Q2 2020 Corecivic Inc Earnings Call
Good morning, My name is Casey and I will be your operator for today's call. As a reminder, this call is being recorded at this time I would like to you welcome you to core civic second quarter 2020, <unk> earnings call.
Oh lunch I was in place don't need to avoid any background noise I.
After the speaker's remarks, there will be a question answer session. If he would like to ask a question. During this time simply press the star key followed by the one key on your telephone keypad.
He would like to.
Withdraw your question you May press star to thank you I would now like to turn the call Overshoot Cameron hope well of course civics managing director of Investor Relations Mr., how well you may begin.
Thanks, Casey good morning, ladies and gentlemen, and thank you for joining us participating on today's call, our Damon Hininger, President and Chief Executive Officer, David Garfinkle, Chief Financial Officer.
We're also joined here in the room buyer, Vice President Finance, Brian Hammonds.
The call today on the call today.
Focus on our financial results for the second quarter yesterday's announcement of our intentions to change our corporate structure and Institute, a new capital allocation strategy.
In an overview of the evolving impacts of the code at 19 pandemic.
During today's call my remarks, including our answers. Your questions will include forward looking statements pursuing to the safe Harbor provisions on the private Securities Litigation Reform Act.
Our actual results for trends may differ materially as a result in a variety of factors, including those identified in our second quarter 2020 earnings release issued aftermarket yesterday and ours and in our securities and exchange commissions filings.
Moving to forms 10-K, 10-Q, and AK reports you were also caution but 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 will also discuss certain non-GAAP measures.
Reconciliation of the most can bear comparable GAAP measurements is provided in our 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 CEO Damon Hininger Damon.
You camera and good morning, everyone and thank you for joining our second quarter 2020 conference call today, but also joining us on a day a great historical significance for company.
Last night's announcement noted our plan to convert to a taxable C Corporation, we're putting our company that better position over time to improve our already strong financial position and ultimately move our share price back to levels that reflect our strong fundamental business.
By doing so we will be able to build on our unprecedented leadership in supporting life changing reentry programs policies and services that address Americas recidivist prices.
To help those in our care succeed with their next step in life.
So for today's call David I will provide an overview of our second quarter financial performance yesterday's announcement of our attention to revoke or read election every kind of a taxable C Corporation and 2021, including its implications on our forward looking business and capital allocation strategy and our own.
In response to evolving developments, resulting from the coated 19 pandemics.
First I will briefly touch on our second quarter financial performance.
The top line our revenue in the second quarter was 472.6 billion, which was a decline of 3.6% over the prior year quarter.
The majority of this decline was experienced in our core civic safety segment.
Normalized funds from operations or effort, though was 56 cents per share in the second quarter, which represented a 19% decrease from the prior year quarter.
The largest in fact, our revenue and normalized FFO and 2020 hasn't been due to lower utilization levels from our largest government partner immigration and customs enforcement, primarily due to the co. Good 19 pandemic.
While current utilization levels by ice are well below historic averages the second and third quarter's from 2019 were already going and present a difficult comparison because in those periods last year ice reached historically high utilization levels.
If you look at our financial performance sequentially compared with the first quarter of 2020, our normalized AFFO per share increased by 4% in the second quarter of 2020.
Yes.
Dave will discuss our financial results in greater detail after I wrap up my comments, but before I turn things over to him. Let me make take a moment to appreciate our tremendous core civic professionals.
I have dedicated nearly three decades of my career to our company starting as a frontline correctional officers in Kansas as the love weren't detention center in 1992.
I won't say I've seen at all but I've seen a lot.
Cobra 19 is unprecedented in every way.
For studies like Correctional facilities, the pandemic put forward a unique set of challenges.
Fortunately at core civic we prepare for these type of situation is all the time and we acted early.
But none of that matters without our people in the field.
They have a tough but rewarding job that has been made even more demanding.
I've had the opportunity to get out into our facilities to see how they're doing and how we can help.
Let me tell you that our core city professionals aren't inspiration to meet every day, but never more so than now.
During our first quarter earnings report I talked about the hero bonus and extra pay day off that we provided to say thanks to our people in the field.
But as we all know Cobra 19 has required the same level vigilance in recent weeks as it did in the beginning.
That's why last month, we were pleased to again show our gratitude to our field employees with mid year raises.
These base salary adjustments, which nearly matched what we did in the first half of the year will bring our full year additional investment in our people to $15 million.
The board and the management team, though that this is the right thing to do to take care of our people right now and to retain them over the long term.
Now, we'd like to spend a little time discussing our announcement from yesterday, which is the conclusion of our process to evaluate corporate structure and capital allocation alternatives.
Our board of directors unanimously approved and plan to revoke our election as a real estate investment trust or reads and convert to a tax will see corporation.
This election will be effective January 1st and foremost 21, as we are confident our year to date dividend distributions are already sufficient to ensure we qualify as a result for the 2020 tax year.
To be abundantly clear, we have not been satisfied with the trading multiple of our stock.
For the past several years are trading multiple whatever metric used to measure it has steadily declining even as our earnings are growing like they did in 2019.
Continued to pay a dividend yield in excess of 50% is simply not sustainable and recent trading multiples below 10 times and certainly the current multiple low five times is not acceptable.
It translates to a higher cost of capital inhibiting our ability to execute our business plan.
As a read because we are required to disappear distribute a substantial portion of our cash flows as dividends. We need to have continues access to capital at reasonable prices to make investments at higher returns that our cost of capital.
With many investors incorrectly categorizing course civic as a non U.S.G. investment and despite precedented leadership in support of range you programs at public policies designed to keep people out of prison for good the cost of our capital has increased.
