Q3 2019 Earnings Call

My name is Shelby and I will be your conference operator as a reminder, this call is being recorded at this time I like to welcome you to the course civics third quarter 2019 earnings Conference call.

Minds have been placed on mute to avoid any background noise. After the speakers remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number one on your telephone keypad if.

If you would like to withdraw your question press Star to Thank you I would now like to turn the call over to Cameron Hope of course, civics managing director of Investor Relations. Mr. Hope well you may begin your conference.

Thanks, Shelby good morning, ladies and gentlemen, thank you for joining us participating on today's coal or Damon 90, Good President Chief Executive Officer, David Garfunkel, Chief Financial Officer.

We are also joined in the room by our Vice President Finance bring him.

During today's call or remarks, including our answers to your questions.

Looking statements pursuant to the C.C. Harbor provision of the private security.

Asian Reformat, our actual results are trends make dipper materially as a result in a variety of factors, including those identified in our third quarter 2019.

19 earnings release.

Issue after market yesterday, and in our securities and exchange conditions, Bilings, including forms and K. and you and they came reports.

You're also cautioned forward looking statements reflect management's current views only and it'd be company under gigs no obligation to revise or update such statements in the future.

This call. We will also discussed certain non get measures reconciliation at the most comparable gap measurement is provided in a corresponding earnings release and included in the supplemental financial data on the investors page of our website course civic Dot com.

With that it's my pleasure to turn the call over to our president and see <unk>.

Thank you can be more than ever want to thank you for doing in our third quarter 2019 conference calls a day.

Courses that he is a diversified real estate investment trust specialize in delivering government real estate solutions to serve the public good.

We are the country's longer his private on our real estate assets in use in U.S. government agencies with 105 facilities totaling over 17 million square feet a real estate.

35 year history of delivering a broad range of solutions to help solve tells government challenges inflexible cost effective ways are unique diversified portfolio Bath is generated standing recurring cash flows dream I have written by investment grade government attendance.

Each of our three business thing and provide specialized skills day to government tennis.

Our safety payment owns and manages corrections in detention facilities, including 50 wind correctional detention facilities, where they design capacity to safely and securely care for over 73000 people.

In the last five years in this thing might well you felt over 30000 individuals achieve your high school.

Or in the industry recognize trade certificate, which evidence based research has shown summit purely reduce recidivism rates.

Our community segment is a network of residential reentry centered and non residential community Bayes Correctional alternatives that helps address America's recidivism crisis.

Includes 27 residential region facilities, where they design capacity to support 5270 board individuals.

We also provide non residential community based services to approximate 33000 people on a daily basis.

Finally, our property say admitted a portfolio mission critical government least properties that as one of the ending the third quarter includes 27 properties, representing nearly 2.3 million square feet, a real estate with ongoing development of an additional 400000 square feet to come on line in the first quarter of 2020.

This portfolio produces predictable we are occurring cash flows through your leases back by high credit quality government tennis with a weighted average leaves terminal 5.8 years.

We want to hand experience strong year over year grow up in the third or are due to a combination of increasing federal and state demand for real estate solutions and that contribution from our recent acquisitions in our community and property segments.

Our total revenue a 599 and the third quarter represents a 10% increase during the prior year and for the second quarter in a row, that's the high water Mark in the company's history for horribly rather than.

A rabbit crowded they'd records all positive growth trendy Unfortunately safety.

In our diversification into court civic community and Gore civic properties, whose year over year revenue growth for the quarter were 23% and 30% respectively.

Our largest say make coarsening safety recorded revenue 458 million and 8% increase over the prior year due to the impact of a wide range of new state and federal contract. We've been awarded and then come in over the past year.

It is clear that are strong financial performance in the third quarter and throughout 2019 has been the result of each of our business segments performing level.

Our third quarter, nor glides episode 70 cents per share represents a 21% increase versus the third quarter of 2018 and exceeded the high end of our guys by eight cents per share.

Are 70 cents per share represent the 30% increase over the prior year and in 9% share of the high end of our guys.

Are adjusted even that on a third quarter of 115.4 million represents a 16% increase from the prior year corner, which exceeded the high end of R. Q3, guys by nearly $10 million.

Our third quarter financial performance in improved outlet for the full year has been reflected in our updated full year 2900 financial guidance.

We are now forecasting normalize this overseer in a range of $2 a 64 cents.

$2 to 68 fans and increased to our previous guys by six cents per share at the mid points.

Add the midpoint misrepresent, they 15% increase over our 2018 normalized.

$2 in 31 sense.

The growth we've experienced a crucifix A.D. as a result of the increasing demand for both state and federal partners.

In fact since the start of 2018, we have been awarded or activated 11, new contracts totally up to 12000 bad the cross age of our safety facilities.

This includes new federal contract with the United States marks of servers and immigration cousins proportionate at our 2232 Bad Adams County Correctional Center at Mississippi awarded in August of two now the 19 and or 1400, and 22 bad even detention center and our 910 bed Torrance count even since.

Facility, both of which I've been in the process to activate their contract awards in May of 2019.

