Geo Group Inc (The) REIT

Good day, and welcome to the GEO Group first quarter 2026 earnings call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star, then one on a touch-tone phone. To withdraw your question, please press star, and then two. Please note, this event is being recorded. I would now like to turn the conference over to Pablo Paez, Executive Vice President, Corporate Relations. Please go ahead.

Thank you, Operator. Good morning, everyone, and thank you for joining us for today's discussion of the GEO Group's first quarter 2026 earnings results. This morning, we will discuss our first quarter results as well as our outlook. We will conclude the call with a question and answer session. This conference call is also being webcast live on our investor website at investors.geogroup.com. Today, we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and the supplemental disclosure that we issued this morning. Additionally, much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the safe harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q, and 8-K reports. With that, please allow me to turn this call over to our Chairman, CEO, and Founder, George Zolle. George?

Thank you, Pablo. Good morning, everyone, and thank you for joining us on this call. I will conduct the entire conference call due to Shane being out for the next couple of weeks. Our diverse five business units delivered strong financial and operational performance during the first quarter of 2026. Our better than expected performance reflects significant revenue growth from the contracts that we entered into throughout 2025. As we have previously discussed in 2025, we were awarded new or expanded contracts that represent up to approximately $520 million in new incremental annual revenues, which represents the largest amount of new business we have won in a single year in our company's history. In our secure services segment, we entered into new contracts to house ICE detainees at four facilities totaling approximately 6,000 beds, including three previously idle company-owned facilities in New Jersey, Michigan, Georgia, and a management services contract in Florida. We also reactivated our company-owned Atalanta Ice Processing Center in California, which was already under contract but had been severely underutilized due to a long-standing COVID-related court case. These facility activations represent annual revenues of approximately $300 million and increased our total beds under contract with ICE to approximately 26,000 beds. The census across our ice facilities reached a high of 24,000 early this year, but has since declined to approximately 21,000, but still representing more than one-third of the national ice population of approximately 58,000. We believe that this recent decline is likely due to several factors, including the recent transition in leadership at the Department of Homeland Security and the 82-day partial government shutdown of DHS resulting in a lapse in annual appropriations for ICE. During this lapse in annual appropriations, we believe ICE detention operations have been supported with funding from the one big, beautiful bill. As a reminder, under the Budget Reconciliation Bill, ICE received approximately $45 billion for detention available through September 30, 2029, and this funding is not impacted by the partial government shutdown. Congress has approved legislation that reopened most of DHS, excluding ICE and Customs and Border Protection, through an annual appropriations bill, while proposing legislation through reconciliation for $70 billion to fund ICE and CPB through the next three and a half years. Consistent with prior shutdowns, the services rendered under our contracts with ICE have continued uninterrupted as they are considered essential public safety services. However, the timing of payments and collections has been somewhat delayed, requiring us to carefully manage our liquidity and working capital needs. With the expansion of our revolving credit facility by $100 million earlier this year, we believe we have substantial liquidity. Our first quarter 2026 results also reflected significant expansion in our secure transportation services on behalf of both ICE and the U.S. Marshals Service. In 2025, we entered into a new or amended contracts to expand secure ground transportation services at four existing ICE facilities and at our three newly activated ICE facilities. And the support services that we provide under our ICE air transportation subcontract have continued to steadily increase. In addition, in 2025, we signed a new five-year contract with the U.S. Marshals Service covering 26 federal judicial districts and spanning 14 states. Overall, these new and expanded transportation contracts are valued at approximately $60 million in incremental annual revenue. Importantly, in 2025, we also secured a new two-year contract for the ISAP 5 program. ISAP is the only ICE program currently in place to provide electronic monitoring and case management services for individuals on the non-detained docket. The program relies on several forms of monitoring, including GPS, ankle bracelets, or wrist-worn devices that provide real-time tracking, as well as the SmartLink phone app, which relies on facial recognition, voice ID, and GPS to confirm a person's location during predetermined check-ins. ISEP counts remained relatively stable during the first quarter of 2026 at approximately 180,000 to 181,000 participants. Consistent with the trend we highlighted last quarter, we have continued to see steady technology shift to more intensive and higher-priced monitoring devices such as ankle monitors. The number of ISAT participants on GPS ankle monitors has increased to more than 48,000 currently from 17,000 in early 2025. Correspondingly, the number of ISAT participants on the SmartLink mobile app has declined to approximately 131,000 today from approximately 