Q3 2020 Corecivic Inc Earnings Call
Good morning, My name is Olivier and I will be your conference operator as a reminder, this call is being recorded.
At this time I'd like to welcome you to <unk> third quarter 2020 earnings Conference call.
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After the speakers remarks, there will be a question and answer session.
He would like to ask a question and during this time simply press Star then the number one on your telephone keypad, if you would.
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Thank you I would now like to turn the call over Q Cameron Hopewell <unk>, managing director of Investor Relations Mr. Hopewell you may begin your conference.
Thank you Olivia good morning, ladies and gentlemen, and thank you for joining us participating on today's call are Damon Hininger, President and Chief Executive Officer, David Garfinkle, Chief Financial Officer.
We're also joined here in the room by our Vice President of Finance, Brian Hammonds.
The call today on the call today, we will focus on our financial results for the third quarter General business updates and an overview of the of all the impacts of the COVID-19 pandemic.
During today's call our remarks, including our answers to your questions will include forward looking statements pursuant to the safe Harbor provisions of the private Securities Litigation Reform Act.
Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our third quarter to 2020 earnings release issued after market yesterday.
And in our Securities and Exchange Commission filings, including forms 10-K, 10-Q, and 8-K reports you are also cautioned that any forward looking statements reflect management's current views only and that the company undertakes no obligation to revise or update such statements in the future.
On this call. We will also discuss certain non-GAAP measures a reconciliation of the most comparable GAAP measurements is provided in our corresponding earnings release and included in the supplemental financial data.
On the investors page or 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.
Thank you Karen good morning, everyone and thank you for joining us today for our third quarter 2020 conference call.
Today, we will provide you with an overview of our third quarter financial performance update you on recent contract awards and provide you with our updated outlook for additional opportunities in the market.
We will also update you on the progress we have made to reducing debt, which is our first priority of our current capital allocation strategy and provide a brief update on our evaluation of potential sale of certain Dod Correctional real estate assets in our property segment and close with some comments about the political environment expansion.
<unk> of our multiyear policy initiatives aimed at reducing recidivism and recent elections.
First I'll briefly touch on our third quarter financial performance, which remains strong, albeit impacted by COVID-19.
On the top line our revenue in the third quarter was $468 million, which is kind of 7.9% over the prior year quarter.
The majority of this decline was experienced in our core safety Corecivic safety segment, but our core civic community segment has also been impacted due to COVID-19 as our government partners have sought to release their lowest risk residence or those closest to the end of their sentences.
Normalized funds from operations or FFO was 52 cents per share in the third quarter down from 70 cents per share in the prior year quarter.
The largest impact on our revenue and normalized FFO in 2020 has been to lower utilization levels from our largest government partner immigration and customs enforcement, primarily due to COVID-19 pandemic and the closure of the nation southwest border.
While current utilization levels by ice are well below historic averages comparing Q3 2020 to the same period of 2019 was already going to be somewhat distorted under any circumstances, because ice reached a historically high utilization levels in the third quarter of last year.
The pace of decline due to ice utilization slows substantially in the third quarter compared with the rate of reduction we experienced from March through June of 2020.
In addition, we were awarded multiple new contracts during the third quarter that as they begin ramping will help offset a portion of a reduced utilization, resulting from COVID-19.
Dave will provide you with greater details about our third quarter financial results. Following the remainder of my comments.
The first new contract we were awarded during the third quarter that I would like to discuss with you is with the United States Marshals service at our Cimarron facility in Oklahoma.
As you May remember during the second quarter of this year, we announced our intention to idle the facility following negotiations with the state Oklahoma to assist them as they sought to navigate significant budget constraints they were facing.
For over a decade, the 1600 and 92 bed facility served the state Oklahoma to meet their need for medium to high security Correctional capacity.
By the end of August Oklahoma completed their departure from the facility.
We began reaching out to partners, who potentially needed capacity and it was quickly apparent that the facility could meet the needs of the United States marshals into region.
In particular, the Cimarron facility is located in close proximity to the transportation hub for the Justice prisoner and Eylea in transportation system or Jay pads in Oklahoma City.
Jay Pass provides transportation services for the Federal Bureau of prisons, United States Marshals service and immigration customs enforcement through a network of aircraft cars bands and buses.
So Jay pass Air Fleet's operational Center is also located in Oklahoma City.
We expect the Cimarron facility will serve to provide ample capacity to facilitate the agency's transportation needs for many years to come.
The new contract commenced on September 15th and the agency has quickly taken of available capacity.
As of November Threerd, we carried we cared for 872 U.S.M.S. detainees at the Cimarron facility.
We believe the new contract provides an attractive upside to our earnings compared with the previous contract.
For the nine months ended September Thirtyth 2020, the Cimarron facility incurred an operating loss of 2.8 million.
Even before the impact of Coca 19, the facilities historic operating margins were below the average margins of the safety segment.
We expect an improvement in facility operating income as a result of the new contract without with annual revenues increasing to approximately $30 million at current utilization levels and an operating margin that approximates the average corecivic safety operating margin percentage with further upside to the extent utilization increases from car.
At levels.
In August we entered into a new contract with the Idaho Department correction to care for up to 1200 adult male inmates at our 1800 96 beds swirl Correctional facility.
Subject to availability, we may utilize our 4128 bed Center, Arizona, Florence Correctional complex under terms of the contract.
We are pleased to once again be working with the state of Idaho to provide solutions and we expect the state will gradually increase utilization of the contract.
