CoreCivic (NYSE:CXW), Inc. reported a 4% increase in total revenue to $483.7 million in its Q3 2023 earnings call, despite the expiration of certain contracts. The company's normalized funds from operations (FFO) saw a significant 21% rise to $40.5 million, driven by increased state and federal populations and lower interest expenses. CoreCivic also reported increased occupancy in its Safety and Community segments, primarily due to higher detention populations from government partners such as ICE.
Key takeaways from the call include:
- CoreCivic signed new management contracts and contract extensions with various government entities.
- The company updated its 2023 full-year financial guidance, raising its normalized FFO per share forecast to a range of $1.40 to $1.46 and its adjusted funds for operations (AFFO) per share to a range of $1.34 to $1.40.
- The company completed an amendment and extension of their bank credit facility, increasing the total size from $350 million to $400 million.
- CoreCivic repurchased 9.2 million shares of stock and reduced interest expenses by $10.1 million.
- The company is considering divesting underutilized facilities and is evaluating each asset in their portfolio for potential divestiture.
The company remains optimistic about the macro environment for its federal, state, and local business, especially in relation to border security and immigration. They expressed potential expansion of services to include alternative detention and compliance programs. The company is also preparing its 2024 budget and will issue financial guidance for that year in February 2024.
CoreCivic (NYSE:CXW) has also reduced debt and increased liquidity through a new bank credit facility and plans to continue its capital allocation strategy, which includes potential share repurchases and debt reduction. The company has no debt maturities until April 2026.
The company is actively working on the California facility contract and has had positive discussions with multiple jurisdictions. Once the targeted leverage range is reached, the company plans to continue buying back stock and paying down debt. The company's CEO concluded the call by stating that they are focused on managing leverage and have not included additional share repurchases in their forecast.
InvestingPro Insights
The InvestingPro data and tips provide valuable insights into CoreCivic's (NYSE:CXW) performance and potential future direction. The company's market cap stands at a healthy $1.6 billion as of Q2 2023, with a P/E ratio of 23.57, indicating a fairly valued stock. The price-to-book ratio in the same period is 1.11, suggesting that the market accurately reflects the company's book value. The company has seen a revenue growth of 0.23% over the last twelve months as of Q2 2023.
InvestingPro Tips highlight that the management has been aggressively buying back shares, which aligns with CoreCivic's reported repurchase of 9.2 million shares of stock. This could be a strong indicator of the management's confidence in the company's future. The company's strong earnings should also allow for the continuation of dividend payments, which is a positive sign for potential investors.
Moreover, CoreCivic's stock is currently trading near its 52-week high, indicating a strong return over the last six months. This is echoed by InvestingPro's data, which shows a 44.61% total return over the same period.
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Full transcript - CXW Q3 2023:
Operator: Good day and thank you for standing by. Welcome to the Q3 2023 CoreCivic, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. [Operator Instructions] 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 Dresner Corporate Services. Please go ahead.
David Gutierrez: Thanks, operator. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. 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 aftermarket 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 Hininger.
Damon Hininger: 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, David Garfinkle, 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 attained 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 expiration of our final prison contract with the Federal Bureau of Prisons at our previously owned McRae Correctional Facility in November of 2022 and the expiration of our lease agreement with the Oklahoma Department of Corrections at our North Fork Correctional Facility on June 30, 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 McRae 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 rate 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 officially 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, occupancy 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, high detention populations within our facilities have increased 4,729 or 84%, which we believe was possible at least in part because of the investments in 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 clear the minimum compensated bed total associated with fixed payment levels, which largely occurred during the third quarter. The increase in occupancy in our Safety segment also resulted from higher occupancy 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 state 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 production 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 Hinds 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 Marshals 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, occupancy in our community segment, which comprises of 23 residential reentry facilities, increased from 57.5% to 62.8% in the Q3 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 occupancy 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 occupancy 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 up 95% over the previous 5 years. During the third quarter, we executed a 5 year extension of the contract with the United States Marshals 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 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 facility with government employees. Affectively converting this facility from one in which we own and operate in our safety segment to one that we simply lease 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 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 noncitizens 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, in 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 a $1.40 to a $1.46 an adjusted funds for operations or AFFO per share to a range of a $1.34 to a $1.40. These represent increases of $0.02 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 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 31, 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 30, 2023, was at 2.8x, just marginally higher than our long term targeted range of 2.25x to 2.75x. 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. 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 purchase 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 and 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 2022 financial guidance and further details about our new bank credit facility and capital allocation strategy. Dave?
