CoreCivic, Inc.

Good day, and thank you for standing by. Welcome to the Q3 2023 Core Civic, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speaker's presentation, there will be a Q&A session. To ask a question during the session, you will need to press star 1-1 on your telephone. You will then hear an automated message advising that your hand is raised. To withdraw your question, please press star 1-1 again. please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Gutierrez of Dresdner Corporate Services. Please go ahead.

Thanks, operator. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Heinegger, 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 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 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 2023 earnings release issued after market yesterday, and in our securities and exchange commission 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, management will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in the corresponding earnings release and included in the company's quarterly supplemental financial data report posted on the investors' page of the company's website at corecivic.com. With that, it is my pleasure to turn the call over to our president and CEO, Damon Heinegger.

Thank you, David. Good morning, and thank you for joining us today for our third quarter 2023 earnings call. On today's call, I will provide you with details of our third quarter financial performance and our updated 2023 full-year financial guidance, which reflects another increase in our core earnings metrics from last year's quarter's 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 financial results and our updated financial guidance in greater detail. He will also provide a more detailed update on our ongoing capital structure initiatives including details of our new bank credit facility obtained just after quarter end. I'll now provide a brief overview of our third quarter financial results and our updated 2023 financial guidance. In the third quarter, we generated revenue of $483.7 million, which was a 4% increase compared with the prior year quarter. This increase is in spite of the exploration of our final prison contract with the federal Bureau of prisons that are previously owned in the gray correctional facility in November of 2022. And the exploration of our lease agreement with the Oklahoma Department of corrections at our North for correctional facility on June 30th, 2023. Excluding these two expirations, our total revenue increased 7%, demonstrating strong occupancy and revenue growth from our core safety and community portfolios. We generated normalized funds from operations, or FFO, of $40.5 million, or $0.35 per share, compared with $33.9 million, or $0.29 per share, in the third quarter of 2022, representing a per share increase of 21%. The increase in FFO was driven by the higher federal and state populations combined with lower interest expense resulting from our debt reduction strategy. The increase in FFO occurred despite the sale of our McCray facility and the expiration of the lease with Oklahoma, which resulted in combined reductions to EBITDA of 4.8 million from the prior year quarter. While we continue to experience ongoing labor market pressures and continue to incur temporary incentives and related incremental operating expenses in many markets, we have achieved notable improvements in our attraction and retention rates as a result of our staffing strategies and due to an overall improvement in the hiring environment. We believe the favorable operating expense trends will continue as the tight labor market continues to loosen. As we have mentioned on past several conference calls, we have made significant investments in our existing staff and have successfully increased our staffing levels through improved recruiting and retention. These investments have enabled us to reduce the amount of temporary incentives from the prior year quarter and have positioned us to accept the additional populations we have begun to experience. From the third quarter of 2022 to the third quarter of this year, occupancy in our safety segment increased from 70% to 72.6%, and occupancy in our community segment increased from 57.5% to 62.8%. The increase in occupancy in our safety segment primarily resulted from higher detention populations from our largest government partner, Immigration and Customs Enforcement, or ICE. On May 11th, Title 42, a temporary public health order issued by the CDC that had essentially closed our nation's border to asylum-seeking individuals since the onset of the COVID-19 pandemic, came to an end. At the same time, Oxy restrictions implemented during the pandemic at our ICE facilities also came to an end. Without the ability to deny entry to the United States and quickly remove individuals using the authority granted under 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 the DHS that is responsible for enforcing immigration laws, arresting, and detaining individuals who have entered the country illegally. These activities have increased since the end of Title 42, and the country continues to report record numbers of people encountered at the southern border. Last quarter, we reported on the increase in demand for detention capacity since Title 42 was lifted. That trend has continued as the number of people in ICE detention increased 18% nationwide during the third quarter alone, resulting in a cumulative increase of approximately 66% nationwide since the end of Title 42. Since May 11th through September 30th, ICE detention populations within our facilities have increased 4,729, or 84%, which we believe was possible at least in part because the investments and staffing I previously mentioned. Due to fixed payments under many of our federal contracts, the increase in residential populations did not result in a proportionate increase in our financial results at such facilities until populations cleared the minimum compensated bed total associated with fixed payment levels, which largely occurred during the third quarter. The increase in OXY in our safety segment also resulted from higher OXY levels from several state government partners. including most significantly the state of Arizona at our La Palma Correctional Center in Eloy, Arizona. La Palma is the second largest facility in our portfolio. Recall that we were awarded a new management contract from the state of Arizona and began receiving populations from the state in April of last year. The ramp of this facility was substantially complete by the end of 2022. we continue to incur elevated operating expenses at the facility associated with temporary staffing and believe expenses will continue to normalize as we continue to hire and train permanent staff. During the third quarter of 2023, we also experienced increases in populations from the states of Oklahoma, Colorado, and Idaho, and more recently in the fourth quarter from Georgia. Further, we remain in discussions with several additional states to help address their challenges in the near to long term. As an example, last quarter we mentioned that the state of Montana, a current government partner of ours, was expected to issue a request for proposal for the placement for up to 120 out-of-state inmates. The RFP was issued, and we were recently notified by the state of their intent to award the contract to CoreCivic. As a reminder, this would be utilized in existing capacity at our Saguaro Correctional Facility in Arizona. Although not typically an avenue of growth in the past, we have had an increase in the number of discussions with county governments for bed capacity needs in our safety segment as well. At the end of September, we announced that we had signed a new management contract with Hines County, Mississippi, for up to 250 adult male pretrial detainees at our Tallahatchie County Correctional Facility in Mississippi. In October, we completed the intake process for approximately 200 residents from Hinds County at the Tallahatchie facility. The Tallahatchie facility is a good example of the flexible capacity we can provide to our government customers as we also care for over 400 residents from the United States Marshal Service, Vermont, South Carolina, the U.S. Virgin Islands, and the local county in Tallahatchie County. I couldn't be more proud of