CoreCivic, Inc.

Good morning. My name is Amy, 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 CoreCivic's third quarter 2022 earnings conference call. All lines have been placed on mute to avoid any background noise. After the speaker's presentation, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number 11 on your telephone keypad. You will then hear an automated message advising your hand is raised. Thank you. I would now like to turn the call over to Cameron Hopewell, Core Civics Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thank you, Amy. 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 today's call, we will discuss our financial results for the third quarter of 2022, developments with our government partners, 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 2022 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 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 Heidegger.

Thank you, Cameron. Good morning, and thank you for joining us today for our third quarter 2022 earnings call. On today's call, I will provide you with details of our third quarter financial performance, discuss with you our latest operational developments, update you on our capital allocation strategy, and discuss the latest developments with our government partners, including the recent $130 million sale of our McRae facility to the state of Georgia. I will then turn the call over to our CFO, Dave Garfinkel, who will review our third quarter financial results and full year 2022 guidance in greater detail and will update you on our ongoing capital structure initiatives. Before I give an update on our government partners, let me briefly pan out and give a big picture view of the past two years, but also a peek into 2023 and beyond. As you know, like the rest of the world, we have had to deal with the challenges of COVID-19 and the pandemic. Being a 24-7 operation for nearly 40 years, I am proud of the team having strong systems, processes, and leadership in place to deal with the challenges that the pandemic brought us. There was a challenging journey for sure, and some difficult decisions were made along the way. I am grateful on how the team navigated through this challenge, and it thankfully appears to be more easily managed going forward as the severity of COVID has diminished. Second, I would note the change in sentiment from the lending institutions in the last few years and how it could have possibly influenced our access to capital needed for growth and maintenance. The quick but proactive work to change our corporate status but also expanding the team and establish new making relations by our team and supported by our board has been impressive to a witness this past year. We have taken a strong balance sheet pre-COVID and made it even stronger with a leverage rate and debt housekeeping at levels not seen in nearly a decade. Third, going into 2021, we have questions about the value and need of our solutions for our federal partners, notably with the United States Marshal Service and Immigration Customs Enforcement. The last 18 months, we have shown multiple times the essential nature of our solutions to our federal partners by new, expanded, and renewal of federal contracts. Fourth, and this was not unique to us for sure, but the concerns with the labor market and our ability to fill vacancies that came as a result of pandemic. I'm extremely pleased with the progress our team has made in the last six months on this front. As mentioned earlier this year, we have started leaning forward on raising our staffing levels at certain locations preparing for higher occupancy rates later this year and going into 2023 while filling vacancies at others. With those goals, we have seen a double-digit decline in our vacancy rate this year. All the while, as you have seen in our recent ESG report, our programs team are achieving tremendous outcomes with the individuals in our care, and we had a 95% retention rate over the last five years of our management contracts. So finally, before I move on, you have seen strong policy debates from this summer going into the election this fall that has significant focus on immigration and border security, along with crime and criminal justice, among things like the economy and inflation. We obviously will see what next week brings from the election, but nonetheless, we have taken strong steps to be well poised for the likely needs of our existing and possible new government partners. Now for an update of our government partners, and beginning first with our federal customers, which are within the Department of Justice, which is the Federal Bureau of Prisons, or BOP, and the United States Marshal Service. The BOP has experienced significant declines in their populations in the last decade. In response to this long-term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners. In August, we completed the sale of our 1978 fed McCray Correctional Facility to the State of Georgia for $130 million. The McCray facility is our last remaining prison contract with the BOP, representing less than 2% of our total revenue. Following the expiration of our contract at McCray, we only expect to generate revenue from the BOP through the provision of residential reentry facility contracts. As a reminder, the sale of our McRae facility is notable for a number of reasons. First, the McRae facility currently has a management contract with the Federal Bureau of Prisons that is scheduled to expire on November 30th, a contract that for the last few years was very clearly not going to be renewed by the BOP. Second, the assets they'll provide a significant after-tax cash proceeds that allow us to more quickly execute on our share repurchase authorization and pay down debt. Third, this is once again a market opportunity resulting from directional systems seeking to modernize their facilities, not the result of prison population growth. This transaction was a great deal for the state of Georgia as it will help them take a drastic step to modernize their system. Finally, and most importantly, this asset sale reinforces the significant underlying value of our correctional and detention real estate assets, which is not reflected in the valuation of our publicly traded debt and equity