This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk00: 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.
spk07: 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?
spk10: 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?
spk09: Thank you, Damon, and good morning, everyone. In the third quarter of 2021, we reported net income of 25 cents per share, or 28 cents of adjusted earnings per share, 48 cents of normalized FFO per share, and AFFO per share of 47 cents. Adjusted and normalized per share amounts exclude an impairment charge of $5.2 million for pre-development activities associated with the Alabama project that we are no longer pursuing, as disclosed last quarter. Financial 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 the supplemental disclosure report posted on our website, we present the calculations of adjusted net income, normalized funds from operations, and AFFO for each quarter and full year of 2020 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 third quarter of 2021 of 28 cents compares to 21 cents on a pro forma basis applying this estimated effective tax rate for the third quarter of 2020, while normalized FFO per share of 48 cents compares to 44 cents on a pro forma basis for the prior year quarter, and AFFO per share of 47 cents compares to 41 cents on a pro forma basis for the prior year quarter. Adjusted EBITDA, which is obviously before income taxes, was $100.9 million in the third quarter of 2021, compared with $94.6 million in the prior year quarter. The growth in adjusted EBITDA and the aforementioned per share metrics were achieved despite the sale of 47 properties since the end of the third quarter of 2020 and the execution of numerous refinancing transactions that were collectively diluted for the quarter as we paid down low-cost short-term variable rate bank debt with the proceeds from the property sales and issued new unsecured senior notes that have higher interest rates than the debt we repaid. The property sales and refinancing transactions lowered our overall debt levels, extended our weighted average debt maturities, and repositioned the balance sheet for long-term success. The 47 properties that we sold accounted for $7.3 million of EBITDA in the prior year quarter. Therefore, excluding these sales, adjusted EBITDA increased $13.6 million, or 16%, from the prior year quarter, demonstrating strong core operating results. Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, but increased to 72.1% in the third quarter of 2021 from 70.9% in the prior quarter and increased from 71.6% in the second quarter of 2021. The impact of COVID-19 began in the second quarter of last year as populations, primarily ICE, declined sequentially throughout 2020 as the southwest border was effectively closed to asylum seekers and adults attempting to cross the southern border without proper documentation or authority in an effort to prevent the spread of COVID-19. As the federal and state court systems have begun to return to normal operations and as the number of undocumented people encountered at the southern border has increased, the utilization of our facilities has increased. Operating margins have trended similarly and were 27.2% in the third quarter of 2021 compared with 23.8% in the prior year quarter and 26.8% in the second quarter of 2021. The increase in our operating margins reflects a continuation of lower cost trends combined with higher occupancies. Many of our facilities continue to operate with pandemic-related capacity and operating restrictions that are modifying the services that we are able to provide, impacting margins compared with normal operations. Further, staffing in this challenging labor market has become increasingly difficult, and we have provided annual as well as additional off-cycle wage increases and special incentives to help address depressed staffing levels. 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 offset the wage increases. Turning to the balance sheet, as of September 30th, we had $456 million of cash on hand and $786 million of availability on our revolving credit facility, which matures in 2023. During the third quarter of 2021, We issued an additional $225 million aggregate principal amount of 8.25% senior unsecured notes due 2026. The issuance constituted a tack-on to the original 8.25% senior notes we issued in April 2021, a $450 million aggregate principal amount. The additional 8.25% senior notes were priced at 102.25% of their face value, resulting in an effective yield to maturity of 7.65%. While we believe this effective yield is still high relative to the stability of our cash flows and credit ratings, it compares favorably to the issuance in April when the notes were priced at 99% of face value, resulting in an effective yield to maturity of 8.5%. As a reminder, the net proceeds from the April issuance were used to fully repay $250 million of 5% senior unsecured notes that were scheduled to mature in 