the leadership and staff at our Tallahatchie County facility. As mentioned, Oxy in our community segment, which comprises of 23 residential reentry facilities, increased from 57.5% to 62.8% in the third quarter of 2023 over the prior year period. We also provide electronic monitoring and case management services in our community segment. Our community segment represents a vital part of our mission and is often critical to the successful reentry of residents in our care. Net operating income in this segment increased 50% in the third quarter of 2023 from the prior year quarter due to the increase in oxy as well as per diem increases we have been able to obtain. we were also able to reduce temporary staffing incentives like we did in our community segment. We expect the oxy trend to continue in the community segment now that all pandemic-related public health policies have come to an end as more of our government partners are returning to residential reentry programs to help individuals be better prepared for successfully transitioning into our communities. Finally, we never take for granted renewals of existing management contracts and continue to enjoy a contract retention rate of 95% over the previous five years. During the third quarter, we executed a five-year extension of the contract with the United States Marshal Service at our 4,128-bed Central Arizona Florence Correctional Complex, the largest facility in our portfolio, where we provide significant capacity to this government agency as well as ICE. We also executed notable contract extensions with Vermont at our Tallahatchie facility in Mississippi, ICE at our Elizabeth Detention Center in New Jersey, Montana at our Crossroads Correctional Center in Montana, Tennessee at our managed-only South Central Correctional Center, and the Texas Department of Criminal Justice for five residential reentry centers we own in Texas. As mentioned last quarter, we entered into an agreement with the state of Oklahoma to lease our 1,670-bed Davis Correctional Facility effective October 1, 2023. We successfully transitioned operations to the state, which is now operating the facility with government employees, effectively converting the facility from one in which we own and operated in our safety segment to one that we simply leased to the state and will now report in our property segment. 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. As we look forward, we remain optimistic in the macro environment for our federal, state, and local business. Our governments are facing complex challenges, and we see increased opportunities to serve their growing needs. At the federal level, although we continue to see a steady increase in detention bed utilization, the long-term impact of the end of Title 42 is still unclear as there are other factors that impact detention utilization levels by ICE. The most significant factor historically has been funding levels approved by Congress. However, the country is still facing significant challenges at the southern border and geopolitical events only enhance the need for border security. Although the appropriations process for funding in the near term, as well as the remainder of the fiscal year ending September 30, 2024, is still in flux, there appears to be bipartisan support for additional border funding for the Department of Homeland Security and ICE to help address the challenges at our southern border. The outcome of the appropriations process is expected to have significant impact on the overall population levels in our ice facilities moving forward. And even though detention funding and related services are just part of the overall solution, we are positioned well to serve their needs. Another part of the overall management of the border that could potentially expand the scope of services includes alternative detention. Earlier this year, ICE issued a Request for Information, or RFI, for Release and Reporting Management Services. This RFI is seeking information about monitoring technology, participant coordination services, including physical space, participant engagement and interactions and program management, and community services to help people comply with their immigration obligations. though not yet funded by Congress and only in the early stages. The RFI is intended to apply to non-citizens released from DHS custody and, according to the RFI, involves engaging with a large portion of the 5.7 million individuals on the current non-detained docket. At the state level, overall state budgets are in very good shape. Most states are reporting increases in their prison populations, and many states are also projecting further increases in their prison populations. Jail backlogs, which are a leading indicator for state prison populations, remain significant. Additionally, courts continue to normalize operations and cases are adjudicated, so state correctional agencies will surely be impacted. So, to summarize, the macro environment is improving and is beginning to manifest in our financial results as some of the headwinds we faced during the pandemic are turning into tailwinds. Based on our updated outlook, we are updating our full-year normalized FFO per share forecast to a range of $1.40 to $1.46 and adjusted funds for operations, or AFFO, per share to a range of $1.34 to $1.40. These represent increases of two cents at the midpoint of our previously issued guidance. We're currently preparing our 2024 budget and expect to issue financial guidance for the full year 2024 in February when we announce our fourth quarter 2023 results. We are obviously focused on a solution to the pending lease expiration with the State of California at our California City Correctional Center. This facility, which generates approximately 25 million in annual EBITDA, is in a great location, but the lease is currently scheduled to expire on March 31st, 2024. We are experiencing growth in many parts of our business, which will mitigate the financial impact of lease expiration if we are unable to identify an alternative solution in the short term. I will close out my comments by discussing our continued progress on our capital allocation strategy and further strengthening our balance sheet. We continue to make progress on our debt reduction strategy. Our debt reduction has contributed to meaningful decreases in our interest expense, particularly noteworthy considering the significant rise in interest rates. Leverage measured by net debt to EBITDA using the trailing 12 months ended September 30th, 2023 was at 2.8 times just marginally higher than our long-term targeted range of 2.25 to 2.75 times. We did not repurchase any shares of our common stock under our share repurchase program during the third quarter, prioritizing our cash flows on repaying debt. But with the progress we have made on reducing our leverage, we will be opportunistic in repurchasing shares in future quarters while being mindful of reaching our targeted leverage range. we have approximately $125 million remaining of our share repurchase program after having repurchased 9.2 million shares of our common stock for approximately $100 million since the Board authorized our share repurchase program in May of last year. Subsequent to quarter end, we entered into a new bank credit facility, increasing the size from $350 million to $400 million and extending the maturity to October of 2028. Dave will provide further details of the new facility. We are very grateful for the support of our new and existing bank partners, enabling us to extend our overall debt maturities and providing us with greater financial flexibility in managing the business and how we balance our capital allocation strategy. Following the extension of our bank credit facility, we have no debt maturities until April of 2026, when approximately 600 million of our senior notes is scheduled to mature. With the strength of our cash flows, we have extensive flexibility in how we deploy our free cash flow in the future and flexibility about opportunistically accessing the capital markets. I'll now turn the call over to Dave, who will provide a more detailed look at our financial results in the third quarter. He will also discuss in detail the increase in our full year 2023 financial guidance and further details about our new bank credit facility and capital allocation strategy.