We have also been awarded multiple state level contracts included in August 2900 in a war from this data Kansas to house up to 600 individuals at our swirl Correctional facility in Arizona or at other facilities upon mutual agreement.

In late October we transport at 120 individual tore tore facility under this new contract.

The growth of our course of the community and property segments. During 2900 continued to be driven by our reason emit a transactions.

The solution to offer by our community thing might happen expanded by our acquisition up to nine residential community Bayes corrections alternative companies in 2018.

We see demand for these services continue to increase and believe there are opportunities available to expand our market share in the space.

Our priorities portfolio has also experience strong double digit revenue growth throughout 2019.

This is mostly due to the incremental contributions from our 242 million dollar acquisition of the 540000 square foot adds up a Baltimore property in August of 2018.

Additionally, we completed the position of a 217000 square.

National Archives of America's Administration property in Ohio in September of 2018.

And we close on a 37000 square foot property and the toy leads to the Michigan Department of health and human services in May of 2019.

These are creative acquisitions at Purdue strong revenue in you know I grow for both the community and property segments. This year and we believe these investments will generate long term shareholder value through our expanded scope of services and real estate offerings.

Having some lie in key drivers of our third quarter financial results I like to shift our focus to business development the market opportunities impact in future financial performance.

In the safety segment, we still have a number of supposedly activations in their way that we have yet to impact our financial performance, but are expected to contribute to future growth.

In Bay, Martin 1400, and 22 bad eating the consent or in our 910, bad Torrance counting detention facility or separately awarding contracts with the United States Marshals and ice respectively.

Activation of both facilities have continued on schedule and is expected to stabilize oxy will be reached during the fourth quarter of 2019.

Wants this milestone is read the facilities are expected contributed five to $60 million to $70 million, an angel I'd rather than it is.

The 500 following that expansion of our own time. They descend silicon was completed in late September bringing the facilities told capacity to 1900 and 94 beds.

In early October only began to accept the digital population from both the United States Marshals and I. The the facility today totaling approximately 1700 individuals.

We anticipate due to longstanding regional demand they expansion capacity to be fully utilized by the end of the fourth quarter.

We were able to complete this expansion project. One month ahead of schedule and had a total cost the $39 million or approximately $3 million under our initial budget.

We are also in the process is activated track with ice that are 2232, Bad Adams County Correctional Center.

The contract with bicycle wanted in August of 2019, However, we began housing and up to 660 ice detainees at that facility earlier in the summer under an preexisting contract with the Federal Bureau presents.

We were not a war in a new contractor atoms, what's the deal pretty upon in desperation in June but weren't successful and quickly transitioning to a new contract with ice.

We value on her longstanding partnership with a B.L.P. at Adam and the Lady the pricing that price in with their primary reason to be it'd be awarded the contract to another bitter.

This belief is supported by the fact that in the last quarter of our operations that Adams under the B.L.P. contract. We were awarded a 2 million dollar bonus due to the facility exceptional operational performance.

We believe we continue deliver this acceptable form it's under our new contract with ice like a minutes in September and we currently care for approximately 1200 and 50 detainees at the facility.

In August when you're awarded to new contract from the state of Kansas to House up to 600 offenders out of state.

Late October we accepted 120 inmates at our 1800 and 96 beds a world Correctional facility in Arizona pursuant to this new contract.

We also care for approximately 1300 inmate building from the state of Hawaii.

Hundred and made from Nevada.

Aside from these recent contract when there are multiple procurements in the market that could result in new contracts of course evict safety before the end as a year.

Most notably the data Idaho and active are paid for up to 1200 and made in Alaska recently issued an R.P. for up to 750 inmates all of which are to be hound outside their respective states.

We believe we are uniquely positioned to meet the requirements of both our appease with available capacity on multiple occasions that should be attractive devotes days, which could potential result in activation of another of our curly idol facilities.

We currently have six idle prisons that attempts facilities represented in total I don't capacity of 7482 beds. So we have ample capacity to propose for these opportunities.

In our community segment, our pay some requiring additional residential reagents, though is that moderate isn't that last year do too in large part to the highly fragmented market residential read you three providers across the country.

However, we have been continued we have continued to pursue select opportunities and expect to complete additional acquisitions and the segment.

Throughout the year, we have focus on integrating the operations to nonresidential community paid service companies required in 2900 degree consistent courses they platform.

We believe our integration better position to comprehend you compete for new market opportunities.

And may have this year I issued and <unk> their intensive supervision appearance for Iran. Also known as I as that.

The highest that program is the largest electron hunting electronic monitoring contract in the world serving well over 100000 active participants on a daily basis.

We have remaining gaze throughout their procurement process and believe we have operated competitive option.

The estimated award day for this opportunity is currently identified as late 2019, but it may slip into early 2020.

Finally, you know probably say, we had a number of promising developments recently that could contribute to meaningful feature grill.

As I mentioned earlier are in that activity has been the primary driver. This statements growth in 2019 2020, we will see other organic are produced drive girls starting first with the anticipated first quarter 2020 completion of the Lansing correct for them. So the construction project.

This 2432 beds and so they won't be operated by the city, Kansas under a 20 year lease agreement and won't generate a first year rental property $15 million.