However, the COVID-19 pandemic may slow the intake period as.
As of November Threerd, we cared for 437, Idaho inmates at this world facility.
The final New contract award I'll highlight is with the Federal Bureau of prisons for reentry and home confinement services, Oklahoma, which was awarded in September of 2020.
The contract award will result in the reactivation of our 289 bed utterly residential center in Tulsa and increased utilization at our 494 bed, Oklahoma reentry opportunity set or in Oklahoma City.
As I mentioned previously the pandemic has impacted residential reentry populations to a greater extent because these residents are lower risk and are on the tail end of their sentences.
The new federal contract will supplement the existing contracts, we have in place with the state of Oklahoma.
These three new contracts represents a potential for incremental utilization of approximately 3000 beds.
We are also pursuing additional market opportunities to help governments, a dresser critical infrastructure needs.
The state of Alabama has continued its RFP process to partner with the private sector to build three modern large scale production facilities to modernize its system and close approximately 15 outdated facilities.
In September the Governor's office announced the next phase of the Alabama prisons program, including the states attention to enter into a lease negotiations with existing vessel developer teams to construct new facilities.
Corecivic was selected for two of the three facilities, which in combination will represent approximately 7000 beds to be constructed.
To make sure I'm being clear this opportunity is to build and lease these facilities to the state to operate which would fall under our course every property segment.
The governors announcement was not a definitive contract award, but merely an intent to enter negotiations.
We remain engaged in negotiations with the state and we believe that Lee lease negotiations will be completed before the end of 2020.
The state of Nebraska is actively pursuing a similar path for a new credit 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 a portion a significant portion of their correctional infrastructure that has reached the U.S end of their useful life.
Modern facilities provide significant operational cost savings due to modern efficient design that cannot be retrofitted for older prison facilities and they offer the type of reentry programming space. It provides opportunities for inmates to be more successful.
In coordination with our government partners our facilities continue to manage inmate movement in person visitation and other interactions in order to reduce the spread of COVID-19.
Given the trend and positive cases in the general public we expect these operational interventions to continue.
Similar to what we saw in the second quarter of the year. Many of our government partners have expanded testing of inmate and detainee populations beyond the testing guidance from the CDC.
We expect expanded testing to continue.
While we are optimistic about the meaningful reduction in positive cases, we have seen in our facilities. During the third quarter, we remain vigilant of the trends the country to see it in the general public.
We will continue to be responsive to the Cove in 19 pandemic and will work closely with our government partners to implement best practices as they evolve.
The impact of the COVID-19 has certainly been quite meaningful from an operational standpoint, but you can see our underlying financial performance remains strong and there are ample opportunities in the market for us to grow.
We have continued to execute on our strategy successfully entered into multiple new contracts in the face of a global pandemic and we remain in a strong and stable financial position.
Last quarter, we announced our intention to revoke our election as a real estate investment trust or reach and convert to a taxable C Corporation effective January onest of 2021.
Revoking our read election provides us much more flexibility in how we allocate our substantial free cash flow.
Be a market for sale, which will also be retired from the balance sheet.
We expect to use these excess proceeds to accelerate our capital allocation strategy monetizing the value of these properties that does not appear to be properly reflected in our stock price.
Our marketing of this portfolio is active right now and we are pleased with a significant amount of inbound interest.
We will provide updates in the future as we work through the sales process.
Following our number one priority of debt reduction, 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.
The management team and the board of directors are 100% align with our shareholders and have a sizeable stake of our own personal wealth represented by course of Ixtoc.
We are clearly not content with the current valuation of our debt and equity Securities and we believe our capital allocation strategy represents the best approach for position to company to create long term shareholder value given current market conditions.
Before I turn things over to Dave I would like to briefly reflect on this week's national election.
As an organization course civic has successfully collaborated with our government partners for nearly 40 years.
We have experienced success cross all presidential administrations over that time, and we expect this to continue across each of our business lines.
Thus illusions, we provide to our Governor partners include mission critical real estate assets that lack viable alternatives.
The federal partners and our safety segment depend on us to execute their agencies missions.
The missions and these are the federal partners, we support may evolve over time, and we have to have a successful track record of being responsive to their changing needs.
We will remain responsive to our federal partners and believe our value proposition will continue to resonate.
We are excited about down fraternities that are appearing in the property segment with the state and local governments taken action on their outdated criminal justice infrastructure, improving the quality of the lies for their staff and those individuals entrusted to their care.
They have budget challenges is stand in the way of addressing their critical infrastructure needs.
These states challenges do not change under different administrations.
And we are pleased to be part of the solution for states I, Kansas in Alabama with more on the horizon.
With the opinion.
With the pending replication of our election, we believe monetizing certain high quality non correctional assets in the proper segment as a way for us to accelerate our capital allocation strategy, particularly considering the value of the sales couturier for our shoulder shareholders given the dislocation in our stock price.
Lastly for our community segment, although the number of people we care for in our community segment is currently suppressed because of the pandemic. We are gratified by the positive change of dialogue Ah reentry that has occurred in our country with additional resources set aside to help people get their lives back on track.
Our educators chaplains case managers and countless others are very proud of the tools, we provide people in our care to help them succeed.
Our mission in this area continues unabated and I need to add I am so proud of the entire course of a team for their tremendous passion for our mission.
So to that end in October we announced the expansion of an initiative. We started three years ago to advocate for federal and state policies aimed at reducing recidivism.