Dave? Thank you, Damon, and good morning, everyone. In the third quarter of 2023, we reported gap net income of 12 cents per share compared with 58 cents per share in the prior year quarter. Among other special items, net income in the prior year quarter included gains on sales of real estate assets of $83.8 million, or 53 cents per share, including a $77.5 million gain on the sale of our McCrae Correctional Facility. Adjusting for special items, adjusted EPS during the third quarter of 2023 was 14 cents, compared with 8 cents per share in the prior quarter, an increase of 6 cents per share, or 75%. Normalized FFO per share was 35 cents during the third quarter of 2023, compared with 29 cents in the prior year quarter. An increase of six cents per share were 21%. The increase in adjusted EPS and normalized FFO per share primarily resulted from higher federal and state populations combined with a reduction in interest expense. These increases were partially offset by the expiration of our final prison contract with the Federal Bureau of Prisons in November, 2022, at our previously owned and operated McCray Correctional Facility and the expiration of our lease with the Oklahoma Department of Corrections June 30th, 2023 at our North Fork Correctional Facility. These two expirations accounted for a reduction of 3 cents per share from the prior year quarter. During the second quarter, we began to experience an increase in the number of residents detained by ICE as a result of the expiration of Title 42 on May 11th, 2023, a policy that denied entry at the US border to asylum seekers and anyone crossing the border without proper documentation or authority in effort to contain the spread of COVID-19. This trend continued during the third quarter as ICE detention populations increased nationwide by 18%. From June 30th to September 30th, ICE detention populations within our facilities increased by 1,972 residents, or 23%. Note that due to fixed payments at certain of our facilities, increases in populations do not always result in incremental revenue and compensated occupancy, because increases can occur at facilities where population levels were already included in our compensated population. Compensated occupancy in our safety and community facilities was 72% in the third quarter of 2023, compared with 70.1% in the prior quarter. which we consider a proxy for our cash available for capital allocation decisions, increased to $42.3 million, or 37 cents per share in the third quarter of 2023, from $29.9 million, or 25 cents per share in the prior year quarter, an increase of 12 cents per share, or 48%. The larger per share increase in AFFO compared with adjusted EPS and normalized FFO was attributable to higher stock-based compensation and lower maintenance capital expenditures during the current year quarter. Maintenance capital expenditures can fluctuate from quarter to quarter depending on the nature of the expenditures required, seasonal factors such as weather and budgetary conditions, but tend to level out over annual periods. Facility net operating income in our safety segment increased $11.4 million, or 14%, from the prior year quarter. net of a reduction of $1.6 million for the contract expiration with the BOP at the Becra facility. Facility net operating income in our community segment increased $2.2 million, or 50%, from the prior year quarter. Facility net operating income in our property segment declined $3.3 million from the prior year quarter, primarily due to the lease expiration at our North Fork facility amounting to $3.1 million. The increases in occupancy contributed to an increase in margins in our safety and community facilities, which increased from 19.2 percent in the third quarter of 2022 to 21.3 percent during the third quarter of 2023. Further, during the third quarter, we were able to reduce certain labor-related expenses, such as registry nursing, temporary wage incentives, and travel, despite inflation and ongoing labor market pressures that have been steadily easing over the past several quarters. Longer term, we continue to believe operating margins will trend toward those we experienced pre-pandemic of approximately 25% as higher per diem rates we have been successful in obtaining from many of our government partners are expected to translate into increasing margins as they are applied to increasing occupancy levels and as labor-related expenses continue to normalize. Turning next to the balance sheet, we continue to make progress on our debt reduction strategy, increasing our total debt repaid year to date through September 30th to $137.7 million net of the change in cash, including $65 million during the third quarter of 2023. Our leverage measured by net debt to EBITDA was 2.8 times using the trailing 12 months ended September 30th, 2023. As of