CoreCivic, Inc.

Good morning. My name is Amber, and I will be your conference operator. As a reminder, this call is being recorded. At this time, I would like to welcome you to CoreCivics' second quarter 2023 earnings conference call. All the 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 11 on your telephone keypad. If you would like to withdraw your question, press star 1-1 again. 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.

Thanks, operator. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's calls 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 second quarter of 2023, 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 provision of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our second quarter 2023 earnings release issued after market yesterday and in our SEC filings, including the form's 10-K, 10-Q, and 8-K reports. You are also cautioned that any forward-looking statements reflect management's current views only and that the company undertakes no obligation to revise or update such statements in the future. On this call, we will also discuss certain non-gap measures. A reconciliation of the most comparable gap measurement is provided in our corresponding earnings release and included in the quarterly supplemental financial data report posted on the investors' page of our website, corecivic.com. With that, it's my pleasure to turn the call over to our President and CEO, Damon Heinegger.

Thank you, Cameron. Good morning, everyone, and thank you for joining us today for our second quarter 2023 earnings call. On today's call, I will provide you with details of our second quarter financial performance and our updated 2023 full-year financial guidance. I will also discuss with you our latest operational developments, update you on our capital allocation strategy, and discuss the latest developments with our government partners. Following my remarks, I will turn the call over to our CFO, Dave Garfinkel, who will review our second quarter 2023 financial results and our increased full-year 2023 financial guidance in greater detail. He will also provide a more detailed update on our ongoing capital structure initiatives. I'll now provide a brief overview of our second quarter financial results and our updated 2023 financial guidance. In the second quarter, we generated revenue of $463.7 million, which was a 2% increase compared to the prior year quarter. This is in spite of the expiration of our final prison contract with the Federal Bureau of Prisons at our previously owned McCray Correctional Facility in November of 2022. We generated normalized funds for operation or FFO of 37.8 million or 33 cents per share compared to 40.7 million or 34 cents per share in the second quarter of 2020-22. The decline was driven by the sale of our McRae facility, which generated EBITDA of $2.4 million in the prior year quarter and higher staffing levels, which we anticipated and communicated on our last quarter's earnings conference call in anticipation of increasing demand. While our operating costs remained elevated compared with pre-pandemic levels, during the quarter we experienced a continuation of modest improvements in the employment market, a trend that began to develop in the second half of 2022. We believe the favorable operating expense trends will continue as the tight labor market continues to loosen. However, the pace of operating expense reductions will largely depend on the condition of the labor market, which we believe will take some time to normalize. As for our updated 2023 financial guidance, we are forecasting full-year normalized SFO per share in the range of $1.37 to $1.45 and adjusted funds for operation, or ASFO, per share in the range of $1.31 to $1.39. These represent increases of 4 cents at the midpoint of our previously issued guidance. Moving now to one of our federal customers, Immigration and Customs Enforcement, or ICE. On May 11, Title 42, a temporary public health order issued by the CDC that has essentially closed our nation's borders to asylum-seeking individuals since the onset of COVID-19 pandemic, came to an end. It is also important to note, at the same time, occupancy restrictions implemented during the pandemic at our ICE facilities also came to an end. Without the ability to quickly remove individuals using the authority granted by Title 42, there has been an increase in the number of people in the custody of the Department of Homeland Security, or DHS. ICE is one of the agencies within DHS that is responsible for enforcing immigration laws, arresting, and detaining individuals who have entered a country illegally. As expected, ICE has experienced a significant increase in demand for detention capacity since Title 42 was lifted. In fact, ICE occupancy has increased approximately 43% nationwide since the end of Title 42, and we experienced a similar increase in our ICE facilities. Due to fixed payments under many of our federal contracts, the increase in the residential populations does not result in a proportionate increase in our financial results at such facilities until populations clear the fixed payment levels at a certain bed capacity utilization. This gap has narrowed significantly, and the majority of our facilities are now near or above the fixed payment levels. The long-term impact of the lifting of Title 42 is still unclear, as there are other factors that impact detention utilization levels by ICE. The most significant factor has historically been funding levels approved through Congress. While the outcome of the appropriations process for the upcoming fiscal year, beginning on October 1st, is still unknown, there appears to be growing appreciation for the need for additional funding to help the agency address the challenges at our southern border. The outcome of the appropriations process is expected to have a significant impact on the overall population levels in our ICE facilities moving forward. Now for an update on our other major federal partner, which is within the Department of Justice, the United States Marshals Service. The U.S. Marshals' prisoner populations have remained 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 of 2021 that directed the Attorney General to not renew Department of Justice contracts directly with privately operated criminal detention facilities. We have only two total remaining direct contracts with the marshals. One of those contracts is at our 4,128-bed Central Arizona Florence Correctional Complex in Arizona and has a contract expiration in September of 2023. Both facilities provide significant facility capacity to the marshals that we believe would be very challenging to replace, but as we've previously stated, we likely will not have a resolution on potential contract extensions until we are closer to the existing contract expiration dates. We continue to work closely with the Marshals to ensure their capacity needs are being met in order to support their critical public safety mission. At the state level, we continue to hear that state correctional systems' largest challenge remains the tight labor market. We have had conversations with a handful of states to help address their challenges