2022 and to repurchase in privately negotiated transactions $176 million of the $350 million outstanding principal balance of our four and five-eighth percent senior unsecured notes that are scheduled to mature in 2023. We continue to be steadfast on our debt reduction strategy, paying down $188 million of additional debt during the third quarter alone, net of the change in cash, including the $112 million outstanding balance on our revolving credit facility, which remains undrawn today. Subsequent to quarter end, we repaid $90 million of the outstanding balance on our term loan B, reducing its outstanding balance to $133.4 million. Including the repayments of the mortgage notes associated with the aforementioned sale of non-core assets, during the nine months ended September 30th, 2021, we have reduced our total net debt balance by over $500 million and our net recourse debt balance by $334 million. Our leverage measured by net debt to EBITDA was 2.7 times using the trailing 12 months down from four times using the trailing 12 months at the end of the third quarter of 2020 when we announced our revised capital allocation strategy and decision to revoke our re-election. As Damon mentioned, the last time our leverage was below three times was 2012, which was the last year we operated as a taxable seed corporation prior to our conversion to a REIT in 2013. Notably, 2012 followed an aggressive stock repurchase program in 2009 through 2011, when we repurchased over a half billion dollars of stock, or equal to half our market capitalization today. As a REIT, from 2013 through 2020, we could not implement a meaningful share repurchase program. It is possible we could slip slightly above our targeted leverage ratio of 2.25 to 2.75 times in the fourth quarter, when we are scheduled to make almost $40 million of semiannual interest payments on our unsecured notes, about $15 million in Social Security payments that were deferred under the CARES Act, and capital expenditures consistent with our previous guidance. But we expect to be sustainably within the range on a quarterly basis thereafter. We have made great strides in enhancing our capital structure by accessing the debt capital markets, addressing near-term maturities, selling non-core assets, reducing debt, and positioning the balance sheet to enable us to take advantage of growth opportunities and return capital to shareholders. These steps have enabled us to reduce our reliance on bank capital, and we intend to address the 2023 maturity of our bank credit facility next in order to provide us with the clarity needed around our future liquidity and to ensure the implementation of our capital strategy remains on track. Our intention is to reduce the size of our bank credit facility and extend the maturity, yet enabling us to continue operating with optimal flexibility and cost efficiency. We continue to get increasing clarity around many of the uncertainties that existed when we suspended our financial guidance and currently anticipate providing full year 2022 guidance in February when we report our financial results for the fourth quarter and full year 2021. I've already highlighted some of the factors experienced in the third quarter that could have an impact on our financial results for the fourth quarter. These include the anticipation of modestly higher occupancy levels as the country continues to emerge from the pandemic. Higher demand for our detention facilities could also result from lifting Title 42, the health care policy causing the southern border to remain effectively closed in an effort to prevent the spread of COVID-19. However, the timing of when the federal government ends title 42 which is evaluated every 60 days is difficult to predict and therefore likely won't have a material impact in the fourth quarter. We also anticipate higher staffing levels as we return our correctional detention and reentry facilities to normalized pre pandemic operations. Longer term, as we look toward 2022, we will endeavor to hire in anticipation of increases in occupancy, which could have a negative impact on our margins, at least until we experience further increases in occupancy. We continue to anticipate a challenging labor market, which could require us to provide further wage increases and other incentives in certain markets necessary to attract and retain qualified staffing levels. Recall, however, that our federal facilities At our federal facilities, we are entitled to equitable adjustments to per diem rates to compensate us for any increases in wage rates mandated by the Department of Labor, providing a potential hedge against increasing wage rates at such facilities. By 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 four 2021 contract expirations with the U.S. Marshals Service. The contract with the U.S. Marshals Service at our 600-bed West Tennessee detention facility expired September 30th and was not renewed. As we previously disclosed, we