The expanded slate of policies. We active support now includes the restoration of Pell grants for incarcerated individuals the restoration of voting rights for the formerly incarcerated and licensure reform to remove punitive measures that make it harder for formerly incarcerated define and keep jobs.
With the legislative process of the past couple of years. We believe now is the time to step up not slowdown our commitment to programs and policies that reduce recidivism.
I encourage you to visit our website to learn more about the public policy positions, we have taken to support those entrusted in our care.
With privacy all these carrying for just about 8% of the inmates in the United States. It's clear that companies like ours are not the driver of the series of golf complex challenges facing our criminal Justice system.
But what core civic is saying through our words commitments and actions is that we are proven to be part of the solution.
Now more than ever it's time to set aside politics.
Take advantage of the consensus around these issues and show the American people that there are areas, where we can all work together to make economic and social progress.
I'd now like to pass the call over to Dave to provide a more detailed look of our financial results in the third quarter and other recent trends Dave.
Thank you Damon and good morning, everyone in the third quarter, we generated 22 cents of ETS for 28 cents of adjusted EPS 52 cents, a normalized SFO per share and 49 cents of <unk> per share.
Adjusted EBITDA was $94 $6 million for the quarter.
Adjusted amounts exclude four $7 million of expenses associated with our change in corporate tax structure.
And $2.8 million of incremental expenses associated with COVID-19.
Adjusted amount is also exclude a non-cash impairment of point 8 million a $1.6 million net gain on the sale of real estate.
And point 6 million for contingent consideration associated with the acquisition in 2019 of two residential reentry centers based on financial performance that has been better than estimated.
With respect to COVID-19 expenses were following SEC guidelines and I've taken a conservative approach, including only those that we believe are non-recurring incremental or separable from normal operations.
Despite being impacted by COVID-19, we continue to generate significant cash flow and signed new contracts to provide essential services for federal state and local governments and are critical real estate assets that are very difficult to replace.
During the third quarter of 2020, we signed a new contract with U S. Marshal service to utilize our 1692 beds Cimarron Correctional facility in Oklahoma, enabling us to keep this facility operational for the long term with improved economics recall last quarter, we announced that we agreed with the state of Oklahoma, which previously contracted for the.
<unk> facility to idle.
The facility because of lower inmate populations, resulting from COVID-19, combined with the consequential impact of COVID-19 on the state's budget.
We completed the transition of the facility from Oklahoma to U S. Marshal service during the third quarter much faster than originally anticipated and therefore do not report any startup costs and are non-GAAP metrics.
During the third quarter, we also entered into a new contract with the state of Idaho for up to 1200 inmates at two facilities, we own in Arizona and began leasing or 656 beds southeast Correctional complex and our property segment to the Commonwealth of Kentucky.
During the first quarter of 2020, we entered into a new contract with the state of Mississippi for up to 375 beds at our Tallahatchie County Correctional facility in Mississippi.
Which the state increase to 1000 beds in the second quarter.
Finally in our community segment last month, we were awarded a new contract by the Federal Bureau of prisons for residential reentry in home confinement services at our Idol 289 bed totally residential centre in Tulsa, Oklahoma, and our 494 bed, Oklahoma reentry opportunity Center in Oklahoma City.
As a result, we expect to reactivate the truly residential center during the first quarter of 2021 and provide the B O P. Additional reentry services at our Oklahoma reentry opportunity center, which will supplement existing utilization by the state of Oklahoma.
These new contracts are exemplary of the critical need we continue to provide through various political cycles economic downturns and now political health crisis.
Since the beginning of 2018, we have signed five other new federal contracts activated for previously Idol Correctional facilities and completed the intake of new inmate populations as a result, new contracts with six other states during.
During the nine months ended September 30th 2020, we generated over $1.4 billion of revenue and as a quarter and we owned or managed 133 properties with a gross book value of $4.5 billion.
Despite COVID-19 or cash generated from operating activities remained strong amounting to $107.2 million during the third quarter of 2020, enabling us to repay $102 $2 million a total debt during the third quarter net of the change in cash.
We currently project that we will repay an additional $60 million of net debt with cash flow from operations. During the fourth quarter of 2020 increase in our total net debt repayments to approximately $185 million in 2020.
This strength and cash flow is despite the pandemic and while the southern border is essentially close to asylum seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of COVID-19.
During the pandemic investors May view sequential performance is more relevant than comparisons to the prior year. Since we began to see the impact of COVID-19 at the very end of the first quarter of 2020.
As mentioned net cash provided by operating activities as presented in our statement of cash flows amounted to $107.2 million. During the third quarter. This compares to $98 $9 million during the second quarter and $75 $4 million during the first quarter of 2020.
Total revenue declined for $4 million or 9% from the second quarter to the third quarter of 2020, including a reduction of $3 million at our Cimarron facility due due to the aforementioned transition from Oklahoma to the U S marshals, which did not begin occupancy until September 17th.
The U S. Marshalls, Nonetheless quickly ramped up to 693 detainees by the end of September and currently stand at 872.
Normalized <unk> declined five $5 million or four per share from the second quarter of 2020.
Declines in occupancy at Cimarron, and our tallahatchie facility accounted for $1.9 million in $2.9 million, respectively of the reduction in F. F O R. Four cents per share for both.
Occupancy at our safety and community facilities declined from 75% in the second quarter to 71% in the third quarter translating into a decrease of 3178 average daily resident populations.