September 30th, we had $103.7 million of cash on hand and an additional $232.6 million of borrowing capacity on our revolving credit facility, providing us with total liquidity of $336.3 million. Subsequent to quarter end, we completed an amendment and extension of our bank credit facility, effectively replacing our previous bank credit facility, increasing the total size from $350 million to $400 million. the new bank credit facility increases available borrowings under the revolving credit facility, which remains undrawn, from $250 million to $275 million, and increases the size of the term loan from an initial balance under the previous facility of $100 million to $125 million, extends the maturity to October 2028 from May 2026, and relaxes certain covenants while maintaining a similar pricing structure. The larger size provides us with additional flexibility in paying down our unsecured debt while increasing liquidity. Moving next to a discussion of our capital allocation strategy, our capital strategy has resulted in a reduction to interest expense of $10.1 million during the nine months of September 30th, 2023, compared with the same period in the prior year. While we have repurchased 9.2 million shares of stock for a total purchase price of $100 million, at an average price of $10.86 per share since our board authorized the repurchase program in May 2022. These repurchases include 2.6 million shares repurchased during 2023 for a total purchase price of $25.6 million and an average price of $9.84 per share. We did not repurchase any shares in the third quarter, but considering the progress we have made on debt reduction, we expect to be opportunistic in repurchasing additional shares in future quarters while further progressing toward our targeted leverage of two and a quarter times to two and three quarters times. We have approximately $125 million of share repurchases remaining under the Board authorization. We have no debt maturities until April 2026 when $593.1 million of our eight and a quarter percent senior notes mature following the open market purchase of $21 million of these notes in the second quarter. In the future, we could elect to use our free cash flow to purchase additional senior notes in open market transactions, privately negotiated transactions, or otherwise. We could also use our effective shelf registration statement to issue additional debt securities when we determine that market conditions and the opportunity to refinance a portion of our debt are favorable, though current market conditions are not sufficiently attractive for such an opportunistic transaction. Given the strength of both our balance sheet and cash flows, we have tremendous flexibility in how we deploy our free cash flow and balance our capital allocation strategy between debt repayments and share repurchases. Moving lastly to a discussion of our 2023 financial guidance, we expect to generate adjusted EPS of 54 to 60 cents, up from our previous guidance of 52 to 59 cents, and normalized FFO per share of $1.40 to $1.46, up from our previous guidance of $1.37 to $1.45. We have updated our guidance to reflect the penny beat in Q3 through to the full year. Higher federal and state populations expected to be sustained throughout the fourth quarter, partially offset by higher interest expense for new borrowings on the Term Loan A. Our guidance also contemplates a continued moderation of our operating expense structure. Our guidance does not include any new contract awards because the timing of government actions on new contracts is always difficult to predict. While we could execute on one or more of these opportunities this year, which would be upside to our guidance, they would be more impactful in 2024. We expect AFFO to range from $153 to $160.8 million, or $1.34 to $1.40 per share, up from $149.8 million to $159.3 million, or $1.31 to $1.39 per share in our previous guidance. We expect our normalized effective tax rate to be 28% to 29%, and the full-year EBITDA guidance in our press release provides you with our estimate of total depreciation and interest expense. We expect G&A expenses in 2023 to be about 3% to 4% higher than 2022. We expect to incur $66 to $69 million in capital expenditures during 2023, including $61 to $63 million of maintenance capital expenditures unchanged from our prior guidance, and $5 million to $6 million for other capital investments down slightly from our prior guidance. We remain focused on managing to our leverage target of two and a quarter to two and three quarters times and have not included any additional share repurchases in our forecast. However, as previously mentioned, we will remain flexible and will continue to be opportunistic in repurchasing shares. I will now turn the call back to the operator to open up the lines for questions.