159,000 in early 2025. We also continue to experience a steady increase in the number of ISAT participants assigned to case management services, which involve staff interaction and monitoring for approximately 111,000 individuals currently. If this trend continues, the technology and case management mix shift would continue to increase the revenues and earnings generated under the ISAP contract, even if overall volume remains constant. Thus, we continue to be optimistic about the importance and growth potential of the ISAP 5 contract, and we believe that it is well positioned to scale up to higher overall accounts. In the fourth quarter, we were also awarded a new two-year contract by ICE for the provision of skip tracing services valued at up to $60 million in revenues per year. We began providing skip tracing services under this new two-year contract in the month of March and are optimistic that the contract can ramp up to higher volumes later this year. Finally, at the state level, we rewarded two new management-only contracts in 2025 from the Florida Department of Corrections valued at approximately $100 million in combined annual revenues. They include the 1,884-bed Graceville facility and the 985-bed Bay facility and are scheduled to transition to geo-management on July 1, 2026. Moving to our updated guidance, we have increased our outlook for 2026 to reflect the strength of our first quarter results, and we believe there are still several sources of potential upside that are not currently included in our guidance. On the revenue side, sources of potential upside include additional growth in our secure services segment from the reactivation of additional idle facilities and or higher overall populations across our active facilities. Additional volume increases and or accelerated technology service mix in our ISEP 5 contract. additional revenue from higher utilization of our skip tracing contract and additional growth potential in our secure transportation segment. On the expense side, our guidance assumes more moderate contribution from labor savings in subsequent quarters. Moving to our outlook for new business opportunities in 2026, we will continue to be in active discussions with ICE and the U.S. Marshals Service regarding the potential reactivation of additional EIDL facilities. It is our understanding that the present ICE detention census is approximately 58,000 distributed over 225 separate locations, which are primarily short-term jail facilities. We believe the federal government is continuing to purchase... Pursue the priority of increasing immigration detention capacity to approximately 100,000 beds or more and consolidate to fewer, larger facilities. As a 40-year partner to ICE, we expect to be part of the solution. We have approximately 6,000 idle beds at six company-owned facilities, which are primarily former U.S. Bureau of Prisons facilities, and therefore high security, making them ideally suited for the current needs of the federal government. At full capacity, these 6,000 beds could generate more than $300 million in combined incremental revenues. Before moving on to a more detailed review of the first quarter results, I'd like to highlight our continued progress towards strengthening our capital structure and enhancing shareholder value. During the first quarter, we purchased approximately 3.6 million shares for approximately $50 million, bringing the total number of shares repurchased to 8.5 million for approximately $141 million. Our current total outstanding share count is approximately 133.7 million shares, and we have approximately... $359 million, still available under our $500 million share repurchase authorization. We believe our stock continues to trade at historically low multiple despite the intrinsic value of our assets and our significant growth opportunities. And we recognize that the imbalance creates a unique opportunity to enhance value for our shareholders through share repurchases. Moving to a more detailed review of our financial results, revenues for the first quarter of 2026 increased to approximately $705.2 million, up from approximately $604.6 million in the prior year's first quarter, reflecting a 17% increase. For the first quarter of 2026, we reported net income attributable to geo-operations of approximately $38.3 million, or $0.29 per diluted share. This compares to net income attributable to geo-operations of approximately $1. $19.6 million, or 14 cents per diluted share, for the first quarter of 2025, reflecting a 96% increase this year. Our adjusted EBITDA for the first quarter of 2026 increased to approximately $131.4 million from approximately $99.8 million in the prior year's first quarter, reflecting a 32% increase. Looking at revenue trends, our owned and leased Secure Services revenues increased by approximately $70 million, or 23% increase compared to the prior year's first quarter. This increase was driven by the activation of our three company-owned facilities under new contracts with ICE, which was offset by revenue loss from the sale of the Lawton, Oklahoma facility and the depopulation of Lee County, New Mexico facility. Quarterly revenues for our managed-only contracts increased by approximately $33 million, or 22%, from the prior first year's quarter. This increase was driven by the joint venture agreement for the management of the North Florida ICE detention facility, as well as certain transportation revenue increases that are reported in this segment. Quarterly revenues for our reentry services increased by approximately 5%, offset by a 5% decline in non-residential services revenues compared to the prior year's first quarter. Finally, first quarter 2026 revenues for our electronic monitoring and supervision services decreased by approximately 4% from the prior year's first quarter. This decrease was driven by the reduced pricing for our ISAF 5 contract, which was offset