responded to a request for proposal to utilize the West Tennessee facility and we remain optimistic in signing a new contract. We have temporarily redeployed most of the staff at this facility to other facilities we operate while we negotiate the contract in order to provide minimal disruption in ramping back up operations. But depending on the outcome and timing of a decision, as well as the pace of utilization, we could experience a reduction in earnings in the fourth quarter of up to two cents per share compared with the third quarter. Our last contract with U.S. Marshals expiring in 2021 is at our 1,033-bed Leavenworth Detention Center in Kansas, which expires in December. We are in discussions with other potential partners to utilize the Leavenworth facility in the event we are unable to reach a solution that enables the U.S. Marshals to fulfill its mission at this facility. Since the contract doesn't end until the end of the fourth quarter, however, we don't expect a material impact in the fourth quarter, even if the contract is not renewed. During the third quarter we responded to a request for proposal from the state of Arizona to care for up to 2700 inmates the state plans to transfer from a facility owned and operated by the Arizona Department of Corrections rehabilitation and reentry. We are optimistic and a contract award near the end of the year, which would obviously be more impactful in 2022. Compared with the third quarter, we expect higher interest expense as a result of the additional issuance at the end of September of $225 million of our 8.25% senior notes, somewhat offset by the $90 million repayment in October of our Term Loan B, which has a total effective rate of 7%. We currently estimate our income tax expense to reflect a normalized effective tax rate of 27% to 28%. although we estimate our cash taxes to be approximately 20% for the year because of net deductions for special items. I will now turn the call back to the operator, Ellie, 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. If you're using a speakerphone, please make sure mute function is turned off to allow your signal to reach our equipment. If you find your question has been answered, you may remove yourself by pressing star 2. Again, it is star 1 if you'd like to ask a question. We'll take our first question from Joe Gomez from Noble Capital. Joe, please go ahead.
spk02: Can you hear me? No. Yes, can now, Joe.
spk09: Thank you.
spk05: Oh, okay. I previously said good morning.
spk10: Oh, good morning, Joe. We do not hear you. Good morning, Joe.
spk05: Thanks. Good morning. Thanks for taking the question. So really nice job on achieving the target leverage ratio early, in my opinion. You know, this would seem to speak not only to your focus on deleveraging, but also the stability of the business overall. You did mention you wanted to see further progress to make on the debt reduction before you started implementing some of the other capital allocation programs such as share repurchases. I was wondering if you might give us a little more color as to how much progress you're looking at or what's your thought on what you want to see before you might implement something like a share repurchase program.
spk10: Yeah, great question, Joe. This is Damon, and thank you for this. So, yeah, we're just an eyelash below the target range, as you know, with the numbers we released last night. And Dave, I think, did a really good job of kind of walking through some of the puts and takes that I think we'll see both in the fourth quarter of this year going to early next year. So it still feels like it's, I think we've said previously, it still feels like that we're probably, you know, a couple quarters away to where we could comfortably kind of be embedded within that range. So, you know, say a different way. Here we are, you know, start of the fourth quarter. Could that be, you know, kind of second, third quarter next year? That's possibility. Again, we're really, really pleased with the progress. We've had great alignment from the management team on kind of working on various activities, obviously, that drive that number in a positive way, notably the transactions we did early this year with the divestment of the non-core assets. So I don't know anything you would add to that, Dave.
spk09: Yeah, and the credit facility, as I mentioned in my script, matures in 2023. We'd really like to amend and extend that credit facility, get that behind us. That will give us the clarity on liquidity and capital resources going forward. I think we've done a really, really good job of positioning the balance sheet to return capital to shareholders. We've addressed the short-term maturities for several years out now, so that risk has really been eliminated from the balance sheet completely. So getting through the credit facility would, in my mind, give us a lot more clarity to move forward, and that would fall in line with the timing that Damon mentioned.