Revoking or read election will provide us more flexibility in how we allocate our substantial free cash flow.
We believe the change in corporate structure will improve our overall credit profile in terms of lowering our cost of capital.
This change a corporate structure will also give us with significantly more liquidity, which will enable us to reduce our reliance on the capital markets and reduce the size of our bank credit facility.
Following our first priority on debt reduction with a target total leverage of two and a quarter times to two or three quarter times, we expect to allocate a substantial portion of our free cash flow to returning capital to shareholders, which could include share repurchases and future payments of dividends.
As detailed in our press release, we will also have more flexibility to pursue attractive growth opportunities not at all which will require capital deployment.
We're also evaluating the sale of lower yielding non core real estate properties outside or Crexus portfolio.
These mission critical primarily single tenant government lease properties, where build to suit according to stringent government requirements.
The quality of these properties combined with long term in place leases and top notch credit quality of our government to is a clear deferred direct different <unk>.
Difference among other reclasses, particularly in the current environment, which is frothy for government lease assets.
So it has resulted in significant the inbound interest in this portfolio.
So what are these properties, which are more formerly owned by non tax paying entities could enable us to de lever accretively, while accelerating our capital allocation strategy.
With our 2013 conversions the restructure was the REIT structure at the right time for of course of action.
And it remains a great structure for many companies.
Well, we have to recognize a limitation to structure imposed on core civic and this economic and political environment, but also recognize opportunities being a C corp, affords us and with that adapt to the most appropriate structure that enables us to execute our business plan further de risk the balance sheet and create the most long term value.
Finally, as many of you know we were a C corp for about 12 years prior to a reduction in 2013.
So we know this structural work extremely well with our mission and business growth strategy.
Now on our last conference call in May we spent a majority of our time detailing our response to the koeppen 19 pandemic.
I'd like to provide you with an update on our operational response, particularly highlighting developments that have occurred throughout the second quarter.
Since the beginning of the pandemic, we had been working closely with our government partners to develop and implement facilities specific Kogan 19 medical action plans.
Our operational plans, followed guidelines by leading health experts from the CDC and the World Health organization as well as those guidelines of good updated too.
And we've also incorporate those into our medical claims.
During the second quarter, we saw an increase in positive cases across a number of our facility is consistent with the general public and across nearly every correction system in the United States.
Our protocols and procedures for addressing positive cases or suspected cases is well established for both our employees and individuals and trusted to our care.
However, positive tests for employees can present operational challenges from a staffing perspective.
We have successfully navigated these challenges by utilizing available staff for other nearby facilities with that without pauses cases when necessary.
In coordination with our government partners our facilities continued demand as you make movement in person visitation and other interactions in order to reduce the spread of Coca 19.
During the second quarter many of our government partners have expanded testing that it may and detainee populations beyond this testing guidance from the CDC.
This more broad based testing has very good results in terms of the rate deposits cases, but the overall performance of our cities has didn't ever.
Also consistent with broad based testing performed at government opportunities. It's a high rate of asymptomatic positive test results.
Many health experts have highlighted the challenges presented by a systematic positive individuals because they have the potential for spreading the virus without knowledge.
This was particularly relevant before businesses and governments implemented hygiene, social dispensing and PE protocols in March and April.
The broad based testing.
Performed across it may detainee populations has been a helpful tool to potential reduce the spread of the virus.
But test he does have its limitations and cannot replace that need to follow proper hygiene disappearing and p. protocols.
We will continue to be responsive to that coded 19 pandemic and work closely with our government partners to implement best practices as they evolve.
Covert 19 is certainly on the top of everyone's mind, but our government partners continue to face challenges that predate the pandemic that have presented us with new opportunities to serve their needs.
For example in July we commenced abilities of our previously idled 656 bed South East Correctional complex with the Commonwealth of Kentucky Department of Corrections.
We originally entered into this lease agreement in December of 2019, which adds initial lease term of 10 years and includes five two year renewal options.
This is a great solution for the Commonwealth, which has had a significant need for additional production capacity and we are pleased we can quickly delivery solution in state with auto with our idle capacity.
Many states are facing budgetary challenges from last tax revenues due to business closures in response to cope with 19.
It is still too early to tell the full economic impact as a pandemic will be and how quickly the U.S. economy can recover.
This is also still the potential there is also still good potential for federal aid to provide assistance to help state and local economies facing challenges as result of a bit Devin.
These matters will take time to develop but we have already seen a number of states looking at trimmed their budgets, including corrections budgets.
In July we agreed with the state of Oklahoma to close or 1600, and 92 bed Cimarron Correctional facility in order to generate budget savings.
While we were disappointed for our dedicated staff members that Cimarron, all of whom have been provided opportunities to stay with the company at other facilities, we recognize that tough budget driven decisions have to be made when facing a significant budget shortfall.
Although oklahoma's prison population has declined as a result of Copel 19. This day continues to face challenges in their correctional corrections infrastructure and could very well utilized cimarron.
Cimarron facility once their budget challenges subside.
We've had discussions with a number of other state partners about ways substantially generate taxpayer savings in response to budget challenges and we are sure those discussions will continue.
The covert 19 pandemic has changed the typical playbook for Crexus departments to respond to buy the challenges because of the need for more physical space to ensure social this thing.
There are also remains the number of market opportunities as correction systems look to address their infrastructure challenges.
The state of Alabama is continuing its RFP process to partner with the private sector to build three modern large scale for facilities to modernize its system and a close approximately 15 outdated facilities.