This is first of its kind transaction is provided a proven pathway for other jurisdictions that are looking to address shortcomings within their own criminal justice infrastructure.

The state of Alabama had pursuant happy to pursuing similar path throughout 2019.

The date is looking to consolidate propping 15 outdated out overcrowded prisons in two three large scale state of the our facilities finance and constructed by the private sector.

The state estimate the average size of this procurement too it'd be a proxy 10000 bad at a cost of nearly $1 billion.

Over the summer that yesterday request qualifications, which is expected to turn into an R.P. into coming weeks.

Upon publication of the R.P., we will be able to better define your wartime line, but the latest information published by the states adjusted their initial war day near the into 2019.

This opportunity, Alabama wouldn't contribute to earnings next year, considering the expected construction timeline.

But it is further evidence that that Bill finance. Please model pioneered by horse living properties his resume and with government agencies dealing with critical criminal justice system infrastructure needs.

We know they're looking for half a dozen other states and there's a speciality considering is similar processes address their aged inefficient inefficient infrastructure.

For decades, appropriators at the federal state and local level hemorrhage keenly declined to provide sufficient funding to address failings within their criminal justice infrastructure need access to private capital and industry expertise brought first to market through our according to the proxy segment the most efficient <unk>.

Active way to address these previously unmet needs.

We are pleased to see this operate offering this resonating and expect to see more of these type of opportunities come to market.

Aside from do develop opportunities there have been two additional opportunities surfers that were that we would refer to as organic that could expand our cost of the property segment in 2020.

Talking to a number or a couple of the states about lazy things defeat Idol course, if they facilities to help them really overcrowding and door the challenges with all the infrastructure.

Either I just don't examples of how they unique solutions often by course certain properties are rather than a.

These assets are currently that apply to the idol facilities and our safety business because in the past we provide a traditional turkey pollution to government partners underpass contracts.

However, these say partners now find their most significant need to be our mission critical real estate, so simple lease agreement better fit there needs.

Should we successfully entered into the propose lease agreements, we will see even faster growth and of course will be property segment next year.

It is clear that not all I have all three of our didn't segments from union play throughout their probably three quarter of the 2019.

Each segment in his position for continued growth and has numerous new market opportunities for which to compete.

And it's also important enough that we don't have any material contract seven digit competitive read this over the next 12 months. So we believe me or permission to <unk> well it to capitalize on a large number of market opportunities outstanding.

Before I close with an update on our capital access to capital allocation strategy I like to talk briefly about recently signed legislation from the state of California aimed at our industry, commonly referred to a baby 32.

The legislation generally prohibits new contract renewal over the existing contracts between private for profit entity and government agencies for the operation of detention facilities within the state, let's say 2028 times that for them to use their private for profit entity by the state.

First it is important to remember that are out to say contract from California came to it in in June of this year as we expected.

Second maybe 32 <unk> facilities leads from private for profit entity, such as our 2560 Bad California of City Correctional Center that is operated by the California Department of corrections.

<unk>.

And we believe the restrictions included in A.B. 32 to four as a phase out federal detention and residential region studies under private management goes against Federal law.

Finally, we believe the federal government and looking at various options. We will continue to monitor their monitor this matter and we will provide thing as appropriate conditions change and we believe it could have an adverse impact on our operations in California.

And as I mentioned I like to close by remark by providing you with an update on our banking relationships access to capital and how we are thinking about our long-term capital allocation strategy.

First of all we are in an excellent position by all relevant.

Metric didn't have strong growing cash flows.

Our total debt leverage has declined to 3.5 times through the third quarter of 2019.

Down from 3.9 times as a year in 2080.

Which is a very <unk>, which is very conservative compared to overall publicly traded <unk> universe and within our industry.

Our overall liquidity vendor are revolving credit facility, which doesn't mature in April of 2023 is nearing $600 million.

And our normalize epicel per share and caseloads are growing as strong double digit right.

By all accounts, we have traditionally company continue to be very attractive from the perspective of our credit worthiness.

We have been very pleased with the response, we have received from the financial community as we have briefly made efforts to cultivate new banker relationships.

In addition to our strong credit metrics and just as important.

How passionate we are in our commitments to better the public good by preparing offenders to successfully Erie enter our communities.

We have shown are committed for transparency and engagement with our interests and partying through opening of our door to anyone.

Sustainability drawer industry for E.S.G. reporting and annual reentry reports.

This is why we believe we will continue to do enjoy cost effective access to capital, enabling us to manage our balance sheet and access capital if necessary.

In addition, or quarterly dividend is very will cover.

Yeah, so payout ratio of 66% bruises the first nine months this year.

Pay out little lail level is very demand for given our strong cash flows and local though the average <unk>.

Since converted to only in 2013, we have maintaining targeted AD hippo payout ratio 80%.

However, and lot of our current visiting you all we do not believe it is the best use of our capital to allocate additional cash flows towards increasing the dividend at this time.

As we discussed in our in second quarter call and all get this we believe it is more <unk> excess cash flow is about the current dividend level two other priorities.

We continue to assess emanating opportunity on a case by case spaces.

We further we believe further growth of our courts have a community that property segments will generate long term shareholder value.