Thank you. At this time, we will conduct the question and answer session. As a reminder, to ask a question, you will need to press star 11 on your telephone and wait for your name to be announced. To withdraw your question, please press star 11 again. Please stand by while we compile the Q&A roster. Our first question comes from Joe Gomez with Noble Capital. Your line is now open.

Good afternoon. Thanks for taking my questions. Hey, Joe. Hey, Joe. So, really nice solid sequential growth in secure services revenues. You know, some of that's from population increases. I think some of that's for some increases in per diems. Could you kind of parse out relative contribution for that revenue increase between the population increases and per diem increases?

I don't have that information at my fingertips, Joe, but certainly populations, particularly on the federal side, were driving the increases if you're comparing to the prior year quarter. But certainly we did see per diem increases, some pretty healthy per diem increases from state government partners that became effective July 1st. as our state government fiscal years begin July 1, and that's typically when we do receive per diem increases. So it was a good year. We reported on that last quarter when, you know, we had mentioned a lot of our state partners recognizing the need to help fund wage increases for our staff. So, you know, most of the increases I'd say was really attributable to population increases though.

Okay. And then kind of following along with that, since the end of September, it's been reported that ICE populations have increased another almost 15%. Are you seeing a similar increase since the end of the third quarter in your populations? And given, I think in your commentary, you said that a fair number of the facilities are now above their minimum guarantees. is it reasonable to assume that we'll start to see maybe a little faster increase in revenue as these populations, if it's sustained, these populations have increased?

Yeah, Joe, thank you so much. I'm going to tag team a little bit with this question with Dave, primarily in the last piece. But on the first piece, yeah, just give you a little bit of trajectory of our numbers. So at the end of July, our total system ice population was about 8,200. That went to about 8,900 at the end of August. End of September, it got to 10,300. And then as of yesterday, we were 11,800. So it just gives you a sense of kind of the trend and the populations with ice within our system. And then I think part of your question was kind of the national number. So I think you and the other analysts reported that there really hasn't been a recent report on ICE populations nationwide until I think since late September, early October. But I have seen, and I think you saw this too, I have seen it reported in the press here in the last week that 39,000 was the number nationally for ICE detention population nationwide. I can't confirm that. That was, again, that was reported in the press, but I wouldn't be surprised if that's the number. But on the last piece, relative to guarantees, I'll let you touch on that, Dave.

Yeah, during the third quarter, there were facilities where we were below the guarantees. There was about 600 residents below the guarantees. So most of our facilities surpassed the guarantee levels during Q3. If you go back to pre-pandemic, they were almost always above the guarantee, so that's not surprising that they're getting back to those levels. So, you know, we reported in the second quarter, that's really when we started to see increases in detention populations because of the termination of May 11th. Still during the second quarter, more of our facilities had not reached those guaranteed levels. So as of the end of the third quarter, most of them have. We still have a few that have not, but they do bounce around and some can go above and back below. But I'd say for the most part going forward, most of our facilities will be recognizing incremental revenue to the extent we see increases in populations.

Okay. Thanks. Pardon me, thank you for that. And also, this has been reported, and just kind of get your guys' commentary or thoughts on it. You know, on the alternatives detention, one of the proposals from the House, as you mentioned, could be monitoring in some shape or form of everybody that's here that's not a citizen, some five to six million people, As we all know, your competitor has the ISAP contract today, which as that level is nowhere near that. If the house proposal were to come to fruition, you know, is this something that you guys could handle a significant portion of that? Or is it something that you would have to really ramp up hard on in order to start to help support that type of proposal?

Yeah, Joe, thank you for that question. And short answer is yes. We've been working in preparation for potential needs with this type of solution. And it's, you know, bottom line, it's been pretty fluid, to be honest with you. So we've obviously seen what the House proposed. We're obviously talking to ICE on a regular basis. You know, I talked about the RFI a little bit in my script. And it's pretty clear to us that ICE and leadership within the organization and also with the DHS are looking at, you know, creating solutions kind of above and beyond what they do today with the ISAT program that's in its current form that's currently performed by BI. So we're absolutely very capable. We've got a lot of expertise in our community division and our recovery monitoring solutions that are out of Dallas that we've had for multiple years. And we've been doing a lot of research, a lot of planning for, again, what potentially would be needed from ICE to serve this population that are currently not entertained. But anything I guess you'd want to add to that, Dave?

I think you're referring to the Release and Reporting Management, RFI, that was issued earlier this year. We did respond to that. It actually has three different parts of monitoring technology, participation, coordination services, and community services that I think Damon had mentioned in in his prepared remarks. And it's the participant coordination services where they mentioned 5.7 million people on the non-detained docket. So it's really early in the process. I think they're gathering information from the marketplace. And I'm sure based on the feedback that they get from all RFIs, they could move forward with an RFP. As you mentioned, Joe, it still does require funding. So a lot of moving parts still at this point on what the final outcome looks like. But yeah, we've been gearing up for several years now to prepare to handle an RFP like what they issued in the RFI.