David Garfinkle: Thank you, Damon, and good morning, everyone. In the third quarter of 2023, we reported GAAP net income of $0.12 per share compared with $0.58 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 $0.53 per share, including a $77.5 million gain on the sale of our McRae Correctional Facility. Adjusting for special items, Adjusted EPS during the third quarter of 2023 was $0.14 compared with $0.08 per share in the prior year quarter, an increase of $0.06 per share or 75%. Normalized FFO per share was $0.35 during the third quarter of 2023 compared with $0.29 in the prior year quarter, an increase of $0.06 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 and our previously owned and operated McRae Correctional Facility and the expiration of our lease with the Oklahoma Department of Corrections June 30, 2023, and our North Fork Correctional Facility. These two expirations accounted for a reduction of $0.03 per share from the prior year quarter. During the second quarter, we began to an increase in the number of residents detained by ICE as a result of the expiration of Title 42 on May 11, 2023, a policy that denied entry at the U.S. border to asylum seekers and anyone crossing the border without proper documentation or authority in an 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 incremental revenue and compensated occupancy, because increases can occur if 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 year quarter. AFFO, which we consider a proxy for our cash available for capital allocation decisions increased to $42.3 million, or $0.37 per share in the third quarter of 2023 from $29.9 million or $0.25 per share in the prior year quarter, an increase of $0.12 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 with the BOP at the McRae 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% in the third quarter of 2022 to 21.3% 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 2.8x using the trailing 12 months ended September 30, 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 9 months ended September 30, 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 at 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 and repurchasing additional shares in future quarters, while further progressing toward our targeted leverage of 2.25x to 2.75x. 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 8.25% 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 and 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 $0.54 to $0.60, up from our previous guidance of $0.52 to $0.59, 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 $0.01 beat in Q3 through to the full year, Higher Federal and State population is expected to be sustained throughout the first 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 that would be more impactful in 2024, we expect AFFO to range from $150 million 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 million to $69 million in capital expenditures during 2023, including $61 million 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 2.25x to 2.75x 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.
Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Joe Gomes with NOBLE Capital.
Joe Gomes: Really nice, solid sequential growth in secured services revenues. Some of that's from population increases. I think some of that's some increases in per diem. Could you kind of pars out relative contribution for that revenue increase between the population increases and per diem increases?
Damon Hininger: 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 1st, and that's typically when we do receive, per diem increases. So it was a good year. We reported on that last quarter when we had mentioned a lot of our state partners recognizing the need to help fund wage increases for our staff. So, most of the increases, I'd say, it was really attributable to population increases though.
Joe Gomes: 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 third quarter in your population? 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?
Damon Hininger: Yes. Joe, thank you so much. I'm going to tag team a little bit with this question with Dave, primarily on the last piece. But, on the first piece, yes, just give you a little bit of trajectory of our numbers. So at the end of July, our total system ICE population was about 80 to 100. That went to about 8,900 at the end of August. End of September, we've 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 in the populations within our system. And then I think part of your question was, kind of the national numbers. So I think you and the other analysts reported that there really hasn't been a recent report on ICE populations nationwide till, 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, I can't confirm that. Again, that was reported in the press, but 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.
David Gutierrez: Yes. During the third quarter, there were, for facilities where we were below the guarantees, there's about 600, residents below the guarantees. So most of our facilities surpassed the guaranteed 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, 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. But still during the second quarter more of our facilities had not reached those guaranteed levels. So as of the end of 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.
Joe Gomes: And also this has been reported and just kind of get your guys' commentary or thoughts on it. On the alternative 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 5 million to 6 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, 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?