However.

Valuation of our debt and equity securities require us to target acquisition opportunities with above average risk adjusted returns entered a structure you need deals that requires significant cats are closing both of which reduce the number of potential targets in our in a pipeline.

As a result, we believe the best use of our excess cash flows in the near term are to further reduce our leverage profile.

We generate a process or a million dollars in excess angel cash flow after the dividend and maintenance Catholics, so weakened materially reduce our leverage over time, and especially when coupled with strong cash flow broke trajectory of or underlying portfolio.

The conservative manner in which we manage our balance sheet, coupled with our strong cash flow generation in growth trajectory makes it very confident that will continue to have cost effective access to capital going forward.

I now like to pass a call over today to provide more detail, but their financial results and the third quarter and of our outlet for the final quarter of 2019 days.

Thank you Damon and good morning, everyone in the third quarter regenerated 41 sent to the T.S. for 47 seven for the just the D.P.S. compared to a guy and change of 30 739 cents.

Normally does the photos 70 cents per share compared to our guidance range of 60 to 62 cents.

Yeah for photos 70 cents per share appeared regardless range of 59 and 61 sense.

Adjusted even that was 115.4 million for the border.

Exceeding the mid point of our gardens by $210.2 million.

Adjusted amounts exclude start up to nominate expenses.

And charges associated with the adoption of tax reform into prior year.

Arpanet result, we've seen jordyn it's levels.

Leave the result is higher than projected populations in our course Alexi segment.

Favorable settlement of a contractual dispute with with respect to revenues that would've been recognized during the previous several years among the three cents per share.

The bonus award earned under one of our safety contractor exceptional operating performance of two cents per share.

Set by a penny more in G.N. explains the median forecast.

Compared to the par you're quarter adjusted E.T.S. increased 11 cents normally though increased by 12 cents per share.

But <unk> 16 cents per share.

The first year growth and adjusted the P.S. normally <unk> from the part of your quarter, but I've heard that first year increases of 31%, 21% and 30% respectively.

Occupancy increased from 80.8% into prior your core to 82.9% and the third quarter of 2019.

During June and July two dozen 18, we were awarded tuned in federal contracts that are Tallahassee County Correctional facility in Mississippi.

Alma Correctional Center in Arizona.

In September 2018 year old we were also word of the new contracts that are cattle hatching facility from day to Vermont.

During the third COVID-19, we began accepting federal offenders.

Activation of a previously idol eating detention center in Texas.

County detention center in New Mexico pursuant to two additional new contract awards.

These new contracts more than all set up the impact on the expected removal.

Meaning populations from the state of California, and it'll upon the facility and P.L.P. populations. Other Adams County Correctional Center in Mississippi, which was transitioning populations from the B.L.P. contract that expired in August 2019 to a new contract device.

We continued to manage a strong balance sheet with leverage a 3.5 times using the trail in 12 months and 3.4 times in wasn't third quarter to build a 19 results.

September 30th we had $48 million a cash on hand, and 586 million availability on a revolving credit facility. In addition to a 350 million dollar accordion feature owner or credit facility, which matures in 2023.

Yeah $325 million of unsecured notes maturing in April 2020. They currently have the have the capacity under our revolving credit facility jury pay these notes if they choose at anytime prior to maturity.

Although the price of our debt and equity have been affected primarily by recent headlines from some of the industry's banking partners as well as Washington politics, We will continue to monitor capital markets and May Alternatively issue debt securities or obtain other forms of capital to refinance these nodes.

2019 capital expenditure forecasting $86 million from during construction of the new lands and Correctional facility in Kansas, including $17 million for the remainder of 2009 team.

Project as being 100% financed with a previously disclosed private placement drawn quarterly installments to align with construction expenditures, thereby requiring no cash from operations or on a credit facility.

The private placement matures in January 2000 forwarding.

This project is on schedule for delivery in the first quarter of 2020 and budget and at a total estimated cost of 155 $260 million.

Full year to those 19 capital expenditure forecast also includes $24 million for the 512 that expansion of our 1480 to bed Oh time Mesa detention Center in California, which was started last year and completed and the third quarter of 2019, a month ahead of schedule and under budget at a total cost of $39 million.

We begin accepting fertile offenders into the expansion last month.

Aside from the capital expenditures for the Lansing Correctional facility for which we have already attained project specific financing.

Virtually no demanding capital punishment for facility construction.

Moving next to a discussion of our earnings Garden as indicated in the press release adjusted E.T.S. guns. The fourth quarter of two dozen 19 is a range of 30 842 cents normalized I thought for sure gardens for the fourth quarter is 60 to 64 cents and half a euro per share guns as 59 to 63 cents.

So the full year adjust any P.S. guns is range of $1.74 to $1.78 up from our car guidance of $1.60 $2 72.

So you're normalized F. overhear guidance as a range of 264 sets to $2.68 a from a prior guns range up to 58 to $2.62 and full your apropos per share guys as $2 and 59 to $2 63 sets up from our car Guy in terms of $2.53 to $2.57.

Adjusted again for the fourth quarter is 104.8 million to 108.3 million.

<unk> for 45.2 million to 448.7 million.