Oklahoma accounted for about one third of this decline again, mostly at Cimarron, while accounted for a decline of 525 with the remainder due to declines across our portfolio due to the ongoing impact of COVID-19.
We were largely able to adjust our expense structure to align with the reduction in occupancy minimizing the impact on our bottom line.
Occupancy in our property segment increased to 99% from 97% in the second quarter with 100% of rent collector.
Although we have excluded the impact of COVID-19 expenses on our adjusted per share results. They are included in the operating margins and per Man-day statistics presented in our supplemental disclosure report excluding COVID-19 expenses. Each period are total facility operating margin would have been 24.5% in the third quarter lower than 25 three per.
Sent for the second quarter, mainly because of the aforementioned transition of populations, it's cimarron and in line with 24.6% in the first quarter, which had no no COVID-19 expenses.
As of September 30th we had $282 million of cash on hand, and 329 million of availability on a revolving credit facility, which matures in 2023.
Our leverage measured by net debt to EBITDA is three nine times using the trailing 12 months and we have no debt maturities until October 2022, when $250 million, a 5% unsecured notes matures.
We currently expect to repay these unsecured notes upon maturity with cash on hand.
We have no material capital commitments and remain on track to achieve that 10% reduction in our maintenance capital expenditures mentioned in on our earnings call and made which we expect the total $54 million split evenly between real estate and non real estate assets.
Or 2020 capital expenditure forecast also includes approximately $5 million, a tenant improvements and leasing commissions associated with new lease agreements down a $2 million from our estimates at the beginning of the year.
We continue to explore the sale of certain non-core real estate assets in our property segment and are very encouraged by the interest expressed thus far in the process. We still believe we can generate up to $150 million in net proceeds from such sales, which should enable us to accelerate a revised capital allocation strategy and we still believe such sales could occur late.
This year and or in the first quarter of next year.
But we continue to perform well and generate significant cash flows and even when new business risks and uncertainties associated with COVID-19 remain.
Operations in the criminal Justice system have not yet normalized the southern border remains effectively closed and many state budgets will have significant holes to fill.
The duration of these disruptions in the response to state budget challenges are difficult to predict because of all the uncertainties associated with our safety and community segments. We are continuing to suspend our financial guidance. While we remain focused on a long term success of the business and on executing a revised capital allocation strategy, we can provide some direction.
On our financial forecasts, having gone through two to four quarters now under COVID-19.
Criminal justice related popular.
Population criminal Justice related populations continue to decline, mostly due to a reduction in new intakes, rather than early releases with a disproportionate impact on the community segment, which is considered a lower risk population.
Governments have acted faster to transfer certain residents assigned to a reentry facilities to nonresidential status as such as furloughs home confinement or early releases to create additional space for enhanced social distancing within our re entry facilities.
Without the court system functioning normally and with the southwest border still effectively closed we expect to continue to experienced declines in populations in our safety and community segments, while right sizing our expense structure without sacrificing safety or quality. These.
These population reductions are likely to continue until a vaccine is distributed our new contracts with U S. Marshals in Idaho are expected to mitigate these declines the.
The pace of occupancy declines however appears to have slowed in fact, excluding are cimarron facility in the transition out of the managed only metro Davidson detention facility on October 4th that we discussed last quarter. The number of people in our care in the safety and community segments has increased by 52 as of November 3rd from the end of September.
Further as a reminder, about two thirds of the federal contracts and our safety segment have fixed monthly payments that help ensure our partners have access to the capacity they need if and when populations increased minimizing the impact of further occupancy reductions.
We have managed through the largest transactional ops obstacle we have faced so far buyback filling our cimarron facility.
What's more we expect an improvement an avid operating income at this facility as a result of the new contract with annual revenues increasing to approximately $30 million at current utilization levels and an operating margin that approximates. The average course civic safety operating margin percentage, which would result in an annual improvement of at least $5 million compared with the full year 2000.
19, when operations were stable.
There was also significant upside to the extent utilization increases beyond current levels.
Are operating margins will be impacted by incremental expenses to procure personal protective equipment and other miscellaneous supplies and certain inmate medical expenses related to COVID-19, which we estimate to be in line with those reported during the third quarter.
We do not expect the material amount of G&A expenses in the fourth quarter for the conversion of our corporate structure from a <unk> to attacks will see corporation as most of that work can expense was complete during the third quarter we.
We will exclude any of these expenses along with the COVID-19 expenses from our calculations of adjusted EPS, adjusted EBITDA and normalize <unk> and <unk> as we did in the second and third quarters.
Finally, we continued to pursue a long longer term opportunity in Alabama to design build and finance construction for up to three new correctional facilities for the state, which the statement operate we are pleased with the progress of this opportunity for our property segment.
We continue negotiations with the state and remain optimistic lease negotiations will be concluded by year and.
I will now turn the call back to the operator, Olivia to open up the lines for questions.
Thank you Sir.
If you would like to ask a question. Please signal bypassing star one on your telephone keypad.
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We will need to our first question that is coming from Joe comes with Nipple capital markets. Please go ahead.
Good morning, Damian, David nice quarter, and a challenging environment.
Good morning, Joe. Thank you Joe Thank you.
Let's start off with somebody easier easier ones first.
It sounds like some of the population levels might be seeing some type of stabilization.
Here, even if it's at.
Do some levels.
Yeah. This is Damon Thanks again, Joe for your question. So yeah, I think that's right. If you look at.
Our first two partners Marshall service and ice.