Damon Hininger: Short answer is yes. We've been working in preparation for potential needs with this type of solution. And 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. 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 within DHS are looking at creating solutions kind of above and beyond what they do today with the ISAP 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 vision 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 that 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?
David Garfinkle: I think you're referring to the release and reporting management or FII that was issued earlier this year. We did respond to that. It actually at three different parts, the monitoring technology, participation coordination services, and community services, I think Damon had mentioned 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 RFI's, they could move forward with 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, we've been gearing up for several years now to compare to handle, an RFP like what they issued in the RFI.
Damon Hininger: Absolutely. That's the bottom-line. We're getting ourselves prepared and definitely got the capabilities.
Joe Gomes: And then, one last one for me, and I'll get back in queue. It was a nice, win with the Hinds County contract, more to come on that in the more opportunities in the pipeline?
Damon Hininger: Yes. Thank you for the question, Joe. I would tell you, probably in the last 90, 120 days, we've been seeing a lot of interest, I've noted in my script, not just with counties, but also with the state. So we've got a lot 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 the Hinds 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 often 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 Hinds County and, pitch 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 in last quarter. I said in my script, we've been given the intent to award with Montana for capacity at our Saguaro facility now out in Arizona. And we've got active discussions with a couple other states. So, yes, stay tuned. We've seen a lot of interest and activity, both with federal, state, and local partners.
Operator: Our next question comes from Kirk Ludtke with Imperial Capital.
Kirk Ludtke: The RFI that you mentioned, which I guess could be an RFP at some point, would that be in parallel with ISAP or would that somehow replace ISAP?
Damon Hininger: 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 outcomes they're looking for a program like this. And so when they put this out the market, they're looking from us and others to see what the capabilities are. And not only just our technical expertise and staffing, the leadership, and 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 there. 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 looks like going forward? If I get anything you want to add to that, Dave?
David Gutierrez: 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 to late 2024. So, more of a '25 opportunity.
Damon Hininger: I guess, I will also say, and add to this delta, Dave, I guess I'll also say, I mean, the size that they're looking potentially for this program, I think gives us a feeling that they're probably looking at multiple, contractors provide that. I think the need and the ability to scale, my guess would be, as I'd probably look 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.
Kirk Ludtke: 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. Like other than you and your primary competitor, who would be qualified to do this?
Damon Hininger: Well, we're not privy to who's what submitted, 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, 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 nonprofit also that are participating. So, probably all those probably show some interest.
David Garfinkle: 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.
Kirk Ludtke: And then, one other topic mentioned that you're in discussions with a number of states. Can you share how many beds are in play?
Damon Hininger: 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 of 100 beds each, the Hinds County couple of 100 beds. So I'd say that's probably a good estimate. Probably, when we start a conversation bed with a new partner, it's usually in the range of 200 to 400 beds. Again, we feel like that's good way to kind of get the relationship started get some time together, show some positive outcomes, and then based on kind of their long-term goals, see if we can grow the partnership.
Operator: Our next question comes from M. Marin with Zacks.
M. Marin: So 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?
Damon Hininger: And the short answer is that maybe 5, 10 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 partially or underutilized or currently vacant. And then with that, we do a market assessment on potentially, what would the market bear relative to 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 facility that we've got kind of underutilized, especially if it's been long-term, we're considering that. But I guess, anything you could add to that, Dave?
David Garfinkle: Yes. 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, we've got residential reentry centers. We could sell, one or more of those assets. But again, those would not be significant proceeds.
Operator: Our next question comes from the line of Brian Violino with Wedbush Securities.
Brian Violino: 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?
David Garfinkle: 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, higher toward the end of the Q3 was, as you looked at sequential months throughout Q3, they continued to increase. And as Damon mentioned, they continued 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.
Brian Violino: And then, in the past, you talked about the NOI margin in the Safety and Community segment turning back towards pre-pandemic levels of around 25% over time. I think it was around 21% this quarter. I guess, could you just walk through sort of the time line, trending back towards that level? What kind of occupancy expense trends would need to happen to get there?