Absolutely. Yeah, that's the bottom line. We're getting ourselves prepared and definitely got the capabilities.

Okay. Thank you for that. And then one last one for me, and I'll get back in queue. It was a nice win with the Hines County contract. More to come on that in the more opportunities in the pipeline?

Yeah, thank you for that question, Joe. I will tell you, probably in the last 90, 120 days, we've been seeing a lot of interest, noted in my script, not just with counties, but also with states. We've got a lot of kind of lines in the water talking to different partners, both existing and potentially new partners. So kind of stay tuned on that front. And again, going back to Hines County, that's a new partner for us. Looking forward to working with them. And I guess I'll just remind to all of our investors, especially some of our new investors. I mean, many of our agreements over the last 40 years start with a pretty small contract where we show our capabilities, we develop a solution for them. They see kind of how the program goes. We want to be able to demonstrate very positive outcomes. And then it's an opportunity where we could potentially grow the partnership based on that performance. So we're excited about starting this with Hines County and a couple other counties that are looking for some solutions. And, again, on the state side, seeing a lot of activity. We talked about Idaho last quarter. I said in my script, you know, we've been given the intent to award with Montana for capacity at our Swarov facility out in Arizona, and we've got active discussions with a couple other states. So, yeah, stay tuned. We've seen a lot of interest and activity both with federal, state, and local partners.

Great. Thanks for that. Nice quarter. I'll get back in queue. Thank you.

Yes, sir.

Thank you. One moment for our next question. Our next question comes from Kirk Ludkey with Imperial Capital. Your line is now open.

Hello, everyone. Thank you for the call.

Yes, sir. Morning, Kirk.

The RFI that you mentioned, which I guess could be an RFP at some point, that would Would that be in parallel with ISAP, or would that somehow replace ISAP?

It's hard to say at the moment. Again, I think ICE, as Dave alluded to, with this RFI, I think they're trying to figure out, one, what the mission would be, what the kind of outcomes they're looking for for a program like this. And so, when they put this out to market, they're looking from us and others to see what the capabilities are. And not only just our technical expertise and, you know, staffing and leadership and, you know, locations where we can perform, but also maybe anything innovative that we can bring that helps them mostly with the mission of that program. So, the short answer is, I think it's too early to tell, but it's clearly their They're doing a lot of homework on their side. They're getting a lot of feedback and information from the market on capabilities and innovative solutions. And, again, we think we've brought a lot to the table that gives them some things to kind of consider and ponder as they think about what the program will look like going forward. I guess anything you want to add to that, Dave?

Not really. I mean, timing is not definitive either. I think they'll take the RFI information back. If it turns into an RFP, it's probably – middle part of next year till late 2024, so more of a 25 opportunity.

I guess I will also say, and add to this also, Dave, I guess I will also say, I mean, the size that they're looking potentially for this program, I think, gives us the feeling that they're probably looking at multiple contractors to provide that. I think the need and ability to scale My guess would be as I was probably looking at it, okay, we'll probably need to look at multiple participants in this program to help support the overall need of the program itself.

Got it. That's interesting. Yeah, there's more than – I guess monitoring could be defined a lot of different ways, but it requires quite a bit of infrastructure, I would think, to do this. Other than you and your primary competitor, who would be qualified to do this?

Well, we're not privy to who submitted on the RFI, so I don't know if I can give you a very good answer on that front. But I'd say it's probably kind of the range of not only organizations like this, you know, publicly traded companies. There may be some out there that are maybe in the defense industry world that maybe have some technology or capabilities that are similar to this requirement or these requirements, I should say. And I'm sure there's probably either some privately held or nonprofits also that are participating. So probably all of those probably show some interest.

There's a lot of different services, too, that could be included. So it certainly makes sense that it could be multiple vendors providing the ultimate services.

Got it. Thank you. And then one other topic. You mentioned that you're in discussions with a number of states. Can you share how many beds are in play?

It'd probably be hard to give a definitive number, but it's meaningful. I mean, we've got, again, we've talked about Montana. We talked about Idaho. Those were a couple hundred beds each. Hines County, a couple hundred beds each. So I'd say that's probably a good estimate. When we start a conversation with a new partner, it's usually in the range of, you know, 200 to 400 beds. Again, we feel like that's a good way to kind of get the relationship started, you know, get some time together, show some positive outcomes, and then, you know, based on kind of their long-term goals, see if we can grow the partnership.

All right. Thank you very much. Please, one moment as we get our next question. Our next question comes from M. Marin with SACS. Your line is now open.