And initial award or the first facility for this procurement is expected in the next few months with subsequent awards being announced next year.
And the state in Nebraska is actively pursuing a similar path for new Correctional facility, but they are not as far as long in the procurement process.
We anticipate similar opportunities will continue to come to market because nearly every state has significant portion of their correctional infrastructure that has reached the end up its useful life.
Modern facilities provide significant operational cost savings due to thoughtful efficient design they cannot be retrofitted for older prison facilities.
This is particularly relevant today with the thread a budget cuts, forcing govern ages become more efficient.
Also relevant today is the limitation older facilities have presented to systems responded to the cobot 19 pandemic.
Including limited medical facilities concentrated townsend areas and suture wise H.B.A.C. systems hampering the ability to prevent the spread of airborne illnesses.
We expect that there will be growing appreciation for the need to modernize correction system, especially after the coded 19 pandemics insights.
Let me also make a comment on the federal side of the safety segment.
We were just awarded this weekend due to your contract with ice that our T. Darren Hadow residential center in Taylor, Texas.
This is a renewal of a contract we've had in place for many years advice at this facility.
We also expect in the next few days a similar award from ice for Houston Processing Center, which will also be a new tune your contract and again a renewal of a long held contract we have had with ice at this facility.
And we and ice is expected to make millions of dollars investments and renovating the physical plant of each facility, which reinforces their attention to use of facilities over the long term.
I'd now like to pass the call over today to provide a more detailed look of our financial results in the second quarter and other recent trends Dave.
Thank you Damon and good morning, everyone in the second quarter, we generated 18 tens of bps or 33 cents of adjusted EPS 56 cents of normalized FFO per share and 57 cents of AFFO per share adjusted EBITDA was $101.1 million for the quarter.
Adjusted amounts exclude $8.2 million of incremental expenses associated with cobot 19, noncash impairments of 11.7 million point $3 million of expenses associated with our evaluation of corporate structure alternatives and a $2.8 million gain on the sale of a real estate property.
Of the $8.2 million of coded 19 expenses 6.3 million represent the tiro bonuses paid to facility line staff.
Compared with the prior year quarter, adjusted EPS decreased 14 cents normalized FFO per share decreased 13 cents and AFFO per share decreased 10 cents.
As mentioned in our previous two quarterly earnings calls, we did not expect the elevated federal populations experienced in 2019 to be sustainable in 2020 and lowered our initial 2020 guidance from 2019 per share levels to reflect lower federal populations.
The decision by the federal government effective March Twentyth 2020.
To deny entry into southern border to asylum seekers and anyone cross in the southern border without proper documentation worth 40 in an effort to contain the spread of Koby 19 has amplified the reduction in people being apprehended entertained by ice.
Declines as stay populations in our safety segment and in resident populations and case management services in our community segment, largely driven by Cobot 19 also contributed to declines and per share results.
Partially offsetting these reductions were new contracts signed with the U.S. Marshal service and ice in the prior year and Mississippi in the first quarter. This year finally, a reduction in GNS expenses, partly due to lower incentive compensation and partly due to reduction of certain other expenses such as travel due to restrictions imposed by Kobe 19 resulted in savings.
Relative to the prior year quarter I.
I normally don't review financial results compared to the previous quarter, but I do think this comparisons, particularly relevant this quarter. Since we did not begin to see the impact of cobot 19 until the end of March.
During the second quarter adjusted EPS increased by three cents, a normalized FFO per share increased two cents from the first quarter.
Although no doubt Koby 19 has had an impact on our business occupancy at our safety and community facilities declined from 79% in the first quarter to 75% in the second quarter translating into a decrease of 3337 average daily resident populations.
Occupancy in our properties segment remained at 97.3% both quarters.
Total revenue declined $18.5 million or 3.8% from the first quarter to the second quarter.
However, we were able to adjust our expense structure to align with reduction in occupancy.
As a reminder, our first quarter always includes higher unemployment taxes when base wage rates reset, resulting in a per share increase of two cents from Q1 to Q2.
A new contract when Mississippi signed in the first quarter combined with lower interest and DNA expenses collectively accounting for about three cents per share were offset by lower population in our safety and community segments.
As a result of these factors adjusted EPS and normalized FFO in the second quarter outperformed the first quarter.
Although we've excluded the impact of Kobe 19 expenses on our adjusted per share results. They are included in the operating margins improved mandates statistics presented in our supplemental disclosure report.
Our total facility operating margin would've been 25.3% for the second quarter, excluding Kobe 19 expenses slightly higher than the 24.6% in the first quarter.
Our cash flow was strong during the second quarter.
FFO, which we use as a proxy for cash flow after maintenance capex, but before debt repayments was $69.3 million compared with $70.3 million during the first quarter.
Net cash provided by operating activities as presented in our statement of cash flows was $98.9 million during the second quarter compared with $75.4 million in the first quarter with this increase including positive fluctuations in working capital balances.
The resiliency in the business is due to the essential nature of our facilities and services in our safety in community segments further enhanced by the diversification and stability of our property segment with all three segments supported by the strong credit of our government customers.
As of June Thirtyth, we had $364 million of cash on hand, after paying $51 million and dividends during the second quarter compared with $335 million as of March 31 to 2020.
At June Thirtyth, we also had $154 million of availability on our revolving credit facility, which matures in 2023.
Our cash balance reflects a partial draw we made on our credit facility at the end of March out of an abundance of caution due to uncertainties associated with koby 19 and to maintain maximum balance sheet and operating flexibility.
We repaid $50 million of this draw in July and expect to continued to pay down the balance.