David Garfinkle: Yes. 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 haven't or 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, as you know, sequential, 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 is 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, 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.
Brian Violino: And one more quick one if I could. When Title 42 was first talked about going away back in May, there was some talk about Title 8 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 Marshals population has been pretty stable, but have you seen any sort of uptick in these cases now that Title 42 has been gone for a few months?
Damon Hininger: We have not. And I know that was discussed and reported, quite a bit during the summer. But at the moment, to your point, yes, Marshal populations, both in our system and kind of the national numbers, have been pretty stable.
Operator: Our next question comes from Jordan Hymowitz with Philadelphia Financial Management of San Francisco.
Jordan Hymowitz: Our first question is, what was your occupancy in the month of October?
David Garfinkle: I don't have that, at my fingertips, I would guess it was slightly higher than the 72% we reported for the third quarter.
Jordan Hymowitz: Second question is, is it fair to assume that since there's been no proposal, if 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?
David Garfinkle: Yes. So since that, yes, exactly right. So it hasn't, been finalized from a funding perspective. And obviously, I think that'll all be tied into potentially in the supplemental or the larger funding bill for the rest of fiscal year. So my guess is that probably ICE is doing two things. One, again, they're probably surveying the market on capabilities based on what their needs were would be with the mission. But second, what kind of direction they get from a funding, from Congress. So it's a little, I think at the moment, it's probably a little bit we can see on our side while they get again, their plan together and also see what funding to get, support wise from Congress.
Jordan Hymowitz: 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 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?
Damon Hininger: Dave, I'll take that one. Well, that was one of the reasons we actually expanded the size of the credit facility, which we just obtain 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 certain element of businesses and deposits for them. So it's good business for them as well. So, we just felt like it was, we reached out to the banks, asked them if they'd be interested in amending and extending the facility. So getting a 5-year deal was longer than the 4-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, yes, they would be supportive of an extension, we just opened it up and expanded it by 50 million and pushed the maturity out 5 years. So, yes, different environment, I'd say, today than it was several years ago.
Jordan Hymowitz: And in terms of that increased flexibility, is there any covenants in that that should you want give you more flexibility on buybacks than before as well?
David Garfinkle: 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, 2.75 will be the governor on share buybacks.
Operator: Our final question comes from Greg Gibas with Northland Securities.
Greg Gibas: First, I have a follow-up on the assumptions related to the ICE population in guidance. I know you said definitely higher than where we were at the end of Q3, but, I believe it was like 11,800 of the ICE population as of yesterday that you had. Is that kind of the assumption that it holds through year-end? Or would we that increases. Just curious what you kind of implied in guidance there?
Damon Hininger: Well, if that's, you're getting at a level of precision that's probably not, 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 that range, and if they're down slightly, they'll be toward the low end of that range. But 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 feel that it's approximately equal to, I'd say, that number you just mentioned.
Greg Gibas: And then regarding the California facility, I think it was up March 31, 2024 about 25 million of the contributor. Any visibility on what will happen with that contract or that facility and when we might get a better picture?
Damon Hininger: Yes. It's a great question. This is Damon again. And, our team is actively working on it, and I have nothing to announce today, but I will tell you that, we've had good discussions, with multiple jurisdictions on the path going forward. So hopefully, as we get to, February, I can give you another update on that front. But, there definitely is interest by a couple of different jurisdictions.
Greg Gibas: And I guess just last one for me, more of a broad kind of question, but, really great to see that leverage reduction continue into the quarter. And 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, like, how would it change?
David Garfinkle: Yes. Good questions, Greg. So we expect to continue to both buy back stock and pay down debt at the same time. It's 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 under our debt agreements. We're obviously a conservative management team and prudent with our leverage ratio, and it is a target, 2.25, 2.75. 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.
Operator: This concludes the question-and-answer session. I would now like to turn it back to Damon Hininger for closing remarks.
Damon Hininger: 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. I look forward to our call coming up in February of next year. Have a good day.
Operator: Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.
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