spk05: Okay, thanks for that. insight and on the vaccine mandate. Um, you know, I don't, I don't know how deep, uh, you can go into, you know, what percent of, of the core civic, uh, employees are, are vaccinated. Um, you know, especially at the facilities, you know, is there any concerns on your part, uh, that contrast could get terminated if the, you, you, you can't get everyone to be fully vaccinated. And, you know, I know that there's a lot of confusion out there over who some of these mandates apply to or don't apply to. But, you know, simply does the mandate also apply to the BOP that all of their staffing also has to be vaccinated?
spk10: Yeah, so several questions there, Joe. This is Damon again. So a couple observations. One is that we have had vaccination acceptance rates a little behind what you see kind of generally in the public, but probably no surprise here in the last probably 30 to 60 days with some of the mandates that have been required. Notably, all the attention has really been at the federal level, but we have had some local jurisdictions that required it, too. So it gave us a pretty good indication of not only how to approach it, be thoughtful on how we communicate to employees, you know, give them, you know, various options, not only for the vaccine, but maybe other employment opportunities. So we had a pretty good playbook before the executive order was signed at the federal level. So we've got work to do. We're clearly working really hard to make sure we, again, educate all our employees, advise them appropriately, and also leadership as they go through the process if they've got either a physical or health accommodation that needs to be considered or a religious accommodation. And again, those are policies that are well established just because we're a public employer. So we're working through that progress. I will tell you, I think we are making good progress on that side. As I just said earlier, we're starting to see a pretty meaningful uptick in vaccination rates within the organization. Again, it's focused primarily on our federal contracts with ICE marshals. And as you know, we just have that one BOP contract on the safety side with McRae. So I think, again, we're making good progress. I don't think you need to add to that, Dave.
spk09: No, I don't. I think that covers it.
spk05: Do you know that, I'm assuming it would, but since there's a lot of, seems to be excessive, does this mandate also apply to the BOP staff, people that work there?
spk10: Yeah, in my understanding, it's federal employees and then federal contractors. Obviously, we fall in the second bucket, so that would be the case. I do not have, I don't think this is your question, I do not have a sense of how they're doing it and what their levels are. But, yeah, my expectation does apply to them.
spk01: Okay.
spk05: And you talk, you know, some detail here on the staffing environment and, you know, you've got lots of different levers that you can pull to try and help with that. But, I mean, what are we talking about here in terms of, you know, increased wages or bonuses, sign-on bonus, whatever, you know, other types of things that you're offering to get people? I mean, in this type of environment, again, it's not just you guys. Almost every company I talk to these days has issues with staffing in some way, shape, or form. But the corrections is a little more difficult just in a normal time. So maybe you can give us a sense of what are you having to do out there in order to attract the staff that you needed.
spk10: Yeah, great question. So we're, to your point, we're just like everybody else in the country dealing with some level of labor challenges, either public or private companies. And I've made a really concerted point this past year to talk to a lot of my peers, especially here in the national business community, and I've gotten a few good nuggets along the way that we've plagiarized and used in our playbook as we think about kind of labor opportunities. But having said that, everyone I've talked to here locally, they're dealing with similar challenges, especially my friends here in the healthcare community. So I would say our playbook consists of a couple things. One, the things that you would expect of any employer. So looking at base salaries and wages, looking at benefits. and then the whole range of incentives, if that's a referral bonus, if that's a retention bonus. I mean, we're looking at any incentive that either we've used in the past or we're seeing used by other employers, regardless of the industry, that may be – transferable and helpful with our challenges. But I'll also say, and we've got a few proprietary things that I won't go into great detail, but we've done a couple pilots this summer going into fall that has shown some pretty good results. So we're looking at some things, and these are things that you know, the public sector can do. So, being a private employer with a multi-state operation, there's a few things that we can do pretty creatively that potentially gives us some help on the labor side. So, what you said very clearly, you know, to our HR and operations leadership, any idea they have, but also anything they're seeing in kind of the larger market, again, with employers even outside our industry, bring it to the table. And let's do analysis. Let's determine the risk for reward and make a decision. And, you know, I had a call with our board of directors last week, and I was telling them that we've done about 35 or 40 kind of different actions to deal with individual facilities in certain regions that are dealing with labor challenges. And that's give you a sense in a normal year pre-COVID, that would be in a category of maybe five, less than a handful. So we're doing a lot of actions very quickly after we do some analysis to make sure our leadership at the field level have got all the tools they can to be successful in their mission. And with that, seeing As I mentioned in my comments, potentially increased utilization from our partners to levels, you know, closer to where they were pre-COVID. So anything you would add to that, Dave?