Our leverage measured by net debt to EBITDA is 3.9 times using the trailing 12 months and we have no debt maturities until October 22 to October 2022, and no material capital commitments. Therefore, we have no need and do not anticipate access in the capital markets in the short term.
We are on track to achieve the 10% reduction in our maintenance capital expenditures mentioned on our last call, which we expect to totaled $54 million split evenly between real estate and non real estate assets.
Our 2020 capital expenditure forecast also includes approximately $7 million of tenant improvements and leasing commissions associated with new lease agreements unchanged from our estimates at the beginning of year.
Although we continue to perform well and generates significant cash flows risks and uncertainties associated with cobot 19 remain operations and the criminal Justice system have not yet normalized the southern border remains effectively closed in many state budgets will and many state budgets will have significant holes to fill.
As Damon mentioned during the third quarter 2020, largely due to a lower number of inmate populations in the state of Oklahoma, resulting from Kobe 19, combined with the consequential impact of Koby 19, Understates budget, we agreed with the state to idle our 1692 bed Cimarron Correctional facility later this quarter.
Prior to the pandemic, we were negotiating with the state to provide them with additional bed capacity in the state at our Diamond Bank facility.
We also closed the 200 bed, Oklahoma City Transitional center during the second quarter and during the third quarter consolidated the remaining resident populations that are 390 bed Tulsa transitional center to Oklahoma system idling, the Tulsa facility.
Other states could face similar challenges during 2019. These three facilities generated net operating income of $2.8 million. So the closures won't have a material impact on our financial results.
Although a much smaller segment at 3% of total NOI for the quarter. Our community segment has been impacted by a larger percentage than the safety segment as the disruption in court hearings as well as an overall desire to minimize movement within the system have resulted in a reduction in the number of referrals to our community facilities.
This resident population is considered lower risk. So governments have acted faster to transfer certain residents assigned to our reentry facilities to nonresidential statuses, such as furloughs home confinement early releases to create additional space for enhanced social distancing within our reentry facilities.
We cannot predict how long asylum seekers of anyone attempting to cross the southern border without proper documentation or authority will be denied entry. Therefore, it is difficult to quantify the impact of our more transient federal offender populations.
It is also difficult to predict the actions of our state partners in response to any outbreaks in public or private correctional facilities, and we cannot predict how long the criminal justice system will be impacted or how long inmate population levels will remain below their pre cobot 19 levels.
Because of all the uncertainties associated with our safety and community segments, we're continuing to suspend our financial guidance until we can produce more reliable estimates. However, we can provide some direction having gone through a full quarter under cobot 19.
Offender populations continue to decline, mostly due to reduction in new intakes, rather than early releases without the court system functioning normally and with the southwest border still effectively closed we expect to continue to experienced declines and offender populations in our safety and community segments.
Although we are somewhat able to rightsize staffing levels. We believe it is important especially at this moment to provide well deserved wage increases to our front line facility staff, who continue to deliver critical services to the people interested to our care.
Most of our facilities received wage increases July onest.
We are projecting margin compression for wage increases in an environment, where it will be difficult to obtain offsetting per diem increases it is difficult to predict when but service levels will eventually normalize adding to our salaries expense.
As previously mentioned during the third quarter, we will ramp down our Cimarron facility and we estimate operating losses of $2.1 million at this facility during the quarter because of the transition.
Our operating margins will also be impacted by incremental expenses.
To procure personal protective equipment and other miscellaneous supplies related to koby 19, which we estimate to be three and a half the four and a half million dollars. During the second half of the year, albeit at lower expense levels than reported during the first half a year.
Our gene expenses will be negatively impacted by expenses associated with the evaluation and implementation of our corporate structure conversion from a right to assume taxable C Corporation, which we estimate to be $5 million to $6 million.
Note that we will exclude these expenses along with the cobot 19 expenses from our calculations of adjusted EPS, adjusted EBITDA and normalized FFO and AFFO as we did in the second quarter.
Despite the pandemic, we continue to make progress on a number of business opportunities that will favorably impact the second half of 2020.
On July Onest 2020, a new lease with the Commonwealth of Kentucky commenced at our 656 bed Southeast Correctional complex.
Kentucky will operate the facility in our property segment under a 10 year lease agreement that contains five two year renewal options. This facility had been idle since 2012.
Last month, the state of Mississippi exercised their second extension option through October 4th 2020 of their management contracts in our safety segment after expanding the contract from 375 inmates to 1000 during the first quarter of 2020.
Last month, the Idaho Board of correction authorize the Idaho Department of corrections to enter into a contract with core civic to care for Idaho offenders at our facilities in Arizona.
Although we have not yet executed a contract we are optimistic that a final contract will be executed in the coming weeks with an exit with an expectation of receiving offenders at our so world Correctional facility. Shortly thereafter.
The state of Kansas in Nevada, which were both expected to return or inmate populations to their respective states upon expiration of their management contracts. This year, both extended them for another year to avail themselves of our capacity during the pandemic.
Although not incremental to the second half of the year Damon mentioned, the renewal of a contract with ice at our Tiet on how to facility in Texas for up to an additional 10 years and we expect a similar renewal of a contract at our Houston processing center or the same procurement in the coming weeks, both demonstrating the continued demand.
Finally, we continue to pursue a longer term opportunity in Alabama to design build and finance construction for up to three new correctional facilities for the state, which the stake would operate we're pleased with the progress on this opportunity for our property segment. We are one of two remaining bidders and remain optimistic in a contract award by the end of the year.
Yes.
Damon covered in detail our decision to become a taxable C. Corp. starting in 2021. So I will conclude my remarks by pointing you to an investor presentation on our website that further describes the strategy.
