CoreCivic, Inc.

Please stand by. We are about to begin. Good morning. My name is Allie, and I will be your conference operator. As a reminder, this call is being recorded. At this time, I'd like to welcome you to the Core Civics third 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, please press star two. Thank you. I would now like to turn the call over to Cameron Hopewell, CoreCivics Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thank you, Allie. 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, the call today will focus on our financial results for the third quarter and provide you with other 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 third quarter 2021 earnings release issued after market yesterday and in our SEC filings, including forms 10-K, 10-Q, and 8-K reports. You are also cautioned that any forward-looking statements reflect management's current views only and that the company undertakes no obligation to revise or update such statements in the future. On this call, we will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the quarterly supplemental financial data report posted on the investor's 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 third quarter 2021 earnings conference call. Going to our agenda for the call, we will provide you with a breakdown of our third quarter financial performance, discuss business development opportunities, and the latest developments with our government partners. We will also provide you with an update on our capital allocation strategy and our continued response to the COVID-19 pandemic. Following my remarks, I will turn the call over to our CFO, Dave Garfinkel, who will review our financial results in greater detail. Our third quarter revenue of $471.2 million represented a 1% increase over the prior year quarter despite 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 during the fourth quarter of 2020. And in the five quarters since we announced the change in our capital allocation strategy, we have substantially improved our credit profile, reducing our net debt balance by approximately $730 million during a time of unprecedented challenges. We remain committed to reaching and maintaining a total leverage ratio or net debt to adjusted EBITDA of 2.25 times to 2.75 times. Using the trailing 12 months ended September 30th of 2021, our total leverage ratio was 2.7 times. Just one year ago, our total leverage ratio was at 4.0 times, so we have made significant progress. And the last time our total leverage ratio was below three times was in 2012, nine years ago. While we have touched the high end of our targeted leverage range, we remain committed to continue to reduce debt to ensure we remain comfortably within the range. Our EBITDA has shown to be durable since the beginning of the pandemic, but there are many other factors that can cause our net leverage ratio to fluctuate quarter to quarter, such as changes in our net cash balance due to semiannual interest payments on our debt, capital expenditures, or changes in working capital. 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. I believe this is evidenced by our recent 225 million unsecured bond issuance, which priced nearly 100 basis points lower than the bonds we issued back in April of this year. However, within the next few quarters, we could also be in a position to shift our capital allocation strategy to one that once again returns a portion of our cash flows to our shareholders and less aggressively delevers. We believe the valuation of our equity remains well below its fair value, and we feel strongly that once we achieve our debt reduction goals, we could create substantial value for our shareholders by repurchasing shares. In 2009, one of my first acts as CEO was to seek authorization from our board of directors for an equity repurchase program. So I have a full appreciation of the potential value creation that the current stock presents. fully appreciating the potential opportunity we have further progress to make with our current debt reduction strategy. We continue to see criminal justice-related populations meaningfully below their pre-pandemic levels. The declines have mostly been due to reduction in new intakes rather than earlier 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 our facilities. However, during the third quarter, we did see many of our state customers increase their utilization of our facilities, which contributed to modest increases in our oxy compared with the prior year quarter. Our safety segment's occupancy was 73.2% in the quarter, an increase of 110 basis points compared with the prior year quarter, and our community segment's occupancy was 56.4%, up 180 basis points. As courtroom operations gradually reopen and operations normalize, we anticipate this trend in utilization to continue. And with that, we are leaning way forward on increasing our staffing levels in anticipation of higher utilization rates of our partners. This, of course, will likely have a material impact on margins as we go into 2022. Normalized funds for operations, or FFO, for the third quarter was 48 cents per share, a decline of 8% compared with the third quarter of 2020. However, this decline was primarily driven by our decision to convert to a taxable C corporation effective January 1st of 2021 from a REIT. We have added disclosures in our third quarter supplemental financial information document available now on our website, which provides our pro forma results for 2020 reflecting income tax expense, excuse me, by applying our estimated tax rate to pre-tax income in the prior year. When compared to pro forma results for the third quarter of 2020, our adjusted earnings per share, normalized FFO per share, and AFFO per share increased 33%, 9%, and 15% respectively. Our adjusted EBITDA of $100.9 million increased 7% compared to the third quarter of 