spk09: Yeah, the number of incentives, the list goes on and on. Our HR department has done a phenomenal job coming up with some creative solutions. You know, your overtime premium, your pay for experience, employee housing. It's just a long laundry list of things that we pull out, which, as Damon mentioned, these things are much more easily done in the private sector than what our public sector counterparts are able to do because they have to get appropriations for budget purposes and special appropriations, so things like that. And we think it actually could end up generating new businesses Some of the state partners are having the same challenges on staffing and may end up sending some inmates to our facilities as they're not able to staff their facilities adequately. So, yeah, it's all of the above.
spk05: Okay, great. And one more, if I may, please. You talked about the West Tennessee facility. You have an RFP out there. Leavenworth, you're talking to other people. I think you have five other facilities that are idled right now. If ICE came to you and Title 42 expires and we see a need by ICE for facilities, You know, given the staffing challenges you just talked about, I mean, how easily or how long would it take for some of these idle facilities if they were needed to actually be back up and running? Or do you have enough existing facilities and occupancy, excuse me, in the facilities that are currently running that you think that, you know, you probably wouldn't have to worry about opening one of the idle facilities?
spk10: Yeah, that's a great question, Joe. This is Damon again. So let me give you a couple answers, you know, one of which is West Tennessee and Leavenworth, even though Leavenworth's a little further down on the calendar, we have not taken any employment action relative to employees that work at those facilities. So most notably with West Tennessee, with that contract expiring in September, we've kept that staff and have them working not only to kind of do some maybe work around the facility, do some maybe training and anticipation of some various partners that may use the facility, but also they could support some other operations here within West Tennessee. And potentially we may do the same thing at Leavenworth. But also part of your question was relative to other facilities that may be currently vacant at the moment outside of West Tennessee. we do have some challenges globally, I would say, on the labor market. So that's been well said. But I will say, again, this is the benefit of being a large multi-state operator and employer, we do have a couple markets actually where the tailwind is with us on the employment side. And so we basically have told every facility to turn on the spigot and wide open relative to employing staff, even if that means that they go over their kind of budgeted FTE count, in anticipation that that staff then maybe could use, be used for other facilities that were potentially activating or maybe other facilities that are going through a maybe increasing oxy and they need some additional staffing while we ramp up the staffing there locally. So we've got, again, the good news for us, again, being multi-state, we've got a lot of different options not only with programs and incentives and salaries and other things that we can do, but also we've got, like I said, a few markets where we've got the wind in our back and we can maybe overhire a little bit and use that staff in other parts of the enterprise. Anything you add to that, Dave?
spk09: No, I think that covers it.
spk05: Well, thanks, guys, for taking the questions. I'll pass it along and let someone else ask some. Thanks again.
spk10: Yes, sir. Thank you, Joe. Thank you, Joe.
spk00: And we'll go ahead and move on to our next question from Brian Villaleno from Wedbush Securities. Please go ahead.
spk01: Yeah, thanks for taking my question. Just one quick one from me. Appreciate the color on the 2021 U.S. Marshals contracts. I was hoping you could just remind us about the contracts coming up in 22 and 23 and even beyond, and I guess how you're thinking about those and any sort of commentary around them. Thanks.