in the near to long term, and the number of states with which we've had conversations about additional bed capacity has increased since the last quarter. Now, it wouldn't be appropriate to disclose all the states that we are currently talking to, but I will highlight one that recently has been reported on publicly. The state of Montana has appropriated funding to place 120 individuals out of state. We currently expect Montana to issue an RFP later this quarter And as a current government partner of ours, we believe we are in an excellent position to serve their growing needs. We have already achieved several successful outcomes from discussions with other state government partners. We recently renegotiated our contract with the state of Tennessee for the managed-only 1,676-bed South Central Correctional Center. Earlier this year, we notified the state of our intent to not renew the contract when it was scheduled to expire on June 30th. However, we successfully negotiated contractual terms that once again made the facility viable for continued operations over the long term, both in terms of an increase per diem and investments in the facility infrastructure. We are pleased to reach this positive outcome and continue operations at the South Central Correctional Center to serve the increasing demand for bed capacity from the state of Tennessee. We also reached a new agreement with the state of Oklahoma to enter into a new lease agreement at our 1,670-bed Davis Criminal Facility, effectively converting the facility to one of which we own and operate to one that we simply lease to the state, which will operate the facility with government employees effective October 1st of this year. We were pleased to reach a positive conclusion to this facility's contract renegotiation, and we believe that a lease agreement is best for the long-term outlook for the facility that also meets the long-term needs of the state. We have signed a 90-day extension under the current management contract and continue to work through the transition process, expecting the transition operations to the state of Oklahoma effective October 1st. And finally, we agreed with the state of Idaho to increase the number of individuals we care for at our 1,896-bed Saguaro Correctional Facility in Arizona. Over the past year, Idaho has utilized approximately 450 beds at the Saguaro facility. Based on recent conversations, we expect the state to increase their utilization of up to 600 beds over the next few months. We are also pleased with the overall success in achieving per diem increases under our state management contracts as our government partners recognize the challenging labor market and cost inflationary environment, which they, of course, are experiencing as well. Most of our state per diem adjustments occur effective July 1st, coinciding with the state fiscal year budgets, and we estimate annual incremental revenue from our state government partners of approximately $35 million resulting from these per diem increases, which will help to offset the incremental labor costs we are incurring. I also wanted to note another component of our business, and that is our community segment, which represents a vital part of our mission and is often critical to successful reentry of residents in our care. Net operating income in this segment increased by 22% in the second quarter of 2023 from the prior year quarter, as occupancy increased 3.5% to a total of 62.8% in the second quarter of 2023. We expect these trends to continue in the community segment now that all pandemic-related public health policies have come to an end. Pre-pandemic occupancy in this segment was closer to 75%, so there is still a lot more opportunity to grow. However, it appears that more of our government partners are once again choosing to use residential reentry programs to help individuals be better prepared for successfully transitioning into our communities. So, to summarize, the macro environment is improving. ICE populations have increased with the listing of Title 42 Oxycaps and increasing demands on the southwest border. Demand at the state level also appears to be increasing. Courts nationwide were significantly hampered operationally during the pandemic, and that has contributed to jail populations growing by 24% in the last 24 months. As courts normalize operations and cases are adjudicated, state correctional agencies will clearly be impacted. Additionally, several states have recently passed legislation that could result in them needing additional services or capacity. Finally, we have had discussions with a few county governments, not historically an avenue of growth for us, struggling with jail overcrowding and challenges with staff. And while we can never say definitively when an agency may engage us for our services, some of the leading indicators are notable as we look to future demand. As a reminder, we were 82% occupancy in 2019 versus occupancy of 70% today. And our financial model is a high fixed cost model with significant operating leverage and earnings potential with increases in utilization. I will close out my comments by discussing our continued progress with reducing our overall debt and returning capital to our shareholders. First, an update on our buyback plan. Year-to-date, we have repurchased 2.6 million shares at an aggregate purchase price of $25.6 million. In the second quarter, we purchased $21 million of our eight and one-fourth percent senior unsecured notes that are scheduled to mature in April of 2026, which is our next scheduled debt maturity. We use cash on hand and free cash flow to purchase bonds through open market transactions. Should opportunities continue to rise, we could elect to use our free cash flow to purchase additional senior notes in open market transactions to further our capital allocation strategy of reducing overall debt levels and reduce our net debt to EBITDA to a range of two and a quarter to two and three quarter times. We have no debt maturities until April of 2026, which provides us flexibility in how we deploy free cash flow for the next three years. We have made meaningful progress in reducing our overall leverage due to the strong cash flows the company generates, reducing our overall debt balance by over $1.2 billion since announcing our updated capital allocation strategy in the summer of 2020. We expect our leverage to continue to decline as we prioritize our cash flows on reducing debt, understanding that in recent quarters, EBITDA has been negatively impacted by the short-term transition of contracts at our La Palma facility in Arizona and ongoing pandemic-related OCCI restrictions with our federal partners, which have now largely come to an end and trends are reversing. These issues mathematically slowed the rate of leverage decline, though we have continued to reduce our debt levels even while purchasing our shares of common stock. I'll now turn the call over to Dave, who will provide a more detailed look at our financial results in the second quarter. He will also discuss in detail the increase of our full year 2023 financial guidance, including the most significant factors behind the change in that guidance.