but I guess let you add to that, Dave.
spk09: Yeah, there are obviously many negative implications for COVID-19, but one of the ones in the correctional setting are, unfortunately, the reduction in the number of services and programs that we're able to provide in order to minimize a movement of the inmates and detainees and residents around the facility. So if you're not having classrooms, for example, you don't have the teachers on board and you're not paying their salary while the programs are not going on. So we've started to see some of that return to normal operations. We continue to see that. We'll see if the Delta variant takes a couple steps back with that. But we're looking forward to reinstating those services, which will then result in higher staffing levels. And I think you'd see margins. I don't know if they'd return to pre-pandemic levels. But I think right now they're probably elevated margins because of the lack of the intensity of services that we're providing the facilities to restrict the movement and the integration and interaction of the inmates and staff.
spk06: Okay, great. And one more for me, and I'll jump back in a queue. I'd like to go circle back to Alabama. Maybe you could give us a little more color on the process they're looking at. I know this is something the legislature has looked at in the past, but seems to have been unsuccessful in terms of allocating funds for building prisons. We know that Alabama's under a DOJ lawsuit about their prisons. What other alternatives, at least in the short term, Could there be for Alabama? Could they, for instance, make use of some of your idle facilities to at least comply with the federal lawsuit? Any additional color there on Alabama would be appreciated. Thank you.
spk10: Thanks, Joe, for that question. This is Damon again. Let me just first say we really have been grateful for the dialogue and work that we've had with the governor and her staff along with the commissioner and the Department of Corrections staff. I have great appreciation for the difficult situation they find themselves in. As you know, I worked in a correction facility when I first started the company, so having a new modern facility that is more humane for the residents and safer for staff it's something very top of mind for me just because I've been there and done that. So I have an appreciation for what they're trying to do in Alabama and continue to be on the sidelines here as a cheerleader for their efforts because, yeah, they are still very much in a crisis. They've got a challenge within their facilities, but also, as you noted, they've got continuing pressure from the Department of Justice on pushing them, trying to modernize the facilities and make it a much more humane environment. So it would be hard for me to speculate and say exactly kind of what the governor and the legislature are potentially going to do in the coming weeks and months. As you know, it's been reported in the press, they're actively talking. I say they being the governor and legislative leadership about kind of the path forward. I am encouraged here in the legislature there is good appreciation and understanding that they do need to do something where maybe that hasn't always been the case back in Alabama. So that's an encouraging sign. But our position right now is to continue to keep engaged with the department. And as they go kind of down this path, with the governor and the legislature while they're trying to figure out potentially new alternatives for a more, what I'd say, mid- to long-term solution in the state. I mean, we stand ready to provide any solutions that may emerge or maybe serve as a bridge to those kind of longer-term solutions. But I don't think you'd add to that, Dave.
spk09: Yeah, I was going to say the same thing. You know, we stand ready. We can provide a number of solutions for them. I know it's Alabama that wants an Alabama solution. But, you know, we do have capacity. We're able to provide out-of-state capacity if that's the direction they take. I don't think that that's where they're going with it. But we stand ready to help them with whatever solutions they think they need.
spk06: Okay, thanks, guys. I'll let Bo and I'll ask some questions and jump back in queue.
spk07: Yes, sir. Okay. Thanks, Joe.
spk00: Our next question will come from M. Marin with Zacks.
spk03: Thank you. So a couple of questions. I'm trying to get my arms around, you know, the situation in Alabama and if we could take that and extrapolate it to the general infrastructure that we see in this country. Could you give us any sense of, you know, perhaps in terms of average age of your infrastructure versus what is currently available? to government entities or, you know, directionally any kind of sense of, you know, where the general, you know, needs are because it seems that they're probably pretty extensive needs, not only in Alabama but in other states as well.
spk10: Yeah, it's a great question. This is Damon again. And, yeah, our sense based on our research is there is thousands of beds around the country that are kind of in a similar situation where they're old, They're antiquated. Maybe, unfortunately, they haven't gotten the dollars to appropriate for preventive maintenance. So, you know, in some locations we find that facilities are maybe only 30 or 40 years old, but maybe there has not been much, if any, dollars been spent to maintain them. So, unfortunately, their kind of useful life has been accelerated just because those maintenance programs have not been in place. So, our average age, and keep me honest here, Dave, I think our average age of our portfolio for our correction facilities is about 20 years on average. So, I mean, you compare that With various states, I'd say probably most states have an average age of probably in the range of 75 to 50 years in age for their system. Some a little younger, some a little older. But, I mean, there are thousands of beds in the United States today that are facilities that are well over 100 years old. And, I mean, we're well-positioned in providing solutions not only for either existing capacity within our system where they maybe could take an older facility offline and use our facility and move into it, or we could develop a new solution like we did in Kansas a couple years ago. So, finally, I'd just say just kind of put a dollar amount kind of in the global discussion you mentioned with the infrastructure. We've estimated that there's probably – about $15 to $20 billion in development opportunity in the United States today to replace old antiquated correctional facility assets in the various 50 states. But anything you'd add to that, Dave?