spk10: Yes, sir. Thank you for that question. This is Damon again. So we've got, after West Tennessee and Leavenworth, which we talked extensively about it on this call, the only other two after that are one in Arizona, which is in 2023, and then the final one would be in Nevada in 2025. So several years out and, you know, say a different way, we have nothing next year after Leavenworth. So 2023 would be the next one. Those being so far off, really the focus for us, and I'd say, you know, on behalf of the market service, has really been focused on the ones in this current calendar year. I suspect as we go into 2022, then we'll start having conversations about the one in 23 and the one in 25. Thank you for that question.
spk00: And we'll go ahead and take our next question from Kirk Lederke from Imperial Capital. Please go ahead.
spk08: morning guys good morning I just a follow-ups on on a couple topics New Mexico Leavenworth and then and then staffing so three topics on New Mexico you know you've expressed some interest in the leasing model in the past and you know this deal seems to be a step in that direction I know you don't comment by profitability by facility, on profitability by facility, but maybe directionally, can you give us a sense for the economics of the New Deal and maybe even more importantly, are other states considering this option, bringing operations in-house, so to speak?
spk10: Yes, sir. Thank you. This is Damon again. Appreciate those questions. So for the first part, I would say I'm going through my mind of all the facilities that we've converted from safety properties like the one you just mentioned with New Mexico. And I would say generally that the return in earnings performance has been consistent with when it was previously safety, if not maybe improved. We've got a couple of situations coming to mind where you maybe had a year or two where maybe the earnings was a little stronger on the safety side versus what we did on the lease agreement on a property side, but there may be some times where it was well below. So one nice thing about these agreements, and this is probably an obvious point, is that it creates a lot of stability and durability and consistency from a returns perspective, and that's a big part of the allure when we're in discussions with these jurisdictions about potentially moving a facility from the safety segment over to the property segment. And then to your last question, I would say, yeah, we actually just – just did a review of a proposal for another existing safety operation that we're going to propose to a state for a lease. So yeah, there's really good conversation and interest by jurisdictions for existing properties in the safety segment. And it may be a case where we're flipping one from a state to a federal or a federal to a state, but I'd say the conversations are good and pretty robust at the moment. So anything you'd add to that, Dave?
spk09: Yeah, I think the economics on northwest New Mexico, I think during the initial three-year base term, the average annual rent is $3.2 million. So it's not a large facility, although it's – $4.2 million in the second and third years of that lease, and then there's annual inflators thereafter. And that facility, I think we disclosed, was operating at a loss year to date just due to COVID-related populations. So it'll actually flip that from an operating loss to a profitable loss. And I think it will depend, you know, facility by facility, just different dynamics in each location. But it's a stable cash flow. As you can imagine, the value you describe or the multiple you describe to that cash flow is higher than it would be under the owned and operated model where revenues are subject to ebbs and flows based on inmate populations versus a fixed monthly payment under a lease arrangement.
spk08: that's super helpful thank you and encouraging on Leavenworth I know sometimes it comes down to alternatives you know what what other facilities are nearby that the marshals might might utilize and Leavenworth if I'm reading this correctly the occupancy was 80% in the third quarter which seems like a good sign Do you have a sense, or would you be willing to share the occupancy rates at the competing facilities, or the facilities that are effectively competing with Leavenworth for the next contract?