As the midpoint, our full year 2019 guidance for blood some increase over 2018 adjusted Dps at 21% wrote the normally the appropriate share of 15% and Fo per share growth of 19%.

<unk> outlook has continued to improve we've increased the midpoint about two dozen 19 pull your normalized F.F. F.F. a per share guided by 26 cents each since our initial gardens published in February 2019.

Our guys reflects the continued intake of populations in the fourth quarter of 2019, two previously idled facilities are 14 20 to bed eating detention center in Texas.

10 that torrents counting detention center in new Mexico, whereas I mentioned, we entered into new contracts earlier this year with us marshals service in ice respectively.

Aside from these activations as I indicated last quarter earnings call, our forecasts contemplated a lower level of ice population in the second half of 2019 than the level.

From the first half of 2019.

We experienced reductions are nice populations in September consistent with an overall decrease in border apprehension September in bit lower our queue for eyes population projections, a bit from our last quarter guns to need more consistent with current occupancy levels.

We will continue to manage our balance you prudently sharpen the focus on our capital deployment strategy in light of the current bank market. Nonetheless, we see opportunities and our course of property segment to acquire additional dumb at least assets with attractive risk adjusted returns and are pursuing creative financing strategies to minimize the amount of cash used for such acquisitions.

The adjusted even <unk> press release enables you to calculate are estimated effective income tax rate before the 5% for the fourth quarter and for a year and provide you with our estimate of total depreciation interest expense for the fourth quarter and full year 2019.

Inspect g. inexpensive to be approximately 6%.

Is that I've just outlined in my remarks, <unk> strong and generate significant cash flows.

Good point of our updated 2002 dozen 19 guidance, we expect to generate over $300 million of AD, though a proxy for cash flow after maintenance cat backs, but before dividends.

At the current quarterly dividend ready to 44 cents per share or dividends anyway to just over 200 million, leaving $100 million of residual cash flow.

Covered.

<unk> ratio of 67% based on are updated guidance meaningfully lower than are guided dividend policy of 80%.

Display despite noise around our sector federal state and local governments continue to see value in outsourcing their needs to cost civic and had been using our solutions as an increasing pace.

The last 24 months, we have <unk>, we have completed the intake of new populations from the state of Ohio, Kentucky, Nevada, South Carolina, Vermont in Wyoming pursuant to new management contracts.

Two large contracts with us marshals service and three large contracts with ice to agencies that rely on the private sector for a substantial portion of their real estate needs because they do not have their own detention capacity.

Two of these contracts resolves embrey activation this year of two previously facilities.

I'm more than one occasion, we have had multiple customers competing for the same real estate asset.

And these government needs to continue yes quarterly except that 120 image from the state of Kansas or the facility on in Arizona Remember a new contract for up to 600 beds Award last quarter. This contractors. In addition to the upper mentions agreement we executed last year with the state to construct at least the here in 2432 bit Atlanta Correctional Center.

One of your lease agreement that was expected just when it's in the first quarter of 2020.

<unk>, maybe emulated by the state of Alabama next year.

Last month, we also begin accepting additional federal thunders.

512 bed expansion completed at their own families a detention center.

So we have not yet executed a tentative agreement we are in separate discussions with a two different states to lose tools are unable facilities.

And as they manage both of these facilities for several stay partners years ago that of course of its safety facilities.

He's opportunities further demonstrate the flexible multi use solutions of our real estate portfolio, where we can provide facilities operated by our government partner through at least in and of course, the properties portfolio or turn key solution, where we provide both real estate input Correctional services and of course of its safety portfolio.

Damon mention the state divide out and Alaska, both have outstanding solicitation for out of state capacity for 10012, sorry, but sounds with 200, and 750%, respectively, which could require an activation of another one of our idled facilities. If we're successful in in these new contract awards.

We are not yet ready to provide financial gone for 2020, but we already have new contract someplace, driven by increasing demand that position as well to continue to grow cash flows without the need to deploy any new capital in 2020, which could result in naturally you leverage our balance sheet, even further from the current conservative level.

We are position for cash flow growth and further d. lever and even though we don't currently expect to sustain the elevated populations provides several legacy facilities and we experienced during the second and third quarter of 2019.

As a reminder, we currently generate approximately $2 billion or they know revenue in over $4 billion of valuable.

Critical real estate assets use their government partners that has very little to no alternative kinda spivey approximately 92% of our real estate is uncover.

We will continue to monitor the capital markets and also evaluate raising alternative sources of capital, including but not limited to joint ventures property sales mortgage indebtedness private placements and other forms of private capital I'm confident that we will continue to have access to the capital we will need considering the castle is that we generate from valuable unencumbered.

Real estate assets and the book process that we continue to seem to business.

I don't know turn the call back to the operator Shelby to open up the lines for questions.

Thanks.

I'd like to ask a question. Please signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure your immune function is turned off.

Signal to recharge equipment.

Pressed scar one to ask a question what passed for just a few moments till now everyone an opportunity to signal for question.

Well take our first question from Joe account for noble capital.

Good morning, Thanks for taking my question.

Morning Jo.

On the the California <unk> 32.

Wondering.