spk09: Yeah, you mentioned Kansas, but that was exactly the situation in Kansas in 2018 when we won the award there to construct a new prison for the state. Their oldest prison was over 150 years old. We affectionately said that that was constructed during the Lincoln administration. So a lot of states are in a situation where they don't have modern correctional facilities to provide safe, humane conditions for inmates and staff. It is also what's driving Arizona to go out with their RFP for 2,700 inmates. They're closing another large facility in the state and need alternative, more modern correctional infrastructure for those populations. That's what's driving, Damon mentioned in his script, Hawaii and Oahu replacing their largest jail on the Hawaiian Islands. So, yeah, there's many, many correctional systems throughout the country that have old, outdated correctional infrastructure. and there's going to have to be something done, whether it's, you know, and we can provide the solution, whether it's constructing a new facility or providing bed capacity. We've got over 7,000 beds of idle capacity that could be utilized to accommodate those populations at probably less expensive than what they're currently spending, considering, you know, that it's a government-run facility, that it's old, incurring deferred maintenance, and all kinds of operational utilities expenses, so forth, so we can provide a more cost-effective solution with more modern capacity.
spk10: And one thing I'll add to it, I was just checking my notes, but of existing state partners with CoreCivic, we've got four of our existing state partners that have six facilities that are over 100 years old, and then all of our state partners, except for two, have facilities that are over 50 years old. So again, unfortunately, a lot of kind of kicking the can down the road on a lot of systems that just have not been able to get the dollars to modernize their correctional systems.
spk03: Okay. Thanks very much for that answer.
spk02: Thank you.
spk00: We'll take our next question from Ben Briggs with Stonex Financial Incorporated.
spk08: Good morning guys. And thank you for taking the questions. Um, uh, most of my questions have been answered, but I had a follow up to the one on margins. So margins were obviously, uh, or operating margins were obviously improved this quarter. Um, I wanted to know what it's going to look like as some of those programs that you guys, uh, rolled off as those come back online, what costs are going to be associated with actually bringing those back online? And then how are higher population levels in a kind of a post-COVID universe going to help offset some of those costs and get you guys back to historical margins? That's all from me.
spk09: Yeah, thanks, Ben, for that question. This is Dave. There won't be any activation expenses associated with bringing those programs back online. It's really just bringing the staff back into the facility. So, you know, obviously that's the incremental expense. We are not paid incremental dollars to reinstate those programs, and that would be the negative impact on margins. Now keep in mind also if you're looking at the second quarter of 2020, we had $6.3 million in the hero bonuses that I mentioned in my opening remarks that are included in the margins reported in the prior year. So if excluded those hero bonuses, I think the margin in the prior year would have been 25.3%. So it was dragged down by those $6.3 million in hero bonuses. And I think I missed a part of your question. Did I cover everything?
spk08: Yeah, you covered most of it. I was just asking if increased populations. Oh, populations, yeah.
spk09: Yeah, sorry about that. Yeah, I mean, it is, we have a leveraged operating model. So, you know, we have fixed and variable expenses, but typically you're not incurring incremental fixed expenses with increases in residential populations. So that does typically result in incremental margins when you're topping off a facility. It's the opposite when you're, you know, when the facility's experiencing a reduction in population. So, yeah, it's quite possible and maybe even probable that the reduction in margins attributable to bringing the staff back into the facility to reinstate the programs will be offset by higher populations if we experience those higher populations.
spk07: Per, that's very helpful. Thanks very much, guys. You're welcome.
spk00: We'll take our next question from Henry Coffey with Wedbush.
spk01: Good morning, and thank you for taking my question. If we think about it in percentage terms or something that's easy to grasp, how close are you, given that most of your contracts have a floor, so how close are you to that floor Or put differently, you know, what would be the percentage growth in population until the additional revenue kicks in? And obviously, given that it's a facility by facility issue, it's difficult to be precise, but.