spk10: Yes, sir. So I would say, let me say I know that Airfare pretty darn well is more than raised in Leavenworth, so I know that Airfare well, and I would say they're looking at I'd say alternatives in two buckets. One, the local bucket, primarily counties, and knowing, again, kind of eastern Kansas, western Missouri like I do, I don't think there's a facility, even if it's completely vacant, that would be equal to size as our facility. So I think on the county side, they are really looking closely at at various counties that potentially provide capacity, but there clearly is not one. And there's probably, even if you put five together, I don't know if they would be equal in vacant capacity with what we've got at Leavenworth. Having said that, though, I know they're still looking at that very, very closely and looking at those alternatives. Because some of those jurisdictions that they're looking at may be existing partners with them. So they know those counties well because they've had a historical relationship with them. The other bucket, I would say, is the United States Penitentiary there at Leavenworth that's been there for about a century. Again, that facility I know very well. It's about, I think, 2,000 beds total capacity. I think that's changed a little bit over the years based on maybe some reconfiguration of the capacity. I don't know to your question, though, what its actual population is today. My suspicion has been impacted probably like us with COVID. I also suspect, you know, with the BOP down almost 70,000 in May since 2013, they probably have got some flexibility in moving the populations out of that facility to other BOP facilities to make capacity available to the Marshal Service. So anyway, those would be the two buckets, looking at counties and or the BOP. That BOP facility is within probably 10 minutes of our facility, so it's in pretty close proximity. And again, I don't know the actual population, but again, I suspect the BOP's got some flexibility on that point. But anything you'd add to that, Dave?
spk09: Just that we have had a couple of conversations with some other government partners that could backfill it if the marshals decides to leave the facility. There are some balls in the air, so to speak.
spk10: That's a good point. And actually, I'd say at a couple different levels. So that's an opportunity we'll continue to look at very closely.
spk08: Great. Thank you. And then lastly, a follow-up on the staffing question. Is there a way you can just give us a ballpark of how many people you may need to add and what the average wage rate is?
spk10: That would be a good question, and I can understand why you'd want to ask that. It probably would all do ourselves a favor, probably wait until we have guidance out in February. But, you know, we are leaning towards an increase in staffing. I don't know if anything you would add to that, Dave.
spk09: I don't think so. I mean, again, I think the opportunities with some government partners, you know, where you could see a surge in populations, those would be the facilities that we're focused in on. increasing staff because you wouldn't want to lose business because you don't have sufficient staff. So those would be the facilities, primarily federal, where we would be increasing staff. But there are some other state opportunities, too, where I think we would like to increase staffing levels, too. So, yeah, it's hard to – I couldn't give you a number in terms of quantity of staff or dollar amount.
spk08: Got it. Yeah, a lot of moving pieces. I understand and appreciate it. Thank you very much.
spk00: And we'll go ahead and take our next question from Ben Briggs from StoneX Financial. Please go ahead.
spk06: Hey, guys. Thanks for taking the questions and great job on the quarter. Kind of a follow-up I had to the previous question about facility-level margins as you transfer from an own-operate model to more of an own-and-lease model. Are there any cost saves you guys can realize at the corporate level that are related to that, just kind of with fewer operational things to manage as you transfer to more of a landlord model?
spk10: Yeah, that's a great question. You know, we've only had kind of onesies, twosies here in the last couple of years where we've had that move from safety to management. to property. But, yeah, I think as we go, I don't know if it will be next year, but probably the next couple of years, I think if there continues to be some kind of movement of, or that migration, I should say, of safeties going over to properties, then there's probably some opportunity. Now, I wouldn't necessarily put it in the category of being, you know, largely material, but there could be a few opportunities there. I don't know anything you'd add to that, Dave.
spk09: Yeah, if we had our portfolio totally converted from own and operate to one where we're just the landlord, obviously you'd have some increases in the real estate staff, but a more than offset reduction in the rest of the operational staff. But I really don't see that happening, certainly not over the next year or two, like Damon mentioned. You'd have to have a pretty significant shift in the safety segment to the property segment before you'd be able to move the needle on staffing in the corporate office. And it's just we're not having those kind of conversations at that scale today.
spk06: Okay, great. That's very helpful. I appreciate the time.
spk10: Yeah, thank you for the question.
spk00: And we'll go ahead and take our last question from Zach. Please go ahead. Thank you.
spk11: So are there any services that you had offered pre-COVID that you're not currently offering and would like to resume but are being hindered because of the staffing challenges you spoke about?