You will see among other things our historical ability to repurchase $500 million of stock in the three years proceeding our conversion to a repeat in 2013 because of our durable cash flows. We are confident the C Corp structure will open new pathways to build shareholder value, including strengthening our balance sheet and improving our credit.
Profile, returning capital to investors and investing in growth opportunities.
We look forward to the potential to so lower yielding non core real estate outside of our correctional portfolio, possibly at levels accretive to AFFO per share, which would accelerate the implementation of our revised capital allocation strategy.
As we're seeing in this volatile time Corecivic has a durable business model and financial strength, thanks to the essential nature of our services and facilities and the embedded and longstanding culture of service excellence of our professionals.
I will now turn the call back to the operator Casey to open up the lines for questions.
Thank you.
Reminder, if you have a question. Please press star one now if you would like to amazing So from Keith Please press star team.
We will take our first question from 10 known as noble capital markets.
Good morning, Thanks for taking the questions.
Morning, Joe Forton, Joe.
Lots to digest here, but let let's start with the operating results and then we can maybe we'll switch gears to the conversion.
On the operating results.
And looking forward I know the Crystal ball is very cloudy today, but.
Do you guys.
When you're looking at do you think that there were getting near a bottom on ice and you as Marshall type populations.
They decline I think the last time I've looked ice was now below 22000 on a daily pop versus in the forties and as high as in the 50 is last year, but.
And just kind of get a little bit of your guidance view on where those.
We might be seeing a bottom on balls.
Yes. This is Joe. Thank you so much for your question and you you nailed it and kind of frame it saying that looking into a crystal ball because that's exactly what we would be doing if we answered this.
Kind of an obvious point, but all this is going to be obviously, what happens nationally internationally as related coke over 19, and then obviously the direction that.
That changes relative to the CDC guidance and federal state local partners and then turn our government partners is this would be an isolated it would be pure speculation and looking into a crystal ball to give any kind of view on that at the moment.
But I'd say, what what we are doing things that we can't control is continuing to recalibrate our resources our staffing at our services within these facilities as appropriate based on direction from from ice is very clear and I think it's getting reinforced with this announcement. This last couple of days with ice on how though for a 10 year contract.
That our solutions our capacity the locations. These facilities and also the additional services that we can help them provide like courts and space for attorneys and case managers that this solution continues to resonate and with that they want to sign long term agreements. So hard to give at the moment any kind of forecast on on the populations I mean, you can't look.
I guess, one thing I'd say kind of look of the trajectory. It it has narrowed or I guess flattened a tad, but it again continued to kind of a decline based on all the reports, but ill, let Dave tag team with me on the dancer, yes. It does seem to pace of declines is slowing a little bit and Joe as a reminder, we discussed last quarter about two thirds of our federal contracts have.
Guarantees if you will or fixed monthly payments. So we're protected on the downside someone thats really to provide the capacity to the federal government in the event that they see a surge or an increase in populations and I'd say based on the conversations we've had with our federal government partners. They are expecting increases in.
Federal populations eventually.
The Crystal ball is and the challenges predicting when that will occur.
And have have any of the.
The ice our U.S marshals.
You said you have been guaranteed minimum guarantees, but with the significant drop in decline if any of them come back to you yet to say hey, we want to renegotiate.
No yes, so at the contrary to kind of days point, we've had some conversations with with folks and leadership and there are always.
Obviously preparing potentially what happened what happens in the coming days weeks and months with not only the pandemic, but also.
Going into 2021, and maybe some outcomes and Congress in it and in the White house, So theyre they're preparing.
And with that working with us today to prepare the.
The other thing I would say again just to kind of reinforced again, the attractiveness of our solutions. The announcement. This week of our contract that Hadow again, we think we're probably there to your way to get a similar tenure extension on our ice contract at Houston.
And then you probably saw two geo at an announcement this week with South Texas. So two analysis already won a third what about is about the come again I think just reinforces the fact that ice really wants to maintain the capacity they've got nationally for their detention system.
Okay.
Switching gears over to the community segment did you guys mentioned, a larger impact there I noticed in the quarter you did say take some impairment charges.
If we start to see the community continues segment continue to see this figure impact are we at risk of seeing more.
Impairment charges going forward there.
Yes, Great question. This is David I would get tanking with Dave on this a little bit, but I would say the value and the desire by governments invests in these facilities with this mission is really really strong I think you probably heard me say beyond what the company almost 30 years, the last 10 years.
Has been a very encouraging to me because governors legislators you folks at the federal level as said, we want to put more investment on in prison programs, but also reentry facilities and that that message continues to be very strong, but we do appreciate obviously in a very tough fiscal environment. Some of these jurisdictions have to make a really really tough decision.
Ends.
Because obviously state level, they've got to close deficit again I can't go year over year with a deficit. So I don't see it as a widespread kind of potential action, but obviously something we're very since doing and keep it keep a close close.
Close eye on.
It obviously to coming days league, but would you add to that David Yes, pretty nothing I'd ask you know I think the as I mentioned in my script. This the governments in the community segment have acted faster to lower risk population. So I think there they're more comfortable putting them on.
In a home confinement things. So we see it is a short term drop in the community facility in it and it can happen fast as I think our total annualized for the quarter was $3.8 million. So for the company, it's not a significant number but to the segment as I mentioned there are significant percentages, but eventually we expect those pod.
Relations to come back again, eventually putting a definition on when it's very difficult, but as Damon mentioned, we continue to see nationwide. The dialogue about helping people in prison transition to society and to be able to reduce recidivism rates is still a very.