securities. The sale price for McCray was nearly $66,000 per bed, which when used to approximate the value of our nearly 71,000 company-owned Correctional beds indicate a $4.7 billion value that is nearly triple the price the public markets have applied to our equity. While we do not expect the sale of our correctional or detention facilities to government entities to become a growing trend, we view this as an excellent opportunity to finalize our diversification away from prison contracts with the BOP recycle capital, and create value due to the dislocation of the prices of our public securities and our assets' true market values. As for the United States Marshal Service, their prisoner populations have remained very consistent in recent years, so their need for capacity around the country remains unchanged and significant due to their reliance on contracted detention capacity. The marshals were impacted by the executive order signed by President Biden and issued in January 2021 that directed the Attorney General to not renew Department of Justice contracts directly with privately operated criminal detention facilities. In 2022, we have no direct contracts with the marshals that are set for expiration and now have only two total remaining direct contracts with the marshals that are set to expire in later years. Both facilities provide significant capacity to the marshals that we believe would be very challenging to replace, but we likely will not have resolution on potential contract extensions until we are closer to the existing contract's expiration dates. We continue to work closely with the marshals to ensure their capacities are being met in order to support their critical public safety mission. ICE is our third federal partner and is within the Department of Homeland Security. Of any of our government partners, their operations and capacity utilization needs were and continue to be the most significantly impacted by COVID-19. Notably, ICE implemented OCTC restrictions at their facilities to improve the ability for resident populations to social distance. These OCTC restrictions remained in place during the third quarter of this year. Nationwide, ice detainee populations remained well below the historical levels since the spring of 2020, and that trend remained unchanged in the third quarter. As a result, our facility utilization levels continue to remain materially below historical averages. Current utilization levels are also well below the number of beds funded through the annual budget appropriation process. Although the agency has nonetheless experienced budget challenges because of COVID-related and other unplanned expenditures outside of their control, which impacted detention levels and actions on new contract awards. Taking this into account, at the end of September, ICE detained approximately 26,000 individuals nationwide. Their new fiscal year started on October 1st. and ice was funded at 34 000 beds under a continued resolution that funds the federal government to december 16th we obviously will be watching what their funding will be once the full year budget is enacted in december today we are experiencing increases in utilization by our federal partners particularly ice across multiple facilities where they are up nearly 26 percent according to date and we expect this trend to continue. This is a result of ICE slowly beginning to relax their pandemic-related Oxy restrictions. While this trend is occurring too late in the year to have a material impact on this year's financial results, we believe this is a notable trend following three years of utilization levels well below historical norms. We also continue to pursue opportunities to provide ICE with non-residential alternative detention or ATD programs. During the third quarter, a different provider was awarded a procurement for young adults, which was issued this January. While we were not awarded the new contract, we remain engaged with ICE as we believe additional ATD programs could be developed. We also know these case management services are similar to the type of case management services we already provide in our community segment. The elevated rates of apprehensions on the Southwest border continue to create challenges, which are expected to increase the government's demand for both residential detention capacity and non-residential ATDs. Should new needs arise, we believe we are well positioned to deliver solutions to ICE. Moving now to the results of the third quarter of this year, we generated revenue of $464.2 million, which was a decline of only 1.5% compared to the prior year quarter, despite the non-renewal of contracts with the United States Marshal Service at our Loveworth Detention Center and our West Tennessee Detention Facility in 2021. and the non-renewal of a contract with Marion County, Indiana at the managed-only Marion County Jail affected January 31st of this year. Collectively, these three facilities accounted for $19.8 million or 4.2% reduction in revenue in the third quarter of this year versus the prior year quarter. In the third quarter of this year, we generated normalized funds for operations, or FFO, of 33.9 million, or 29 cents per share, compared to 58.6 million, or 48 cents per share, in the third quarter of 2021. Now, the decline was driven by the non-renewal of the three contracts that I just mentioned, the transition of populations at our La Palma Correctional Center pursuant to a new contract with the state of Arizona, and a challenging labor market. Dave will provide more detail regarding the financial impact of these items. But I would add that while we have spent considerable amounts of considerable amount on incentives to recruit and retain our valuable frontline staff, and on increasing staffing levels that were unsustainable in the prior year, these investments have positioned us to take advantage of increased demand from our government partners that we will believe occur once Oxy restrictions imposed by our government partners during the COVID pandemic are relaxed. As mentioned earlier, we are also poised to enter into new contracts and accept additional residential populations from our government partners that are unable to manage existing population levels because of their