Marshall service has been pretty steady during the quarter ices continue to decline, but the rate of decline definitely is a slowdown versus what we saw in.
Q too and then on the state side and looking at numbers. This morning, I think we have seen.
Pretty pretty pretty soon if you slow down with our state populations I think Tuesday have shown a little bit of an increase in the last month and I think we've seen four states the increase a little bit the last week. So so yeah, I think generally looking I kind of both sides of the portfolio of the safety segment.
Again see in a little bit of decline in a couple of partners, but the rate of decline has slowed.
Slow down a bit and then in a community segment.
That's fine I think pretty stable over the last probably a month or two and again, we're excited about the new opportunity in Oklahoma, which you'll be a nice opportunity for a couple of days have been underutilize, there in Oklahoma, but only thing anything to add to that Dave No well I guess I'd say are Marshalls populations were pretty flat I think they were down like 50.
From the second quarter to the third quarter.
I says compensated populations were down probably about 500, something like that as I mentioned in my script that Pops are total pops or actually up even if you exclude cimarron, which is a new contract ramping up.
There are up slightly from the end of September two a couple of days ago. So.
Fingers crossed but.
As I mentioned in my script that a lot of uncertainty and and still.
Still in the middle of COVID-19.
And would expect to see some impact of that in the form of reductions in and populations going forward, but.
Little bit.
I think it has slowed down.
Okay. Thanks for that and then in the fourth quarter.
Any significant contracts that are up for renewal I saw in the third quarter looking at you guys had about 90%.
Retention rate. So just wondering what what it looks like here in the fourth quarter for contracts up for renewal.
Yeah, nothing is the David again, just nothing in the in the fourth quarter and I go out a little further into kind of first second quarter, maybe even out 12 months nothing really significant relative to significant contract renewals. The the Houston and huddled contracts were ones that were focus DNR, but now that we've gotten those across the finish line I'd say that the list of.
Kind of near near term contracts that we think are.
At risk of being competitive they're pure and whatnot, we think that probably pretty unlikelihood mixed bisexual months, yes with.
With contracts their average three to five years in terms generally speaking you do always have a significant portion of them <unk>.
Expiring in any one year, but as we look out over the next 12 months.
It's pretty pretty quiet relative to what it has been when you are looking at the material contracts. So.
So I feel pretty good about those that are coming up that they would be renewed.
Okay, and then just kind of a technical question here I know you guys suspended the dividend at the Tiger suspend that you said you thought you had paid enough and dividends that you would be able to retain we'd status for 2019.
That's still I'm assuming.
Walt process right now.
Yes, yes, we we had mentioned that there are some benefits under the cares act to accelerate some depreciation qualified improvement property.
Without that we probably wouldn't have been there, but we obviously have that and.
Don't anticipate an additional distribution required this year now if we were to sell a significant portion of our assets that are that we've talked about on the and the scripts.
At at arch taxable gain there could be an additional distribution, but I don't anticipate that right now.
Okay.
And.
Kind of a broad from the 10000 foot I know David touched on a little bit here.
Obviously, if we look at your guys' stock price.
The with what's been going on here with the election.
There is a.
A huge portion of the Investor base, saying.
The feeling is is that with.
If biden wants to win the election that is a huge negative for the company just based on what's happened to the stock price here.
If you can fill in a little more color here it any more detail.
What actually can can bite and do from a.
Ah regulatory.
Standpoint in terms of.
Changing.
<unk> or the U S Marshalls.
I know that the bureau of prisons has reduced its populations over time I don't know if that gives them access capacity can that allow.
The government to transfer.
Detainees.
Currently being house by the private.
Sector to the Federal Bureau of prisons are those.
<unk>, just not set up to handle detainees versus inmates.
My understanding correct me if I'm wrong. Please you know ice and in the U S Marshalls on.
Minimal amount of beds at all so that again the alternatives for the federal government.
House knees detainees is extremely limited any kind of.
Overview R. D. More detail you can give on all that would be greatly appreciate it.
Absolutely. Thank you for the question. So yeah, let me give a little color on all three federal partner. So let me start with the Federal Bureau of prisons.
So that was as you know about 10 years ago that was about 10% of our revenue or excuse me about 15% of our revenue came from the Federal Bureau prisons. This year on the safety side is going to be about 2%. So we started a conversation with our board about seven eight years ago, noting that the the need and the trends for the <unk> was going to.
Change because at that time gone through some since the reform change some policies on since he for different criminal offenses, and so we went through a process to as we saw contracts come up exploration most notably the reason why here Adams County, just thinking about maybe alternative for those facilities, so that 15% of revenue.
From the B O P back in 2010 now down to 2%. So we think if there is a change in policy.
Directed towards the B O P about utilization of the private sector again, we think are a risk is pretty pretty minimal there just because we're down to one con when contract.
I'll touch a little bit more on ice and Marshalls, but let me I guess the answer a one part of your question that was embedded there and that is that B O P being able to support the missions for ice and Marshall service, we think that if there is some direction.
Then for the B O P because utilization and oxy has gone down in their system that it's likely that the contracts they have with the private sector directly.
Like our one in in Mccrae, maybe that's capacity or S population, they move back into their system. So facilities they own and they operate we think if that if that's a step that's probably the first step.
That they do those direct contracts that they've got with the with the private sector. Because you again utilization has gone down Oxy has gone down and I'll say they've impacted here near term also with with with Covid COVID-19.
So.