Important part of the dialogue. So I think they'll continue to make investments in in those facilities and we could see a resumption of our population has returned to pre pandemic levels faster in that community segment, even than in the safety segment.
Okay.
On the cash flow.
I think you said you generate roughly a 100 million from operations in the quarter. How are you kind of anticipating at similar level.
For each of the next two quarters.
I'd say.
The I said, our FFO was pretty much flat with what it was in the first quarter. The $98.9 million is what you're going to see in the statement of cash flows for Q2.
Well, we rise out a year to date for Q for June Thirtyth, but if you back out the first quarter. That's the number you'd get post 100 million that did include some positive.
Working capital fluctuation. So we collected on some receivables our receivables actually very low at the end of the second quarter. So I'd say going into the next two quarters I wouldn't expect to see that level of cash flow in the statement of cash flows.
Again, we don't have guidance out there, but as I alluded to in our remarks occupancy.
Populations continue to decline.
It would be tough to say that we achieved the same level of FFO in Q3, as we did in Q2, but that's that's it's a little bit of Crystal ball and that's why we don't have guidance out there it's tough to predict.
Right Okay.
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Hi.
Guys.
On the.
Be cautious took down the liquidity earlier this year.
Currently paid back.
50 million, you said, but you still have a significant amount of cash on the balance sheet.
If you look at it prior to the draw down.
Why just pay back 50, why not a bigger numbers there something else out there that.
Keeping you wanting to.
Have a large cash balance.
Yes, great question Joe.
That said that was a drawdown in the first quarter of an abundance of caution then we launched the evaluation of the corporate structure and what we're going to do with the dividend.
And so it's something we've been thinking about and I totally expect in the second half year, well continue to take that cash and pay down the.
The revolver.
Okay.
And then let's switch gears kinda to the that conversion.
Maybe you could just kind of walk us through a little bit more on the thought process and what other alternatives you know your financial advisor here you know brought to the table to you guys to look at.
When you when you make the conversion is there either positive or negative from the cost perspective being C Corp versus.
Right.
Maybe you can you can talk a little bit about those talks about some of the new programs and services that your talked about maybe being able to grow into.
And your confidence in your ability to do those in who you'd be going up against to.
Access both services.
Absolutely so.
This is David again, I'll take team with Dave on this but to answer compared to your question there. So.
Yeah, Joe that you've heard me say and we've talked about there's quite a bit obviously, but.
Reported in my script, but I mean that this multiple for our stock is just not appropriate I mean, you look at our underlying real estate and you look at the replacement cost as we would take for government to replace that real estate I mean, we're talking you know conservatively, maybe three maybe six maybe up to $12 billion.
Our real estate is valued if you'd like it replacement costs and so we're just not getting credit for real estate, but also the services, especially in this environment Coker 19 that we provide to add to our government partners and so it was was that kind of would that context.
Talking about.
With the board of you know maybe changes or other alternatives to where we could kind of reallocate our cash flow at our capital into more effective way to not only meet the needs of the of the business, but also.
Thank you think of some ways that we could potentially rentech return capital shareholders in different ways like share repurchase Vietnam's. Obviously example, and so mall as has been great. We've worked with them along with labor walk into bass variance ends on all this analysis they've done a very thoughtful work alongside our team process to evaluate this and work with the board.
This has been about it's been a multi year discussion, but I'd say probably heard as it's been probably last six seven months, where we really have and earn has talked about this alternative going to into a seaport and is probably through gosh, probably eight nine meetings. We had the board. So it was a very very detailed discussion and good analysis.
The alternatives you probably heard.
You know talked about and kind of and then kind of equity circles within our universe.
Opco propco potentially going private.
Those are those were alternatives, but we felt like this was one that just made the most sense. We've got the board the management team and all that kind of key functions under one roof as a C Corps.
Second it's a it's a structure we're familiar with so we did you know 12 years before the reduction to 13, we were a C Corp. So we know from a business perspective as part of your question. It while we won't Miss a beat so operations responsibilities of all of our employees, serving our government partners and people Trustmark.
Here It will be we'll do this and it won't it won't impact them at all they won't see any change in kind of operation as it relates to kind of day to day business activities.
Other I guess on things that I would say is that.
Look at this debt market I mean look at interest rates and Holy Cow. I mean is lot lot of people with as lower rate in interest environment.
Our taking advantage of that obviously do a debt deals and kind of historic low low levels and getting a lot of a lot of debt that they're able to.
Address kind of that needs for their respective organizations, but we're not fee that and then we're seeing at it and in a backdrop, where we had a very meaningful increase in earnings of performance in 2019, and you look yes, just kind of the the outstanding debt. That's in the industry I mean, you're seeing and kind of current.
Yields out there 11, 12% and that's just crazy.
So we thought it got Lee you know if we're if productive getting any credit.
For dividend yield and we're also seeing and just the bond market just not being.
Kind of a poker are properly calibrated for Myrisk perspective of our underlying real estate in the essential nature of our business that our government partners really require of us.
C Corp, potentially could be a right away, where we can kind of control, our destiny and kind of payer away all the needs. We have and also pay down debt appropriately. So so I think there were several parts of your questionnaire I think I've addressed most of it but let me turn over my my colleagues here and add to that David Yes, two things so.
DNA labor efforts and things like that the cost structure going forward, it's not material in fact, it probably nothing it's really just different I would say you know our finance department has to deal with the operating requirements as a read so to some back office things that we have to deal with in order to comply with the require.
Permits as Damon mentioned it has no impact whatsoever on facility staff facility operations. They wouldn't even know the difference between what we're doing as a a read or as a regular taxable C Corp.