Have you guys seen any momentum out there for other states to go down that same path.

Yeah to this day and did the answer is no I will tell you that I've been with a couple of 27 years I think there's been a couple of times and simply by changing with the company or spend a couple other states it kind of made a similar one.

And as you know as I tend to buy a script, there's various options that the federal government consider and so what I've seen in the past.

That's our government all point to the supremacy clause, which you know, which is you know the constitution and federal laws Trump any or take precedent over in each state laws or a state constitution and they'll allow states to interfere with any federal function. So so I don't seem to your question I don't see anything the look around the country any other efforts, but I do hit.

Historically, there's been other state that made tennis similar actions and the federal government remind bumps isn't it just for him said clause in that case and those cases trumped any kind of state activities tables.

Okay, and how how horrible are you guys to other states in sourcing populations are are we in at a point, where there's just no.

You know a government capacity and that you know the your your facilities are really then the.

Ones that that are available to house populations.

Yeah, we we don't see any first we don't see any new capacity being built virtually anywhere in the country. You know it's been a couple efforts like Alabama, but even then those cases states had difficulty get the funding from their respective legislature. So there even if they knew need capacity to kind of deal with age are really old infrastructure.

They think the private sector are solutions can bring a solution for that lesson accomplish those type of goals to replace that capacity, but the second is yeah. We don't see any really available capacity around the country. So we think our capacity based on locations.

<unk> really mission critical to those respected agencies need and with that are some of the newest bed with respect to jurisdictions. So if you look at our.

System on the safety died our average age is about 20 years old and I would say most states. Their average agency anywhere from 15 is that if out here, so not always or no excess capacity, but we're also the youngest portfolio or youngest beds I should say in one of those jurisdictions I need to add to that David.

Mentioned, you know a couple of states looking at leasing facility. So that's an alternative option for states as well if they prefer state employees operate their correctional facilities, we've done that in a couple of states already we're happy to have those conversation.

Okay, Great and then one last one for me you know.

Given that where we are at you know some record lows unemployment rate how challenging use the labor market.

Are you guys.

And what are you doing to deal with.

Tight labor market.

Yeah, I would say generally if I look at kind of our overarching enterprise you know about 15000 employees I'd say, we're holding our own who actually doing doing pretty good. We do have a couple of markets like you're in Tennessee, where the market is getting really red Hot Nazis puts a strain a little bit.

Kinda labor market as an employer, but they generally we're we're in good shape and then hold their own thing.

Thing I would just say as a reminder, I think a year and many others I call him those already on our federal contracts, which is about half our business. If those wages go up we actually get reimbursed a dollar for dollar through Echo of Justice understood. All contract. So even if the way you just go up a that is actually a call. It that we can get recoup from the federal government.

Those contracts, so that's a nice provision and about half of our business.

Great. Thank you very much for taking my questions.

You bet per year questions.

Well take our next question <unk> second to market capital.

Hi, there a.

I'm just going up on that previous question from about the 32 can you just clarify that because the <unk> facility is ice goes marshals.

Federal and so the supremacy clause would in fact allow those contracts to continue.

Yeah, I can't you.

Correct, So I can't see exactly the what the federal government thinking at the moment I know, they're looking at various options, but again, it's history to indicate that when I think about this and other states.

The federal government quickly pointed out to these days is that the supremacy clause within the constitution.

<unk>.

<unk> Constitution, and federal laws from and take precedence over any state constitution stay laws, so that as they option that maybe the federal government considers in in this case and I guess, yeah. What are they had to say about that facility as I mentioned earlier my prepared remarks, yeah. We just completed an expansion. So you know that populations be ramped up an expansion.

So I think again, they know that those are considered options, but I feel like that's a good facility for a location where they have additional demand.

<unk> very helpful and then just.

Me this skill Kennedy state contract like you do it again.

You mentioned fleet, Alabama, and a few others what potential sight of those contracts could you see.

Say five years down the road.

She cut out there are a little bit I think it was the size of the contracts that were curly considering so Idaho is about up to 1200 bits are looking for what how to state.

Kansas is looking for or Kansas, I should say over toward at about six and 600 beds and then I think for Alabama, which would be a properties opportunity happy about 10000 beds and and the cost of the only asked that we have on costs would really be Alabama based on there are kids you big things estimated it close to a billion dollars or more.

Precise three facilities for approximately $900 million of construction costs.

Alright, thank you.

Thank you. Thank you.

Well take our next question from Jordan Sherman with Ranger Global real estate advisers.

Thanks, I guess I have two questions. One is <unk>, probably quicker and then it and another on this sort of political over like any update on and I apologize if I Miss this any update on Puerto Rico.

Oh, who did not provide a updated for radio but we are still in concert communication with with the government with it with the Commonwealth.

You know the conditions in those facilities continued to worse and especially with the hurricane They had a couple of years ago, and Unfortunately, I've had some pretty tragic incidents within their facilities to adopted a fiscal situation also it's in.

Difficult play, so where continue the conversation with them, we do they bad provide some capacity within our existing safety portfolio would be <unk> something that would provide immediate relief, but also be very cost effective so nothing at the other than that the report at the moment, but we are not good conversations with them.