by favorable technology and case management mix shift and some modest skip tracing revenues. Turning to the expenses during the first quarter of 2026, our operating expenses increased by approximately 15% as a result of the activation of our new ICE facility contracts and increased occupancy compared to the prior year's first quarter. Operating expenses were favorably impacted by lower than expected labor costs compared to our prior guidance for the first quarter of 2026. Our general administrative expenses for the first quarter of 2026 declined to 8.6% of revenue as compared to 9.6% of revenue in the prior year's first quarter. Our first quarter of 2026 results reflect a year-over-year decrease in net interest expense of approximately $4 million as a result of the reduction of our total net debt. Our effective tax rate for the first quarter of 2026 was approximately 28.5%. Moving to our outlook, we have increased our guidance for the full year of 2026 and issued guidance for the second quarter of 2026. We expect full year 2026 GAAP net income to be $153 million to $166 million, or a range of $1.15 to $1.05. and 25 cents per diluted share on annual revenues of 2.95 billion to 3.1 billion dollars based on effective tax rate of approximately 30 percent inclusive of known discrete items. We expect full Year 2026 adjusted EBITDA to be in the range of $525 million to $545 million. We expect total capital expenditures for the full year of 2026 to be between $137.5 million and $162.5 million. For the second quarter of 2026, we expect GAAP net income to be $33 million to $39 million, or a range of $0.25 to $0.29 per diluted share, on a quarterly revenues of $715 million to $725 million. We expect second quarter 2026 adjusted EBITDA to be between $130 million and $135 million. Moving to our balance sheet, we closed the first quarter of 2026 with approximately $80 million in cash on hand and approximately $1.61 billion in total debt. At the end of the first quarter of 2026, our total net debt was approximately $1.53 billion, and our total net leverage was below 3.2 times adjusted EBITDA. With the expansion of our revolving credit facility by $100 million, which we announced in January, we believe we have substantial liquidity to support our diverse capital needs as we manage through the current partial government shutdown. In closing, we are very pleased with our first quarter results and improved full year outlooks. Our strong performance has been driven by the new growth opportunities we captured in 2025 and are normalizing in 2026. Last year was the most successful period for new business wins in our company's history, and we expect 2026 to be a very active year as well. We have therefore believed we have upside potential across our diversified business segments. We have approximately 6,000 idle high-security beds that remain available, which could generate in excess of $300 million in annual revenues at full occupancy. The continued shift in technology and case management mix and potential increases in counts under our ISAB 5 contract could also provide additional upside through 2026. We are also well positioned to continue to expand our delivery of secure ground and air transportation services for ICE and the U.S. Marshals beyond the significant growth we have already experienced. Finally, as we discussed last quarter, ICE has purchased 11 commercial warehouses that we that were to be retrofitted as detention facility while contracting with private sector companies for operations. These purchase were part of a plan to acquire 24 warehouses and retrofit them as detention facilities using funds from the $45 billion provided for detention in the one big beautiful bill. At this time, the warehouse project has been paused, and DHS is evaluating how to proceed with this initiative to increase and consolidate detention capacity. It has also been widely reported that ICE is considering the purchase of approximately 10 privately-owned turnkey ICE processing centers. ICE uses approximately 40 existing detention sites nationwide that are owned and operated by private contractors. CoreCivic owns and operates approximately 15 detention facilities, while GEO owns and operates 23 ICE detention facilities. I can respectfully acknowledge that we have been in discussions with ICE regarding the potential sale of multiple facilities subject to mutual agreement on price and our continued management of those facilities under long-term support services contracts. We consider ourselves primarily a support services operator and will place particular importance on our ability to continue our support services at any facility sold to ICE. There will also be a need to renegotiate select contracts so as to eliminate the ownership costs such as depreciation and property taxes embedded in our present contracts in the event of ICE ownership. At this time, there is no definitive agreement in place with ICE and no precise timeline for the closing of any such transactions. And, of course, we can give no assurances that these transactions will take place at all. But if select facilities are sold to ICE, GEO would use the proceeds to reduce debt and continue stock repurchase as well as other corporate purposes. The potential sale of multiple facilities to ICE could represent a significant liquidity and shareholder value enhancing event for our company. While the exact timing of government actions is always difficult to estimate, we remain focused on pursuing new growth opportunities and allocating capital to enhance our long-term value for our shareholders. Given the intrinsic value of our assets, including 50,000 owned beds at 70 facilities and our current and expected future growth, we believe that our stock is significantly undervalued and offers a very attractive investment opportunity. That completes my remarks, and I would be glad to take on any questions from our audience. Thank you.