So that's what we say potentially could be a staff. If there is some direction and desire either from the Barber justice in or a Bureau prisons.
Go into the eyes of martial service. So you touched on this both those agencies our law enforcement focused and so Marshall service do not have any facilities they own or are they operate so I'd like to be O P, where they've got 100 facilities around the country that day, one and they operate Marshall service doesn't have that luxury and so they have they have no alternative either rely on.
US the private sector or city of counties for for for space. So if they are.
Asked to look at either buying or building new capacity outfit that'll be a very large capital commitment and probably would take anywhere from five to 10 years to happen. So I'll say not something they can affect overnight and again, depending on what the leadership is within the Congress.
That I'll say, we require also some encouraged with Congress.
Federalizing of workforce to operate this facility so several different steps at all today would they would have to take.
So we think are you know 40 years work with them our service am with ice too we have been able to be very closely aligned with a mission, which has changed changed overtime provide high quality. Good solutions that are very efficient for their mission, notably and again it goes a little bit of question about.
Potentially providing capacity to those agencies that capacity has to be in the right location. So for example are zody in San Diego, which is about a mile and a half from the southwest border that facility has a capacity, but it's got court rooms, it's got space for lawyers and for case managers and the B O P doesn't have anything near.
By that could support them. So our facilities are not only efficient from a design perspective, but they're very strategically located to make the admission of both agencies marshals and is very very very effective. So that's an important important point on that on that piece. The last thing I would say is that.
The the needs for ice and Marshall service come from two different different areas. So Marshall service they have to provide capacity anytime a federal judge directs them to hold a federal prisoner. So they they regardless of the budget situation U S attorneys that they're prosecuting someone in a Joe.
Says this person needs to be pain, and they produced this individual to them our service they have to how's that individual they don't have the luxury say they don't have the the dollars or maybe the policy.
To have that population. So there again beholden to what's being directed by the federal judiciary and ice different circumstance, it's driven by their funding levels.
And as you know Joe we've talked through kind of the charts I funding going back to 2005, and so it it goes back to.
George W. Bush President Obama as of now under President Trumps, almost 15 plus years over three different administrations ice funding year over year has either been flat or has grown.
15 years, you have not seen a decline in I Sunday, then again, you've got three different administrations and you've had multiple changes in leadership both on the house and this on the on the set aside. So so we think that indicator is probably a pretty good side of it.
Regardless of what the outcome his here this.
This week's election your eyes mission is they have a need for capacity they rely on the private sector or.
Local facilities and funding has been either stable or has grown over the last 15 years and we are constantly show not only a high quality.
Solution in strategic locations, but also we continue to apply and.
Advocate that highest continue to raise the standards have appropriate oversight.
So all these different reforms an improvement in standards and quality of operations, we've advocated for and we've met the bar and so.
So as a probably a pretty long answer to it pretty important question, but I guess, Dave Let me look at you anything you would add to that just a couple of points you touched on the standards are facilities meet the what they call. The performance based national detention standards that the alternative in a public sector facility.
Where they house them in county jails, just oftentimes cannot meet those facilities because of physical plant limitations, so where our facilities are newer facilities. They meet all of those standards.
In many cases, the alternative use public sector facility just can't meet those standards because of the physical plant and then last point.
Last couple of points I guess I'd make as many of our facilities also have courts within the facilities and ice officials, we have hundreds literally hundreds of ice officials that when they get up in the morning to report to their place of work it's at one of our facilities.
And in the case, where they have courts.
Is an extremely efficient much more efficient.
Use of the space when as opposed to having to round them up from county, jails and get them to court. So a lot of critical needs, we provide within our real estate that's.
Very challenging to replicate when the other thing I would add Joe is that we've got about 65000 beds and our safety segment that we own and we operate and so if there was a for whatever reason of desired either to lease or by that capacity. If you put a.
A dollar amount to it new construction for federal facilities that we've seen over the last few years is anywhere in the range of about two to 400000 per bed state new construction as in a range of about 100 or 200000 per bed. So if you just used 200000, that's kind of the midpoint between state projects versus federal projects and put that against 65.
And bed, that's $13 billion.
In value of our underlying real estate and again about about a third maybe to actually have a that is with the the federal government. So so that's where I will have to have that conversation.
If appropriate basically yoga alternative, but I guess I'll just to say again, both Marshall service eyes have been and continue to be very satisfied and really.
Have a great desire to kind of keep the current situation in place, which is look at the private sector.
First maybe city counties second for capacity they have capacity needs they have around around the country.
Great really appreciate that one last quick one for me and I'll get back in queue. So again will go back to the stock price.
And I can understand.
I understand the first focus here is on.
That reduction but.
Show Me, we were able to to sell the non-core assets in the property segment any consideration given to maybe using a portion of those proceeds to buy back some of the stock if the stock was to stay at these types of levels.
Yeah, I mean, a share repurchase program, obviously would make a lot of sense based on current current valuation in it as a large shareholder of the company, obviously I agree with that just because of my current holding.
But we think the physician we put ourselves in now which is now we can't can control our own destiny as it relates to if equity in.
Credit markets are not available to us we can pay down debt. So that is our singular focused at the moment, let's pay down debt, let's get our leverage level down to two two and a half times and along the way we can evaluate especially if the bond market opens up for US we can buy wait and see if there's opportunity to refined some if not all of our outstanding debt.
But the near term focuses just to pay down continued kind of evaluate market conditions, but clearly a share repurchase program based.