staffing challenges. We believe these needs could manifest as early as this quarter. In April of this year, we convinced transitioning populations at our La Palma Correctional Center in Arizona from ICE populations to Arizona state populations pursuant to a new contract we were awarded by the Arizona Department of Corrections Rehabilitation and Reentry late last year. We expect the transfer process to be completed near the end of this year. Upon achieving normalized utilization based on the contract, we expect to generate approximately $75 to $85 million in annualized revenue. However, because of the preparation received to Arizona inmates, including a reduction in the average daily population of ICE attendees at the facility whose contract expired at the end of the third quarter, Facility net operating income decreased nearly $12 million during the third quarter of this year compared with the third quarter of 2021. The La Palma facility currently supports the mission of the state of Arizona by caring for approximately 1,900 inmates. We continue to actively collaborate with Arizona Department of Corrections, Rehabilitation, and Reentry to ensure we successfully complete the transition by the end of this year. I would like to briefly discuss our updated four-year 2022 financial guidance. We are now forecasting four-year normalized FFO per share in the range of $1.28 to $1.32 and adjusted funds from operation, or AFFO, per share in the range of $1.18 to $1.22. The increase in our guidance is reflective of our third quarter financial results being in line with our internal forecast, the expectation of completing the transition that will also be sooner than estimated in the prior quarter, and the expectation of increasing utilization by federal partners starting in the fourth quarter. They will provide greater details about our third quarter financial results as well as the financial impact of the more significant assumptions included in our updated four-year financial guidance following the remainder of my comments. So finally, during the third quarter, we had multiple important milestones that continue to strengthen our balance sheet. First, as I mentioned earlier, we completed the sale of our McRae Correctional Facility to the state of Georgia for a sales price of $130 million, which generated a $77.5 million gain on the sale. During the third quarter, we also sold two residential reentry centers in California, and a parcel of undeveloped land for an aggregate sale price of $16.3 million. The cash generated from these asset sales has helped accelerate our capital allocation strategy. During the quarter, we also repurchased an additional $3.6 million principal amount of our outstanding 4.625% senior undersecured notes, which are scheduled to mature in May of 2023 and have a remaining balance of only $166 million. Following the maturity of those notes, our next bond maturity isn't until April of 2026, and we have less than $100 million in variable rate debt. With our debt maturity schedule in a comfortable position, significant cash on hand, and resilient positive cash flow generation, we also repaid $33.5 million principal amount of our 8.25 senior notes, reducing the outstanding balance to $641.5 million. So far this year, we have reduced our outstanding debt balances by nearly $250 million, significantly reducing our future interest expense and improving our long-term cost of borrowing. We remain committed to our targeted total leverage ratio or net debt to adjusted EBITDA range of 2.25 times to 2.75 times. We have made meaningful progress in reducing our overall leverage due to the strong cash flows the company generates, and we expect our leverage to continue to decline over time. Understanding that recently our EBITDA has been negatively impacted by the short-term transition of contracts at all of Palm City and Arizona, mathematically increasing leverage through debt levels have declined. So as the transition years completion, we expect our leverage to naturally decline. During the third quarter, we continue to execute on our stock repurchase program on the $225 million stock repurchase authorization approved by our board of directors earlier this year. Since commencing the program in May of this year, we have repurchased 6.6 million shares of our common stock at an aggregate purchase price of $74.5 million, or approximately 5% of our total outstanding shares. The remaining share repurchase authorization of $150.5 million would allow us to repurchase an additional 12% of our outstanding shares based on recent trading price of our equity. Our capital allocation strategy has enabled us to remain flexible, and in future quarters is expected to include a combination of share repurchases and debt repayments, taking into consideration factors such as the price of our securities, progress towards achieving our targeted total leverage ratio, and potential returns on other opportunities to deploy capital. We continue to believe our capital allocation strategy has been prudent for 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 sources of capital. Before I turn it over to Dave, let me acknowledge what is being seen and reported in corporate America on a daily basis, and that is the warning signs of a recession for the U.S. economy and the impact it is having on companies and industries, both near-term and going forward. As we have seen in previous recessions, our industry has been resilient during previous downturns in the economy. This is in large part because we are an essential government service, So as the economy slows down and we watch the labor market coming off its unprecedented demand cycle, we are actively hiring employees for anticipated growth and we have plenty of capacity to meet the demand of our partners. No need to spend capex in this environment of rising interest rates. To be clear, we won't turn a blind eye toward the current and forecast of macro trends in the economy. but history has shown that our business can be stable and growing during a recession. I'll now turn the call over to Dave to provide a more detailed look at our financial results in the third quarter, discuss in detail our updated full-year financial guidance, and provide additional financial updates. Dave?