Okay, and then considering whether stock is trading I think people of.

It seems to me that people are priced in the worst case scenario.

Well they change a potential changing the administration coming next year and I guess I'm, just you've talked about some of the state opportunities, obviously that would be an offset.

From a federal level. If there was a change of administration with a more say hostel outlook on private prisons.

Can you just run a through what is <unk>, what could they do to in fact of business and how and how that would flow through I mean, what's the what would be though the the worst case possible scenario considering that the you know I send us marshals have very little of their own capacity.

[noise] Yeah important question. So let me walk you through that as we think about kind of worst case scenario, we think that the need for capacity does not change and also the alternatives to our capacity is not available. So I I'd start with that kind of over arching kind of assumption.

So as we speak about kind of worst case scenario, we think that eight option could be if there is a big <unk> subtle, but at the state level to eliminate used to the private sector to provide real estate and services.

That may be the option. They ask us consider is to either by our existing assets are capacity or lease our facilities and so let me kind of walk you through I guess first of all over the math that we explained through.

So as you know we've got about 73000 bags of capacity and our safety segment of that about 65000 is bad that we own outright.

So if you take that 65000, you consider some recent building that the federal or state that done near to Lance I'd say, probably four or five years.

At the federal level, we've seen calls per beds in a range of 20 200000 400000 per bed.

And at the state level, we've seen some building projects in a range of 100000 to 200000, a bad so look at it. This way if you think about half a business at the federal hamper business with the states 200000 for bad probably a good average per bad if you look at least in building projects within a within our industry. So you take that 200000 per bad <unk>.

65000 bet that we Oh that gives you a evaluation about $13 billion for our real estate. So I think if worst case scenario is they don't want to use the private sector no longer for services.

Don't have an alternative.

I don't want to build new capacity and they meet our capacity either it outright purchase or a lease of that capacity. We think is probably net positive at the end of the day now 13 billion dollar and you can argue what the right cap rate is on that but I think if you look at our current marker cat in the equity market again, I'd say that still.

Positive.

And I also I'd say, if you look it over arching enterprise that does not include that 13 billion does not include property or community. So if you just did a simple I say 13 or 15 times multiple on the F.F., though earnings from the property segment that get you in around the 900 million dollar range for that portfolio alone.

And then another $300 million if you look at the acquisition would down on the community segments I give you a sense, it's kind of enterprise value in guerillas are real estate.

The other thing Dot points, you again kind of think about worst case scenario is that.

Nevada are real and say again, it's very very attractive because they're getting scheme. Good locations at the newest portfolio and then you. These it means jurisdictions.

I guess another day. The point is you look at our pricing. So you look at our cost per day. If you look at our supplemental released last night about $80 a per man day.

At the Battle eight per cent increase over the last two years and that's about a 5.5% increase in the last year. So the pricing on our real estate continues to improve and again I think they chose the value of our facilities. You know the final thing I'd say again, just to kind of showing the value about real estate is that you know we at flipped here.

Last year's a couple of facilities that we're in a safety segments of the property segment.

Both those contracts if you just look at earnings from a dollar perspective, the earnings is actually better than we own when we owned and managed facilities ourselves. So.

Maybe even a case, where they don't want privatization, but they need our real estate and a purchase or alisa that real estate actually it's going to be able to that probably for the company because he and there's no alternatives and we could be a lot quicker and easier to give them access to capacity versus in trying to do it on their own.

And just I, just want to chill down a little bit odd. So that's the alternative capacity I just want to drill down a little bit on the neat I guess, what would have to change what would <unk>, how would things change how could.

To reduce the need to what I mean, what how could cause that's one thing I mean, clearly if we want open borders that's but I don't think everyone expects that we would have a dramatic decrease in neat or maybe not but specifically for for who you who are in your presence, but can you just talk about how that might play out to under a worst case, though.

Absolutely so let's just break it again in the two pieces the federal and state. So stateside without would say put California outside California dogs have been very unique cared laugh 13 years with a sphere overcrowding and they've done a lot of reforms.

But if you take California out of the next what I would say as we look over the next your five year olds of population growth, it's probably in a range of you know one two maybe 3% year over year.

And most states virtually all state that should say do five year projection. So we're looking at their numbers out our numbers relative to what they're forecasting.

I think about the need of the state side than they engagements we've already got with our say customers that business lives very stable. In addition, like said we are the new its capacity.

No state so give you a good example, california outcomes of might actually again, I said earlier, our average age your bar or safety beds is about 20 years in California.

Today, it's about 50 years, so there's two and a half years, two and a half times and older capacity. So again not only their capacity younger, but it's probably a lot more efficient. So again it makes a real estate very very valuable on the federal side, you know what I would say that the the biggest jurisdiction at seeing reduction here. The last 10 years of therapy or prisons weird.

Down to one contract with them so about 2% about revenue. So if you were there any kind of all till they still where the federal beer prison does get down to one one contract.

So very minimal with for US as we think about 2020, and then would ice and Marshall serve as the funding for marking service has been very stable lucky and decisions on populations. Those are driven by us attorneys and federal judges, so they're not driven by administration and like that eyes funding is determine our eyes capacities determined by funding from Congress it off as a present.