spk10: Yeah, thank you for that question. So, yeah, Dave talked through a little bit on kind of what the number is on, I guess, on a per-day basis or a population basis, but I'll let you do a little bit of the math there, Dave.
spk09: Yeah, I guess I'm trying to think of how to answer that question. In terms of occupancy, it does, because most of our federal facilities are the facilities that have those occupancy guarantees or the fixed monthly payments to, and again, it's for their benefit to ensure that they have capacity in the event that they have a surge in the future or need higher populations. So as I mentioned, it was about 3,200 that they're currently below that. That's probably out of, say, close to 15,000 beds that have that minimum fixed payment, if that helps.
spk01: Yeah, that does help a lot. Sort of a similar question about debt levels. if we wanted to put an absolute number to it, at about what level of corporate debt are you going to sit back and be satisfied with the situation and then start looking at other return on capital measures? I know you've given us the ratio, but I was wondering if you could box it in a little bit in terms of what that maybe based on LTM, what that dollar number would look like. And then the second related question is, well, what Besides cash flow from operations, what's going to be available to get you all to that dollar level?
spk10: I'll answer the second question first. So, yeah, I'd say probably now that we've really taken advantage of all the opportunities to sell assets that we've done here in the last six, seven months, There may be a couple more kind of onesie-twosies, but they're probably a pretty smaller dollar amount. But, yeah, the vast majority we think of the debt repayment is going to come from cash from operations.
spk09: Yeah, and I'd say that's probably just real rough numbers. I haven't run a calculator on it. It's probably $300 to $400 million worth of debt that maybe not even that much that we would have to reduce in absolute terms. Again, we don't have guidance, so just kind of going by a trailing 12 months, like you said. before we get to our targeted leverage ratio. So in terms of timing, that's probably a few quarters. I'd estimate, you know, again, we don't have guidance out there, but real ballpark, I'd say the end of 2022 is when we'd hit that targeted leverage ratio, give or take a quarter.
spk01: Yeah, that's the advantage of actually having a number in mind, because it's not that far away. It's 12 months. A year from now, we'll be talking about this or maybe nine months from now we'll be talking about this.
spk09: Yeah, yeah, that's right.
spk10: Yeah, exactly. Yeah, I was going to say second half of 22 I think is probably a pretty good estimate. And, again, going back to kind of the capital needs, I mean, we've got, you know, the normal kind of maintenance capex we'll have for the enterprise, so that's, you know, normal course of business. But business development-wise, you know, with Alabama now on the sidelines and we've got the Arizona opportunity, we don't see any kind of near-term, and I say near-term, at least next 12, you know, 18 months, any near-term kind of business development activities that are going to require any kind of major capital needs.
spk09: Yeah. And let's be clear, you know, today sitting here, we believe our stock is undervalued. So if it doesn't move, you know, we're going to be disciplined in getting down to that targeted leverage ratio. But once we hit that targeted leverage ratio, you know, without the external capital needs, because we've got, you know, 7,000, it's actually close to 8,000 idle beds for growth opportunities. You know, it's really using all of our cash flow to buy back stock if we're not, you know, if the stock hasn't responded to what we see as an undervalued stock price. And if it has, you know, we'll look for other ways like dividend, reinstating a dividend to return capital to shareholders. So I think your point, my point is we're not that far off from getting a return of capital to shareholders.
spk01: All right. In Alabama, the initial problem besides the politics was the inability or the unwillingness of the New York Money Center firms to get the bond deal done. How much actual municipal capital would need to be raised, whether it be at alabama arizona or some theoretical situation and you know are there other non-new york-based firms firms that have a strong presence in alabama firms that have a strong presence in arizona that would be committed to getting this kind of municipal finance done or is it just a shutdown market and the institutions aren't willing to play at all
spk10: It's a great question, and I'll tag team again with Dave on this. Let me answer the second half first, and that is absolutely, yeah, there's been a lot of folks been knocking on our door. with all the news coming out in the last six, seven months with Alabama saying, hey, sign us up. We know a way to get a transaction done. We've done it before. We've had great success with this project or that project. So, yeah, we've actually been pleasantly surprised the amount of inbound interest with all the noise coming out of Alabama about firms that we could partner with to do transactions. Now, it could be municipal bond financing. It could be, you know, there's obviously a lot of different markets we could take advantage of. So we're encouraged by that. So we have not lost our appetite or our pace to go ahead and develop, you know, new opportunities with various states that want to modernize their infrastructure just because they can't, for whatever reason, get it done themselves or have difficulties doing it themselves, I should say. And then, you know, the final thing I would just say is, you know, going back to Kansas, As I think you know, we did a private placement transaction on that facility for $160 million, but we had a billion dollars in interest. So there clearly is a strong investor appetite to finance these type of projects. So we, like I said, we're very encouraged by that, not only that transaction, but also some of the stuff that we've gotten in from inbound interest from various firms who want to work with us that, to your point, maybe are not in the... kind of New York area, maybe other parts of the country, that it feels strongly not only about these projects, but also a tremendous ESG opportunity. I mean, just think about getting your firm in the team picture of modernizing a correctional system that is safer, more humane for residents, more program space, more medical and mental health space, and safer for staff. I mean, who wouldn't want to be in that team picture to show what we've been able to do in a certain jurisdiction? So we've got, again, people kind of lined up who want to be part of that process and be part of that solution. But I'll let you add to that, Dave.