Based on current stock prices would make sense down and down the road and I guess, the last thing I would say, especially for newer investors I mean as a tool in the toolbox that we have used in the past you know from 2000 late 2008 to 2011, we bought almost $18 million of shares back. These were in the early days when I was C E O about half a billion dollars. So it's clear.
Two one a toolbox that we've utilized in the past, but again just want to re re emphasize number one priority is paying down debt and.
And getting in our leverage level down to a level, we think it's appropriate.
Thank you for that really appreciate you guys, taking the time for the questions.
Thank you Joe.
Thank you we will take our next question from Jordan Sherman with a range of global. Please go ahead.
Thank you just wanted to make sure I understand the Alabama opportunity and you said I think you mentioned 7000 plus ads.
Yeah.
Maybe you can compare that to Kansas.
Absolutely. So it is a daemon I appreciate your question so yeah, Kansas was about.
About 2400 beds, primarily two compounds one was a.
Secure facility about medium to high security there was a big investment there too for medical infirmary beds or whatnot as in about about 500 beds that were outside the facility. So combined is about 24 2500 beds.
Capital project, if you want to put a dollars to it was kind of in a range of about $160 million. So, Alabama, obviously all of us larger.
Project and I should say projects cause it's going to be two facilities that we've been selected zoom. When we're successful on release negotiations and this all this is be pretty fluid probably hear the next probably 60 days, but one facility will probably be in a range of about 3000 beds. The other one will be in a range of about 4000 beds. One of them was going to have.
Also a very big investment for.
Specialty medical care, so probably the infirmary beds and whatnot.
That's conceptually of what the state wants to to accomplish.
It's hard to put a dollar amount to it right now just because it is pretty fluid right. Now you know one of the key things we bring to the table is we know how to build facilities, obviously very efficiently from not only a a systems in utilities perspective, but also from a staffing perspective, and so that's really the meat of the work that we're doing right. Now is continued kind of work with the design with the the folks in <unk>.
Alabama.
The ultimate give them the most efficient facility that meets their goals of the project, but anything I guess, you would add to that David I think the state has put a total estimated cost of close to $1 billion for all three of them as Damon mentioned, that's the process. We're in right now.
Working with them to try to.
Minimize the cost and obviously the lease right that they would ultimately pay so much.
Kansas.
I apologize you're the phone cut out just as you were saying the dollar amount.
The state put a put an estimate.
Posted $1 billion on it.
And that was for the for all three facilities to the ninth at almost 10000 beds or something.
That was their asthma that's right.
Okay, and what's expected returns for you guys similar to Kansas.
I hate to get into the details of that but I would say at least some alternatives, Kansas, Kansas was the first one in the industry ever done.
Kansas is also one where ownership reverts to the state at the end of the these plenty your lease term.
That is not going to be an option in Alabama. So we would expect to retain ownership at the end of the 30 year lease term. So I think it's what they're shooting for.
But but yeah that'll be.
Returns that hit our thresholds.
Okay, and then just wanted to ask about the facilities to be sold I'm not sure I I quite.
No.
My mind around which which is how many facilities total are you thinking of selling and then what's the associated NOI with those and what type of pricing ranges I don't you know like they're not.
No I'd, probably be careful about what you say about that but yeah.
Grandma's around that.
Yeah. There are 46 facilities NOI about 30 $30 million on an annual basis. If you look at our supplemental disclosure report, they're all in the course of Icke properties segment and there at least most of them are least to the GSA General services administration most of them like SSA built social security administration.
Gration buildings IRS buildings.
So it's really your non correctional portfolio.
And yeah, I, just probably wouldn't want to talk about price at this point.
Understood.
And these are these some of these are are part of the new newer direction you guys had been headed in.
That's correct, yes. So we started acquiring these are a couple of years ago. There was a couple of reasons why we thought that was advil just one of which is is to diversify the cashflows for the overall company, but clearly with the current valuation of the of the stock price, we're not getting any credit for those assets.
But we would also has happened on a parallel path is that government lease assets like these I mean this market is red hot because other real estate asset classes, obviously or distressed right now for for obvious reasons. So we think there's a market opportunity to take advantage of the current market interest in the market should say to buy these assets under.
You're saying that we're not getting any credit with it being embedded in our portfolio, but the other strategic reason we thought these assets makes sense and now we feel like we've kind of cleared that hurdle.
Is when we were building the properties line initially.
There was a lot of trying to kind of misunderstanding or maybe not complete awareness of what we're trying to do on places like Kansas and now, Alabama now that we've completely develop that market, it's very very well understood. It's seen as a very attractive option first dates like Alabama, and Kansas, and Oklahoma, Kentucky, and even Nebraska, we think.
Having a portfolio of got release assets, we've kind of we've kind of made the market kind of aware of how we can do it but we've also made the market aware that this could be an individual project basis, something that might be interest for investors. If they want to help with the development of the cost and maybe do a specific loan.
For projects like Alabama, like Kansas, So through a couple of reasons strategically we thought these portfolios added value, but we thing now is an opportunity with the market being red Hot from a buyer's perspective, and also not getting credit is a good time to go ahead and see what the market will bear relative to purchase.
Scary thought <unk>, you know considering I'll put people think about private prisons. These days, maybe you are getting credit for that but I'm just kidding.
Uhm.
Just a question on so so obviously, there's some concern with you know the Democrat Joe Biden wins, and I would think that's a concern would be less now with a if the Congress doesn't turn it over.