2020, and again, this is after the sale of 47 non-core assets since the end of the third quarter of 2020. Dave will provide greater details about our third quarter financial results, including reconciling between our GAAP and normalized results, following the remainder of my comments. We will start our operational and business development discussion with a brief update on the impact of the COVID-19 pandemic and our ongoing response. While the rate of positive cases around the nation was significantly increasing due to the Delta variant during the third quarter, we only experienced a small temporary increase in positive cases at some of our facilities. The most substantial impact of the emergence of the Delta variant was that it temporarily slowed the timeline for normalizing facility operations to remove various protocols that were enacted in response to the pandemic. As we move towards normalizing operations, the most substantial challenge in today's environment is attracting and retaining qualified employees. No different from our government partners' own correctional systems, the current employment market has caused staffing challenges for us at many locations across the country. We have responded to the challenge by aggressively developing new and creative hiring and retention strategies. And being the private sector and a multi-state national employer, we have a lot of tools we can deploy in this environment. These include increasing wages, sign-on and retention bonuses, and multiple other programs that can increase engagement, a sense of shared mission, and overall job satisfaction. Our government partners have been very collaborative in this effort by supporting our request for per diem increases that reflect above average wage inflation in current markets. Across the company this year, we have provided the largest wage increases in my 12 years as CEO, and we are committed to utilizing all necessary resources to address this challenge. We are also following closely the recent vaccination mandates issued by various states and the federal government, including the September 9, 2021 executive order on ensuring adequate COVID safety protocols for federal contractors. We are working diligently evaluating the new guidance being received from our government partners and ensure we are in a position to fully comply. 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, so it should come as no surprise that the rate of vaccination acceptance is similar to that of the general public. We continue to provide educational resources to all our residents in order to encourage more to get vaccinated. I will move next to discuss some recent federal and state level business development updates. We're 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 of a 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. Marshal service populations have remained relatively consistent in recent years, so their capacity needs remain unchanged. In fact, nationwide marshal population has increased over the past year. 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. In the first half of the year, we were able to enter into new contractual arrangements for our Northeast Ohio Correctional Center and Crossroads Correctional Center in Montana to remain operational and serve various government partners, where both facilities previously had direct contracts with the marshals. At the end of September 2021, our contract with the marshals at our 600-bed West Tennessee detention facility expired and the federal detainee populations were transferred to alternative locations, including approximately 200 to our Tallahatchie County Correctional Facility in Mississippi. We have elected to retain our staff from the West Tennessee detention facility as we pursue an active procurement for the facility with an existing government partner. The only remaining marshal's contract I have yet to discuss is at our 1,033-bed Ludmore Detention Center, expiring in December of 2021. Of note, we are currently in discussions with other potential government partners to utilize the Ludmore facility in the event that we are unable to reach a solution that enables the Marshal Service to fulfill its mission at this facility. Our third federal partner is Immigration and 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 activity along the southwest border has caused significant volatility in their utilization levels. Nationwide, ice detainee populations doubled during the first half of 2021, and we experienced a similar utilization increase at our facilities under contract with ICE. During the third quarter of 2021, ice detainee populations remained relatively flat. As a result, our facility utilization levels continue to remain materially below historical averages. The largest driver of their lower utilization levels has been the enactment of Title 42 since March of 2020, 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 individuals apprehended at the southwest border to immediately be expelled to Mexico or the individual's country of origin. Administrative changes and court decisions have occurred since the 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. As I discussed last quarter, these changes have essentially no impact on the demand for our services by ICE because we do not house unaccompanied minors in any of our facilities. and our one facility with family mission is provided to ICE on a fixed price basis. We primarily provide ICE with detention 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 this year. Whenever Title 42 is rescinded, we believe there will be a significant surge in the need for detention capacity. Our facilities support ICE for providing safe, appropriate housing and care for individuals as the agency works through the various processes associated with an 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 take days or weeks to be adjudicated. 