What different issues as a C Corporation tax will see corporation that are taxed consulting engagements to try to.
Tax plan, so theres I'd say, it's really just a difference so I don't see any different really in terms of what gene expenses, we would be projecting under a.
Tactual C Corp structure, compared with the restructure and going back to you know the cost of debt that Dan was was talking about you know under a C Corp structure, we can self fund the business, we had retain our cash flows.
As we mentioned the priority prioritization would be priority would be on paying down debt, but you get to two in a quarter to two and three quarters times leverage which is a very comfortable leverage very low leverage we could potentially see improved credit ratings from the rating agencies.
But it will it should improve it will definitely improve our overall credit profile and should reduce our overall cost of capital them. So we.
We like the ability to take control of our dusty rather than having to rely on the capital markets, which have become increasingly expensive.
But at the capital markets are therefore, like I mentioned, if if we're able to go out in issue debt at reasonable very low opportunistic rates will take advantage that push out maturities and.
So with the balance sheet like that but under taxable C Corp structure. The important thing is we don't have to we'll have to rely on the capital markets for those things.
One thing I'd add though too is that this is.
Really significant step, but it's part of other steps, we've taken that kind of de risk the business and so as you know over the last 456 years, we've really taken some steps I think as we go into 2021, it really has lowered the risk profile, even more so with the company notably.
The last 10 years, we have continued to kind of shy away from our managed only business. So last 10 years about the basically the time I've been CEO, we have lowered our exposure I mean, it's only business. So this is again the business that government owned real estate, we provide the service we've lowered that by about 16 facilities about 20000 back.
As.
It's just the topline. So obviously hit revenues is about $240 million in annual revenues with those 19 facilities that we've transitioned back back to governments, but this was single digit margin business and with that it had about four 4000 employees and about $1 million to $2 million and kind of annual capex for the.
Facility, So weve opposite put aside now with with this completely kind of narrowing of the managed only business not only the capex needs. Good business again, small, but significant but also the risks with that business being kind of single single digit margin. So thats. One step and then also I think you'd I've talked about the Bureau prisons.
And the state of California, without say program, both those partners individually or about 50% of our revenue in 2010 or combine about 25, 30% of our revenue today, the how say program, California zero and B O Pmln to preserve our revenues. So we've taken it again from about 25, 30% revenue down to two 2% so weve.
The volatility with that those partners, obviously been taken down dramatically from a risk risk perspective. So so those steps along with the one that we now yesterday. We just think we've really positioned the company going at 20.1 would be really a lower risk and be able to control our destiny in a very meaningful way.
Very thoughtful thank you for those answers I will.
Stepped back and let someone else asked a few here and.
Thanks again.
Thank you Joe.
Thank you.
Is there a minder if you would like to ask your question. Please press star one now.
Your next question from Kevin can wrestling of Rubicon partners.
[noise] mortgage and thank you for taking my call.
Just a quick question about a couple of quick questions about the debt levels that youre targeting.
Based on what I'm seeing maybe.
Yeah.
Based on the numbers that I can glean here.
What's the lids and deliver a little.
Debt reduction Youre targeting.
If you're looking at the current members of the trailing 12 month thought around when looking at $830 million.
Overall, I'm not sure which period of time, you're talking about but I'd say I'd say this.
In 2019, we generated over 300 million of FFO, which as I mentioned in my comments, we use as a proxy for cash flow after maintenance capex, but before debt repayments.
Our pre pandemic guidance included an AFFO of say 283.5 million at the midpoint for 2020.
Now, we'll incur taxes. So if you apply a 28% tax rates and 2019 pretax income we would have paid an additional $50 million in annual taxes and $43 million. If you apply that to the pre pandemic guidance.
For 2020, so that would translate into slightly over $200 million of annual pay downs of debt.
And let me a little bit to that question and the per into previous question to you know I mentioned earlier about kind of.
Yes, what we're seeing within the industry on kind of yield for outstanding bonds bond maturities I will tell you and birch I've been everybody on the call knows it's already but if you if you watch our bond prices right now in the last question last 30 to 45 days, we're trading much tighter than others in the industry with this announcement so the bond market I think.
It is answer pretty loudly. They liked this idea going back to a C corp, and be able to control our destiny. So I think thats again, virtually I bet everybody on the call know that already but if you follow the what's the movement in the last.
30, 45 days you know, there's a delta of five call. It 600 basis points of our maturities versus others in the industry and so that again I think just saying the bond market. The saying this is a really good step in that kind of cheering us on yes, and one more comment on mine that didnt take into consideration in the property sales. So we've.
Identified we called lower yielding GSK type government leased properties outside the corrections portfolio.
That would only accelerates.
The capital allocation strategy, and and we could even do those potentially accretive way. So it's not like we're going to be killing the earnings by disposing of those properties, because they're just lower cap rates and so we think we could potentially sell those potentially accretive way, but certainly not not significantly dilutive while de levering the.
Business at the same time like I said accelerating the capital allocation strategy getting to our target leverage ratio sooner and being able to at that point, then do other things like buy back stock and pay dividends.
Thank you. Thank you for the caller I. I was I was referring to I guess the amount the total amount.
You need to reduce the fine so.
Right.
25, so is that just if you look at it for instance at the guidance you guys gave a pretty cool.
Yeah.
And you apply those numbers.
And the 225 to 75, what level of I mean, how much is that we're looking at yes like <unk>.
Required to be a paid down over the next couple of EUV.
Im sorry, it'd be about $500 million, if you go back our pre pandemic guidance.