Thank you. So you, you have really moved along in this debt reduction strategy, capital allocation policies, and just generally strengthening the balance sheet. When you first announced this strategy, I think one component was to include asset sales in order to increase the cash you had to repay debt. and you were able to sell a good number of assets. So now when you look through your real estate portfolio and you see some of the perhaps older facilities or those that are underutilized, are there any specific assets that you look at now that you think might be right for divestiture at this point?

Yeah, great question. And the short answer is that you know, maybe five, ten years ago, that wasn't necessarily a thought for each individual asset, especially ones that are underutilized, but we really think about that for every asset that we've got in the portfolio that are, you know, partially or underutilized or currently vacant. So, and then with that, we do a market assessment on potentially, you know, what would the market bear relative to a transaction. So, nothing near term to really kind of point to or indicate that we're close on a transaction, but I guess the short answer is any facilities that we've got kind of underutilized, especially if it's been long-term, we're considering that. But I guess anything you'd add to that, Dave?

Yeah, in the short term, I guess there are some residential reentry centers, both in our property segment as well as in our community segment. They're not large assets. They're several million dollars per asset. The larger prison facilities, those are longer conversations. Obviously more complex with larger dollars associated with the government coming up with the dollars to purchase those facilities. So those are much longer conversations. I wouldn't say, I'd never say never, but those are lower likelihood. But I'd say certainly in the community and properties portfolio where we've got residential reentry centers, we could sell one or more of those assets. But again, those would not be significant proceeds.

Okay. Thank you.

Thank you.

Thank you. One moment for our next question. Our next question comes from the line of Brian Violino with Wedbush Securities. Your line is now open.

Hey, thanks for taking my questions, guys. Just wanted to clarify in the guidance, you mentioned sustained higher federal and state populations being an underlying assumption. Does that, for ICE, I guess for ICE specifically, does that assume that they're sustained at the higher levels like the average level seen in 3Q, or are you assuming an incremental increase in the average ice occupancy in the fourth quarter?

I would say modest. I mean, the average population during Q3, we would say the guidance would be slightly higher than the average in Q3. So, you know, higher toward the end of the Q3. You know, as you looked at sequential months throughout Q3, they continue to increase. And as Damon mentioned, they continue to increase post-September 30th as well into the fourth quarter. So our guidance reflects, it's a range, but it does reflect an increase in the average daily population from Q3.

Got it. Thanks. And then in the past, you've talked about the NOI margin in the safety community segment turning back towards pre-pandemic levels of around 25% over time. And I I think it was around 21% this quarter, I guess. Could you just walk through sort of the timeline, you know, trending back towards that level? What kind of occupancy and expense trends would need to happen to get there?

Yeah, I'd say pre-pandemic occupancy was around 80%. So to get back to 25% pre-pandemic margins, we'd have to get toward that occupancy level. We're not projecting that. I mean, we obviously don't have 2024 guidance out yet. We'll issue that in February when we release our fourth quarter results. But I wouldn't expect us to be getting to 80% occupancy throughout 2024 either. But certainly incremental steps. If we see sequential growth, we could see an increase in that margin percentage, perhaps not as high as the 25% by the end of 24. I wouldn't rule it out, but probably not likely we'll get to 25% margins by the end of 24. But again, we can speak more to that when we release our 2024 guidance in February. So in the short term, I'd say modest increases perhaps in that margin, assuming we continue to see increases in occupancy like I just mentioned. And we do continue to see, again, sequential quarters beginning probably with the second quarter of 2022 and improvement in the hiring market. And then a last point I'd probably say is You know, our La Palma facility, we continue to have a lot of temporary staff there. Every day that goes by, we're hiring more and more permanent staff, but we are experiencing elevated operating expense levels at the La Palma facility while we have the temporary staff there. So that will continue to normalize over time and also contribute to an increase in our margins.

Great, thanks. And one more quick one, if I could. When Title 42 was first announced, you know, talked about going away back in May. There was some talk about, you know, Title VIII coming back into play and that repeat offenders could be referred to the DOJ and be detained under the U.S. Marshals. It sounds like Marshalls populations have been pretty stable, but, you know, have you seen any sort of uptick in these cases now that Title 42 has been gone for a few months?

We have not. We have not. Yeah, and I know that was discussed and reported, you know, quite a bit during the summer, but at the moment, to your point, yeah, Marshall populations have both in our system and kind of the national number has been pretty stable.

Got it. Okay. Thanks very much. Yes, sir. Thank you, Brian.

One moment for our next question. Our next question comes from Jordan Hemmowitz with Philadelphia Financial Management of San Francisco. Thanks, guys.

Our first question is, what was your occupancy in the month of October?

I don't have that at my fingertips. I would guess it was slightly higher than the 72% we reported for the third quarter.

Okay. Second question is, is it fair to assume that since there's been no proposal yet, there's nothing in your numbers or in any way going forward that you're projecting for the potential large expansion of the electronic monitoring business, but you're really not in there?