But I'm just wondering you know in your experience.
And they've gathered from all your comments that you think these concerns are are <unk>.
Not well founded any either history or and your expectations.
But how long will it be say that you know Joe buttons elected and we have a Republican Congress, how long will it be before we start to see whatever policy.
That the new administration has for.
Immigration and private prisons, taking shape and what when when was a rubber start hitting the road to sort of demonstrate that.
Life is not gonna be as as bad as feared.
The change in administration.
Yeah. Good good question, so and I'll tag team with us with Dave on this but I'd say a couple of answers. Let me first say it was a marshal service. So again the martial service.
100 per cent rely on private sector or local local facilities. They do not have any facilities. They have no no alternatives and again, they uhm completely take every prisoner that's producer them from the federal Judiciary. So I think if there was a policy decision made where the March service <unk> longer use that private sector for forever.
Reason.
That would be very very hard if not impossible to to affect.
And again I've talked to you through a little bit about the idea of maybe a leasing or.
Buying a facilities again, if the Republicans control the Senate, there's gonna have they have to be some discussion and probably agreement that that is in the best interests of government. So we think that when it's going to be it kind of a difficult one.
As it relates to.
I see your question I think probably what you intentionally would see as maybe through the funding cycle. So as you go into the new funding cycle for this would be I guess fiscal year, 2022, which would happen during a kind of spring and summer of next year.
Obviously that level of funding could go up or go down and that could be somewhat linked to maybe a policy directive or desire with a with a new administration again, if his reason indication under multiple Congress is being controlled by either Democrats or Republicans. Another three different presidential administrations over the last 15 years.
Finding fries has either been flat so year over year on par with the previous year or has has increased.
But I don't want anything you add to that David just said you know.
If if Joe find where to become the next president I think there's a lot on his plate to deal with certainly COVID-19 is going to be mission number one to to help get that under control, but when you think of all the other initiatives that are on his plate health care tax a form climate change trade negotiations, it's probably a while before.
You would expect the the focus to become on private prisons, it's just such a complex area to solve because we provide such an essential.
Governmental service there that I, just can't believe that that would be one that they want to tackle the box.
Yeah, I've always thought that the you know the bigger well two things one is that the bigger.
Picture question would be more important you know comprehensive immigration reform, then specifically targeting the private prisons.
And and also that.
With President Trump out in in a <unk> a shot at.
<unk> you know comprehensive immigration reform, the private prisons would become less of a target.
Okay.
Yeah that might be.
Again going kind of going through the list of kind of legislative priorities I think if if if it is by new becomes president and he's got the.
Congress controlled by Democrats on the house side, and Republicans along to set aside there could be an opening but they've kind of ticked off there are so many other priorities, but also challenges normally with the pandemic and he's also you've got to think through.
What's my priority list over the next couple of years, especially with the midterms coming up and 22.
The only thing I would add to that is it's a little uncertain, what's going to happen to the the trends of immigration right. Now populations are really down because of COVID-19, there's not been a fundamental shift and the number of people trying to cross the border those numbers are still.
Large numbers, but they're just turning them away to help prevent the spread of COVID-19, I would expect although it's just an opinion you you would suspect that Ah software immigration policy or perceived software immigration policy from there by the administration compared with the Trump administration might result in an increase in the number of people try and 10.
The United States, it's going to be a good economy. The benefits that are potentially provided to asylum seekers and people undocumented people tried to enter the country could could create somewhat of a surge in I'd 0.2.
Joe Biden was vice President under the Obama Administration Internet administration, they did turn to the private sector to help resolve the humanitarian crisis that they saw in 2014 so.
Hopefully.
Memories are are are long and can can recall the solutions that we help provide yeah.
That's kind of the bottom line you know obviously, there's a lot of US narrowed you can go through with this question, which is a really good really good question an important question, but the thing we can control is to provide safe humane high quality solutions to ice and Marshall service and we think we have answered that call over and over and over again with turnover that.
We've seen in leadership, both in the House Senate and the the White House. So the thing we can control is continue to raise the bar on our quality continue to advocate for transparent operations in onsite monitors and completely raised the bar on standards and policies and pro calls and we feel like we keep doing that which we've got a good record based on.
Ah renewal rates on our contracts.
We will continue to be a very attractive option for the government.
Understood and just the last question. So I I appreciate the capital needs and the capital concerns.
Behind the view of potential.
Potential stock corporate corporate level stock buybacks.
But I'm wondering at what level is both a question than a set of suggestion at what level does the stock become attractive for management to step up and buy and I guess the suggestion there is that purchases by management at these levels would certainly send the right would be the right signalling to the market about the value in the stock.
Yeah. So.
Message message received you know I've got I think about 300000 shares and then I've got I think probably equal amount of options I have barton over over the years. So I've vast majority of my personal networth as in and of course, if it stopped so I'll see I'm highly highly motivated incentivize accordingly, so but.
I understand your point in.
This is Dave I have not so we stopped we used to issue options up until I think it was 2013 something like that and then we've issued restricted shares. Since then I have never sold a share of stock. Since then we have shareowner guidelines.
That we require our management team to hold I own three times the requirements. So I think I'm the same way, so certainly well invested and as a fellow shareholder are certainly a frustrated with the performance of the stock.
What we call a purchase it that these levels averaging down.
Okay understood right. Okay, alright, Thank you guys.
Thank you.
Baseball conclude today's question and answer session and today's conference.
You for your participation you may now disconnect.
Okay.
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