And split the baby on the two in a quarter to two and three quarters leverage.
That'd be about $1 billion, and we have about 1 billion at a half.
Have a debt thats recourse debt, so we'd be paying down 500 million to get to that level.
Just talking about them.
Great and then and then so once you fill those properties and I think those properties. If we're talking about the same property.
Regionally you guys paid for them a blog about $428 million those properties are talking about.
Those are the properties, we're talking about and that's probably I don't remember the exact number but thats. It thats in the ballpark for sure and they have some of them have dead on them. So that's how you're getting down to a net net proceeds.
In a year, assuming the whole portfolio is sold you pay off that.
The non recourse debt any defeasance costs and so forth. So we're comfortable putting out we put in our press release net proceeds after all that about 150 million could be could be more could be less but that's got about marker out there for us.
Okay, so $350 million in and discuss.
The fact that this year.
It was suspended im sort of dividends was suspended it's about around a million as well right. So we're looking at 250. So that's.
I guess, even without the conversion you guys.
We collect raise half of what the overall target if I understand correctly is that right.
That's all right, yes, and yes, I think we paid 100 million. This year is I think what you're saying for 200 million on annual basis.
So yeah I mean, it's.
We can delever pretty quickly with the cash flows the business generate.
Right.
Even if you do.
Due to the full game.
As you go it's made up in fact, even without the conversion you could have sold properties get to 150 million goes in equity at least in them and then because from a tax perspective, you didn't you don't have to pay any extra dividends, even if you decided to continue with the right.
Structure, then that's another $1 million in cash so altogether to on the 50 million bonus for the tough.
Oh I get gets you on half way, where you want to go.
If I'm right.
Yes, I thought your 150, the dividends with 200, you're saying, if we reduced the dividend or maintain the dividend.
I'm seeing even if you just suspect I mean, you go suspended and you could still.
Still retains the restructure until <unk> mix you I just got.
The dividend or whatever level the yes.
And then.
Yeah, Yeah, that's right I mean, it would've been this year you could have so we if we had to spend the dividends. This year in resumed it next year, we would have saved $100 million in dividends for the second half the year and if we're able to generate $150 million a net proceeds from the asset sales.
That would have been a total of $250 million.
Yeah. This year whenever you can put sales <unk>, okay and then so.
Since you guys are going to go ahead with the conversion in next few so do.
Besides its hundred 50, this year and how to next year or you were looking at.
What level based on the.
Based on the pre cobot estimate so guidance, we're looking at to pay him.
Oh I'm.
So you they pay down of.
And liver, though for $160 million here in cash.
Looking Oh, yes, I would say, it's probably 200 million.
Pretty to pre pandemic levels would've been about 200 million after taxes.
So yeah. Obviously the question is what 2021 looks like with the pin debit but.
Pretty prepaid M&A as a priority number.
So we're looking at reaching that the debt level target I guess, the middle of 2022.
Again, if it if you get to kind of back to normal levels again as the Crystal ball question, you get to normal levels in 2001 are there.
Thanks.
Yes.
Spend to extended so you know it could be it could be a little longer than that.
Okay.
Okay, Thanks and have been so.
I guess.
The ultimate objective you may be used to go to investment grade just to expand the universe. So.
Great if as the current investment.
Yeah, I think you investment grade its.
It's been a little bit garden of the crack you know we did have it at one time as they as a result, but.
We think that near the beer goal is that this will get rewarded for investment both in the bond and equity side. It's just lower the credit profile. The company period now that lead to grade rating upgrades investment grade could possibly but also just keeping we also when does control.
And that is below the credit profile of the company's over at lower leverage and again kind of payer away.
Based on the needs, we haven't really be debt maturities, but also the business. Yeah. Let me be clear I think I, we think we would be investment grade at two into quarter, two or three quarters times leverage with the cash flows that we generate but that is not an MLP. All we're not going to continue to change leverage policy if.
The rating agency said, you've got to get below one times just as an example that yeah, we're not going to manage the business to get to investment grade, we're going to manage the business to have to leverage levels that we believe is appropriate and we believe our credit profile will be substantially improve with this decision because of our ability to retain our cash flows and use its paid.
Our debt or or for other things other than dividends the mandatory dividends.
Okay, and the food or I guess the last question.
Housekeeping I know there was some issues with the.
Elizabeth Pensions and two new Jersey.
What was the but since his contribution to fit following 2019.
Yeah, I'll, let you answer that last part birthday, I guess give a little bit of context. There. So we've got a lease with the current landlord through 2022, and then we've got the unilateral rights extend that lease through 2027, So we've got.
The ability on that property for the next next seven years, but I'll, let David answered part, yes, I mean, we don't give specifics it's how many bed facility 200 bed 200 bed facility. So it's a relatively small facility, we don't disclose EBITDA.
Facility as you know that we for facilities that we continue to operate for competitive reasons, but it would not be material one, but it's one that we still believe that we're going to be able to retain.
Okay.
That's right.
Thank you for your question.
Thank you questions.
Thank you.
This concludes today's question and answer session I will now turn the conference back over to Bowman for closing remarks.
Thank you so much Casey and thank you so much for everybody joining on the call today, obviously in the coming days and weeks feel free to reach out to camera Hopewell or other members of the means to you.
With this announcement, we made today Abbott and three additional questions offline.
Also as a reminder, what they said earlier, we do have a updated investor presentation. The website within uploaded and provides a little more color contacts with the strategy with the with the conversion so with that thank you. So much for your continued interest in the supportive of course civic.
Have a good rest your day.
Thank you ladies and gentlemen. This concludes today's presentation you may now disconnect.
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