Yeah, so it says to that. Yeah, exactly. Right. So it hasn't been finalized from a funding perspective. And obviously, I think that'll be tied into potentially the supplemental or the larger funding bill for the rest of fiscal year. So, my guess is that probably is doing 2 things. 1 again, they're probably survey and the market capabilities based on what their needs were would be with the mission. But second, you know, what kind of direction they get from a funding from Congress. So I think at the moment it's probably a little bit of what you can see on our side while they're getting their plan together and also see what funding to get support-wise from Congress.

Okay. And my last question is, you've expanded your debt facilities quite a bit. And if you don't want to give names, that's fine. But you know, not that many years ago, like you couldn't find anybody at any rate to lend you money. Can you talk about the number of banks or facilities without mentioning that are now interested in your debt facility or interested in doing business with you?

Yeah, great questions, Dave. I'll take that one. Yeah, well, that was one of the reasons we actually expanded the size of the credit facility, which we just obtained last year before expanding it in October. We have 11 banks in our bank credit facility, and we did have some additional banks come to us between the last time we did the facility, which was April or May of last year, through now that wanted to get into our facility. Again, they're not the big bulge bracket banks, but more regional banks. And so it's nice to see banks actually approaching us, interested in getting into our bank syndicate. They look at the credit. The credit's rock solid, and we can provide a certain element of businesses and deposits for them. So it's good business for them as well. We just felt like we reached out to the banks, asked them if they'd be interested in amending and extending the facility. So getting a five-year deal was longer than the four-year deal we got last year. And they were very receptive. They're very good banking partners. I speak with them pretty regularly. And so when they said, yeah, they would be supportive of an extension, we just opened it up and expanded it by $50 million and pushed the maturity out five years. So, yeah, different environment, I'd say, today than it was several years ago. Yeah, great question.

And because of that increased flexibility, is there any covenants in that that should you want to give you more flexibility on buybacks than before as well?

There are no restrictions under the credit facility other than our obvious covenants when we're way inside of our total leverage covenants on how much stock we could buy back. The only restrictions we have on buying back shares is under our 8.25% unsecured notes. There's a restricted payment basket, but it is plenty, and it would not be a restriction on the amount we could buy back. Our internal leverage profile of 2.25% to 2.75% will be the governor on share buybacks.

Okay, thank you.

Thank you. Yes, sir.

One moment for our last question. Our final question comes from Greg Gibbous with Northland Securities. Your line is open.

Great. Hey, guys. Thanks for taking the questions. On the assumptions related to the ice population and guidance, I know you said definitely higher than where we were at the end of Q3. I believe it was like 11,800 of a nice population as of yesterday that you had. Is that kind of the assumption that holds through your end or would be expecting increases? Just curious what you kind of implied in guidance there.

Well, if that's you're getting at a level of precision, that's probably not, you know, our. Guidance is a range, so I would say it's approximately that level, but if they're up slightly, they'll be toward the high end of that range, and if they're down slightly, they'll be toward the low end of that range. But, you know, I think given the range that we have out there, we're pretty comfortable. Here we are beginning of November, have somewhat decent visibility on the rest of November and December, and certainly know what October was. So I feel that it's, you know, approximately equal to, I'd say, that number you just mentioned.

Okay, fair enough. And then, you know, regarding the California facility, you know, I think it was up March 31st of 2024, about $25 million of the contributor. You know, any visibility on what will happen with that contract or that facility and, you know, when we might get a better picture?

Yeah, it's a great question. It's the Damon again. And our team is actively working on it. And I have nothing to announce today, but I will tell you that, you know, we've had good discussions today. with multiple jurisdictions on the path going forward. So hopefully as we get to, you know, February, I can give you another update on that front. But there definitely is interest by a couple different jurisdictions. Okay, great.

And I guess just last one for me, more of a broad kind of question. But, you know, really great to see that leverage reduction continue into the quarter. And, you know, as we get close to that targeted range, How are you thinking about maybe capital allocation once you hit that range, once you're at like 2.5 or something like that? How would it change?

Yeah, good questions, Dave. So we expect to continue to both buy back stock and pay down debt at the same time. We're not applying a formula to that allocation. We'll obviously react to prospects in the business, share price, things like that. As we just mentioned, there's really no limitations under our debt agreements. We're obviously a conservative management team and prudent with our leverage ratio, and it is a target, two and a quarter and two and three quarters. We're not there yet. Now, we've made significant progress and are just a hair above it, so we'd expect to get there in the short term, but we'll allocate our free cash flow both toward debt reduction and stock buybacks.

Okay, thanks. Appreciate it.

Thank you.

Thank you. This concludes the question and answer session. I would now like to turn it back to Damon Heinecker for closing remarks.

All right, thank you so very much, and thank you all for joining our call today. We appreciate giving you an opportunity to ask questions and give you all an update, and look forward to our call coming up in February of next year. Have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.