spk09: Yeah, we did. We had Alabama-based investment banks. We had other investment banks not based in Alabama. We had publicly traded investment banks, privately held investment banks. We had an investment banking team lined up to replace the banks that decided not to do the Alabama project, who actually visited facilities of ours. They did their due diligence. They did their homework. They understood the project, the situation that Alabama is in with the Department of Justice lawsuit and all the things that, you know, were going to be rectified through the governor of Alabama's plan, and they were ready. So that was not an inhibitor. It disrupted the project, mid-project, which we're frustrated about, as is Alabama, but we did have replacement bankers ready to go to pick up the project.
spk01: So the capital doors are open, and the challenge is having the sort of dialogue required with the community, to understand this, you know, no new prisons, this is not new, you know, just to really understand what's going on, and I assume that process is going on in Alabama now.
spk10: Yeah, absolutely. Yeah, so the key thing here is in Alabama, and it's the same case in Kansas too, is that this is about modernizing their system. So not necessarily looking to increase. In fact, that's not the case. It was just more we've got old antiquated facilities that are 50, 100 plus years old that they've got to modernize.
spk01: Understood. Very helpful. Thank you for answering my questions.
spk07: Absolutely. Thank you, Henry. Thank you.
spk00: Our final question comes from Jordan Sherman with Ranger Global.
spk05: Yeah, I wanted to confirm something. I apologize if I missed the commentary around the West Tennessee facility, but that contract expires end of September. Where does that actually stand? What happens if we get to the end of September and we haven't finalized things, or will we definitely finalize things before then?
spk10: Great question. So yeah, short answer is that it'll come to some conclusion, just like it did in Montana and Ohio. So I see it playing out pretty similar as it did in those two locations, which is probably during the month of August and then going into September. we'll continue our dialogue, not only with the Marshal Service, but other jurisdictions that are interested in that capacity. Along a parallel path, the Marshal Service will still continue to kind of evaluate their alternatives, either where they could use maybe federal capacity with one of their partner agencies or maybe local county facilities. So it's still underway, and we're actively engaged with all the various parties.
spk05: Okay. And then separately, This seems like a century ago that we've had conversations about this. Puerto Rico, what, if anything, is happening, has happened, will happen there?
spk10: Yeah, great question. I tell you what, I have not heard anything recently, but as you probably know, I mean, they just are a system that has been very challenged in the past, not only with old antiquated facilities, but also some of the challenges they've had with some of the recent hurricanes. So we definitely keep the lines of communication open. Interestingly, not to your question, but on a On kind of recent activity, we have been marketing, you know, employment opportunities with folks on the island that maybe want to work for CoreCivic. We have a pretty good amount of folks that work in our system from Puerto Rico when we had operations down there back in the 90s. So that's a long way of saying with that initiative, along with some other activity, we're keeping lines of communication open and staying ready to meet kind of any of their either emerging needs or kind of long-term opportunities where they want to modernize their systems.
spk05: Got it. So it's a good thing that wasn't going to save them any money, so I could see why they put that off. Anyway, being facetious. Anything else on this? Arizona, obviously, live. Anything else? I thought there were a few other state opportunities percolating. Is there anything that you can mention?
spk10: Nothing I can mention, but, yeah, great question. Yeah, we've got a couple other states that are engaging us on either increased capacity and then maybe one or two new states, but nothing public at the moment.
spk05: All righty, great. Thanks very much.
spk07: Yes, sir.
spk00: This concludes today's question and answer session as well as today's call. Thank you for your participation, and you may now disconnect your phone lines.
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