spk10: uh keep me honest here dave i'd say no i mean we we did have you know kind of early days of the pandemic and this was kind of identical what we saw with our public sector counterparts and that was just you know scaling back services within our safety facilities around notably around programs academic vocational etc but those are starting to those have been i should say ramping back up and will continue to ramp up based on oxy within those respective facilities but um outside of that
spk09: Yeah, I agree. In the 2020 time period, in consultation with our government partners, unfortunately had to shut down some of those programs, which is an unfortunate byproduct for the residents in our care, because obviously they need the skills training, GED training that you want to provide them so that when they get released, they've got the tools to get a job and sustain living outside of a correctional facility. But most of those have been reinstated now. And so, you know, outside of those types of programs, industry trade certificates that we had temporarily shut down, most of which are back operational today, I can't think of any other services that were not performing today that we were pre-pandemic. Okay.
spk11: Thank you.
spk02: Thanks for the question.
spk00: And we actually got one more question. We'll take it from Michael Christodoulou from Inwood Capital. Please go ahead.
spk04: Good morning, gentlemen. I'm newer to the name. You've got a fascinating business, which is clearly underappreciated. A couple follow-on questions. You mentioned that you had a Hawaii proposal in Oahu that would be a, you know, build, own, operate. You mentioned there's also another RFP which is a lease only for an existing facility. Are there any RFPs on the horizon where you would envision needing to contribute equity like was envisioned in the Alabama project?
spk10: Yeah, good question. The opportunity I alluded to a few minutes ago would not. So that being an existing asset that's currently in the safety segment, that potentially would go over to the property segment. If there is any investment, I'd say be relatively minor, just to maybe make a few changes there for that mission and that new population. And then for Hawaii, I guess your question was outside of Hawaii, but I guess Hawaii, that RFP actually won't be out, we don't think, until next year. So it's too early to tell exactly kind of what the opportunity would be and then what potentially the team would have to do or not do. from a equity perspective. But outside of that, outside of kind of normal maintenance capex that we all talk about on a regular basis and forecast on, I don't see anything else beyond that. Do you, Dave?
spk09: Yeah, Arizona is not a new build, so it's existing capacity, so no capital required for that opportunity. Hawaii could be, I think they've pegged the cost of $400 to $600 million. That one we would intend to finance like our Kansas project a couple years ago, which is project-specific financing in equity contribution. Actually, Kansas was 100% debt financed So no equity contribution on Kansas. I don't know if Hawaii, we'd likely have to put in some equity. But beyond that, there's nothing on the table today that would require us to put any equity capital into a new project.
spk04: Okay. And then just a question on staffing and margins at the owned and operated facilities. You know, page 10 of 22 says, Talks about the facilities margin through nine months, right? 24% up from 22. You've kind of signaled that if you have some higher staffing, you might have some margin impact there. But then there's some per diem increases. And I'm wondering, I don't know if there's a rule of thumb, but do per diem increases happen in advance or concurrent with or in arrears of a population increase?
spk09: Yeah, I'd say most of our per diem increases go into place July 1st. in connection with the fiscal year of our state government customers. So this was a good year for per diem increases. Those are reflected in the third quarter results. Our federal per diem increases are usually on the contract anniversaries, so they could be throughout the year. So as you look at where we would be seeing increases in populations, if they're at the federal level, They're probably going to be most of them would be for under existing contracts. So I wouldn't anticipate per diem increases in advance of new populations coming in. It's typically at the end of the contract year. For any new contracts, like the one we're describing at West Tennessee, we're negotiating the per diem up front so you know going into the new contract what the per diem is going to be, and you build in inflators into the contract as well. So I'm not sure if that answered your question.
spk04: No, it does. Thank you very much. I commend your execution and your capital allocation journey that you're embarking on.
spk10: Very good. Thank you. Thank you so much.
spk00: And with that, that does conclude our question and answer session. Also, that does conclude today's call. Thank you for your participation. You may now disconnect.
Disclaimer