I had to sign so it's got to go through I'll see Bowden Chamber, it's within the Congress and then open signed by the President populations can't I'll see be impacted that there is lower funding for ice.

The last 25 years actually there's been no you overhear decrease in funding for eyes to catch you capacity even with.

Both Democrats and Republicans, either and how said it or in the White house, So oh, the eating added that day, but it's just.

Earlier point game and on the yeah, the math or.

Real estate the VLP, obviously has their own correctional capacity their own correctional officers. Unlike us marshals on ice so U.S. marshal the highest rely exclusively at a private sector.

Jails further detention capacity so.

It comes to that that meeting the real estate again chip one of the need they had the need we provide that real estate.

<unk>.

That you.

Well take on next question from Stephen Rock with the Colony group.

Good morning, gentlemen.

I want to follow up from that last the last bunch of questions, which was very helpful. In your answers about that so I've been very pleased with you what you've done over the past year as far as fill in capacity and the businesses operating quite well and.

You're making a lot of good smart decisions and getting things done.

But of course, the stock is almost back towards where it was you know when president Obama, what's going to make a federal prisons are legal private use of it and so I'm just wondering you're you've you know things are operating well obviously, we're in a political environment, where a certain candidate will talk in the stock.

Hit harder, but in a year from now things can change and even though you just spelled out to actually how your position does good as far as what might actually happen.

I'm just wondering if the board and management does discuss strategic alternatives to try to realize value given that you know this talk by almost any measure if you were to measure it versus other reach a where prison for each of traded in so many different ways. Mrs stock is trading it a fraction of what it should be.

And obviously you can make the point that should the Democrats when it'll be you know my regardless of how you are actually positioned perception wise plus the fact of all the political you know movements against private prisons or whatever you want to say about that.

You know you can't make a case that maybe it just environment, where we are in America right now that maybe you know <unk> private person shouldn't be a public company or or something along those lines. So I'm just wondering if management.

And the board does discuss these matters.

Just you know, especially given in light of an election year from now.

Yeah, Great Great question in the in the short answer is absolutely yeah. We have concert communication knowledge remain routine, but also with the with the board and we're always a assessing not only the current operating environment and political environment, but also with alternatives could be so I'll see here today to disclose anything on P.L. won't work.

Considering and how we waited but I get that would look at past history, which is things like share repurchase is things like that those are options that we considered an active executed on so yeah I think based on the current environment absolutely agree he looked at it yeah look at our share bites you know that could be a good option that the upper appropriate time so.

You're not here to disclose any actual option and how awaiting it and what the timing to date, but I think being a past history shows that are now do we consider a but we execute at the appropriate time those various options only to add to that David no well I guess I'd say, obviously, we think are soccer's undervalued, but aniston repurchase program would be a very.

Attractive option force.

I think we had yeah, we didn't have weren't operating in the environment right now, we're saying that made announcements not to provide find anything to us and you know until we demonstrate accidents capital, which I believe are going to have her continue to have.

That that's kind of a challenging strategy, but as they mentioned, we've we've done that before and you listen to investors and and.

The best interests or the shareholders.

Mmm.

And no more questions and the Q. at this time I would now like Kinda conference back for today Manhattan injured.

<unk>.

Thank you Sheltie before you concluded that call at once again to take a moment and to recognize our employees, who are teachers chaplains nervousness mothers and fathers and veterans and many others.

Really good people doing great work for our government partners any individuals who trusted in our care.

I want to thank them for the meaningful work that they do make in a real different for those in our care, whether they are putting individuals on the road to retreat or providing safe environment for people, who have just entered our country, they play and meaningful and important role and for that I am truly thankful.

And as I mentioned earlier Menjivar employees are veterans as we've come up on Veterans Day next week I wanted to take them and all that twins further service to our wonderful country.

Having spent 27 years working for this company and now just over 10 years as he Oh I'm extremely proud of our niche in in the line change you work, we do for all those in our care.

We are confident in our purpose and the reality of who we are and what we do.

A couple of additional items I would like to report on before he concluded days call.

We will be in Los Angeles next week for <unk> World.

But camera help all minimal if you would like to meet with us because we would enjoy meeting with you or indoor catches up with you if you're going to be at the conference.

Second we are very excited to be one of the founding members along with G.O. and then keep save for the day one alliance.

But they want alliances they trade association, representing private sector contractors, helping address corrections and attention challenges in the United States.

For more than 35 years.

One eight members have worked with local state and federal government's led by members of both political parties to revive professional humane and respectful treatment you incarcerated entertaining individuals.

From day, one and we understand we have responsibility provide safe and dignified care to those in her facilities.

They want member do not lobbying for or against policies regulations or legislation net impact the basis for or duration of an individual's incarceration or detention.

To learn more about do you want to hey look at their website, which is dating one alliance a day never want alliance dot org or follow them on Twitter at the day one alliance.

So finally I like to thank everyone for 200 up on the calls a day, we look forward to report into our full year 2019 financials, all they're providing you with our initial outlook for 2020 in February . Thank you.

[noise].

This concludes today's call. Thank you for your participation you may now disconnect.