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 are 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. Finally, we know there has been a great deal of coverage of a minimum wage ICE attainee lawsuit faced by our largest competitor in Washington State. We don't have a facility in Washington, and so we aren't subject to litigation related to the Washington minimum wage statute. We do have a pair of similar lawsuits in California, but those are both stayed while one of them is on appeal in the Ninth Circuit. We don't have trial dates scheduled for those, and the timing of any future litigation activity is uncertain. We don't generally comment on litigation, and this will be my only comment on this subject during this call. As our competitor has pointed out, very similar litigation has been dismissed, and that dismissal has been upheld on appeal by the Fourth Circuit Court of Appeals. We also have other litigation around the U.S. related to the ICE Voluntary Work Program, or also known as VWP, but those lawsuits don't raise minimum wage claims. The VWP is a ICE contract requirement. And as the VWP's name suggests, it's voluntary. Detainees aren't forced or coerced to participate in the VWP. VWP assignments provide an opportunity to avoid idleness, improve morale, learn new skills, and earn money at or above the ICE prescribed minimum daily rate. Moving now to state-level developments and opportunities, I will first mention our new lease agreement with the state of New Mexico for our 596-bed Northwest New Mexico Correctional Center that we announced in September. The new lease has an initial term of three years, but includes automatic extension options that could extend the lease term through 2041. The new lease commenced on November 1st, and we successfully transitioned operations of the facility to the state. So you will see that property reclassified from our safety segment to the property segment during the fourth quarter. We continue to pursue an opportunity with the state of Arizona, which has an active procurement for up to 2,700 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 outstanding request for proposal will allow the state to evaluate alternative capacities available from the private sector. We have responded to the procurement and believe the state's Department of Corrections, Rehabilitation, and Reentry is poised to move quickly on the procurement. The only other opportunity I will mention is in Hawaii. The state continues to determine the best approach to replace the O'ahu Community Correctional Center, the largest DIL 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 we anticipate a competitive procurement in 2022 to replace the current facility. Two final comments before I turn the call over to Dave. First, Newsweek recently released their list of America's most responsible companies for 2021, and we were so very honored to learn of our placement on this list. At the beginning of their report, they note, and I quote, as this difficult year comes to an end, it's good to remember that we're all part of a community. Neighbors, family, friends, first responders. We depend on, appreciate, and hope to be helpful to each other. Many corporations also step up. They care about being good citizens and give back to the communities they operate in, end quote. Their ranking goes through a rigorous four-step process, starting with a review of the top 2,000 public companies based on revenue, then afterwards a detailed review of company ESG reports and their relevant KPIs, along with a reputational survey of 7,500 U.S. residents. This list is a who's who of companies I have long observed, admired, and have inspired to emulate. And I am deeply grateful and proud of every single CoreCivic team member for their tireless passion for our mission that has allowed us to achieve this well-deserved recognition. Finally, we shared last month that CoreCivic co-founder and industry visionary T. Don Hutto passed away on October 22, 2021. Known as a fierce advocate for correctional professionals, and for the safety and well-being of justice-involved individuals, Don was instrumental in the creation and implementation of industry-recognized standards that greatly improved conditions for incarcerated people and those who cared for them. He will be missed by everyone who knew him and remembered truly as a hero in the field. Prior to co-founding CoreCivic, then known as Corrections Corporation of America, with businessman Tom Beasley in 1983, Don had a long and prestigious career in the corrections industry, including as Commissioner of Corrections for the state of Arkansas and later the Director of Corrections for the Commonwealth of Virginia. Don's rise to industry leader came through a time of uncertainty in America. Not long before he began serving as the Commissioner of Corrections in Arkansas, The landmark Holt v. Sauver decision declared the entire state of Arkansas' prison system unconstitutional. At that time, there were over 40 states that had some level of control or oversight by the federal government due to inhumane conditions. This need for higher standards is what sparked the birth of CoreCivic and ushered in improved conditions across the country. Don's experience gave him extensive insight into modern systems to emphasize rehabilitation and education, and he used that experience at CoreCivic. Don was absolutely the right person at the right time to create a better way and lead our profession into the modern era. And CoreCivic is so very grateful for his leadership, for our wonderful company, but I am also personally grateful for his mentoring, and friendship with me. I'll now turn the call over to Dave to provide a more detailed look of our financial results in the third quarter of 2021, as well as factors that could affect our business for the remainder of this year. Dave?