Q2 2021 Corecivic Inc Earnings Call

August 10, 2021

[music]. Good morning, My name is Casey and I will be your conference operator and.

As a reminder, this call is being recorded I would like to welcome you to core civic second quarter 2021earnings conference call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question and answer session. If he would like to ask a question. During this time simply press Star then the number 1 on your telephone keypad, if you'd like to withdraw.

Your question Press Star 2 thank you at this time I would like to now turn the conference over to Cameron Hopewell core civics, managing director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thanks, Casey good morning, ladies and gentlemen, and thank you for joining us participating on today's call are Damon <unk>, President and Chief Executive Officer, and David Garfinkle, Chief Financial Officer. We're also joined here in the room by our Vice President of Finance, Brian Hammonds.

The call today will focus on our financial results for the second quarter and we will provide you with general business updates during today's call our remarks, including our answers to your questions will include forward looking statements pursuant to the safe Harbor provisions of the private Securities and Litigation Reform Act, our actual results or trends may differ from.

Materially as a result, and a variety of factors, including those identified and our second quarter 2021 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 and the future.

On this call. We will also discuss certain non-GAAP measures a reconciliation of the most comparable GAAP measurement is provided on our corresponding earnings release and included in the supplemental financial data on the investors page of our website <unk> dot com with that it's my pleasure to turn the call over to our president and CEO Damon <unk> Damon.

Thank you Tamara and good morning, everyone and thank you for joining us today for our second quarter 2021 earnings Conference call.

Going to our agenda for the call. We will provide you with a breakdown of our second quarter financial performance discuss business develop opportunities and the latest developments with our government partners.

We will also provide you with an update of our continued response to the COVID-19 pandemic.

Particularly relevant due to the emergence of the latest delta variance.

Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will review our financial results in greater detail.

Our second quarter revenue of $464.6 million represented only a 2% decline over the prior year quarter. Despite the continued impact of the COVID-19 pandemic on occupancy within our safety and community segments.

<unk> of 47, non core real estate assets within our property segment and multiple transactions between December 2020, and June 2021, and our decision to exit 2 managed only contracts with local governments and the state of Tennessee.

And in the year since we announced the change and our capital allocation strategy, we have meaningfully for improved our credit profile, reducing our net debt balance by almost $550 million during a time of unprecedented challenges.

We are maintaining our target of reaching a total leverage ratio or net debt to adjusted EBITDA of 2 and 2 <unk>.

And 225 times to 275 times.

Using the trailing 12 months ended June 30 of 2021, and our total leverage ratio was 3.3 times.

At the same time last year, our total leverage ratio was 3.9 times. So we have made significant progress.

We continue to believe our capital allocation strategy is the most prudent approach to positioning the company to generate long term value through a stable capital structure and continue to cost effectively meet the needs of our government customers with less reliance on outside partners.

We continue to see criminal justice related populations declined mostly due to a reduction and new intakes rather than early releases.

Governments have acted faster to transfer certain residents assigned to our residents our reentry facilities to nonresidential statuses, such as furloughs home confinement, our releases to create additional space for enhanced social distancing within facilities.

The year over year over year rate of decline and oxy and our safety and community facilities has slowed because the prior year quarter was also impacted by the COVID-19 pandemic.

Our safety segment occupancy was 72, 5% and the quarter down 330 basis points versus the prior year quarter, and our community segments Oxy with 58, 1% down 420 basis points.

However, our safety Oxy increase of 120 basis points over the first quarter of 2021, and our community segment Oxy increased by 650 basis points versus the first quarter of 2021.

Normalized funds from operations or <unk> for the second quarter was <unk> 46 per share a decline of 18% compared with the second quarter of 2020.

However, this decline was primarily driven by our decision to convert to a taxable C Corporation effective January 1.2021 primary REIT.

We have added disclosures in our second quarter supplemental financial financial information document available on our website, which provides our pro forma results of 2020, reflecting income tax expense by applying our estimated tax rate of pre tax income in the prior year.

Comparing our second quarter 2021, normalized <unk> of <unk> 46 per share to our pro forma second quarter 2020, normalized <unk> 47 per share. It shows a decline of just 2%.

Our adjusted EBITDA of $101.7 million was also resilient, increasing 1% compared to the second quarter of 2020.

Our GAAP results included some larger than average special items, including $52 million and expenses related to debt repayments and refinancing refinancing transactions.

These charges were the result of the repayment of our $250 million and unsecured bonds due in October 2022.

Partial repayment of our $350 million and unsecured bonds due in may of 2023, and the repayment of non recourse mortgage notes associated with the recently sold GSA leased assets previously and our properties portfolio.

These charges were partially offset by a $39 million gain we recognized from the sale of 5 GSA leased real estate assets, which we have excluded from our adjusted results.

Dave will provide we will provide greater details about our second quarter financial results and.

<unk> and reconciling between our GAAP and normalized results following the remainder of my comments.

We will start our operational and business development discussion with an update on the impact of COVID-19, pandemic and our ongoing response.

Last quarter I spoke about 2 trends the increasing availability of the vaccine and substantially lower rate of positive cases across the country, which were leading many corrects assistance to beginning of moving towards normalized and their facility operations over time for the various protocols enacted in response to the COVID-19 pandemic.

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These protocol changes included returning to classroom based learning and rehabilitation programs and person and visitation and reduce mass requirements for vaccinated staff and <unk> just to name a few.

With the current rate of positive cases, now increasing across the country. The emergence emergence of the delta variant and changing guidance from leading health experts. It is likely that the pandemic protocols will remain in place longer in order to mitigate the risk of virus transmission.

Throughout the pandemic, we have worked diligently to collaborate with our government partners, while being guided by a leading health experts to proactively respond to the changing conditions within our facilities.

Throughout the second quarter, the number of active cases within our facilities, where I remained low and we continue to expand the doses of vaccine administered to our staff and resident populations.

Our latest data shows we have a minister at approximately 27000 doses.

Today, the vast majority of our positive cases are and ice facilities and.

And most of these individuals' arrive at our facility Covid positive.

We do testing during our intake process. So we can identify these individuals before they joined the facility's general population.

Proactive testing and quarantine protocols have helped us to reduce the potential for wider spreading of the virus.

We are also following closely the recent vaccination mandates issued by various government and private entities to their employees.

While we have made vaccinations available to our employees and there is currently ample community access to free vaccinations and until recently, we had not taken the position of mandating vaccinations.

In recent weeks various government partners across the country have begun communicating new vaccine mandates and COVID-19 testing requirements for our staff, which we are diligently working to fully comply with.

For our inmate detainees and resident populations, we do not have the ability to mandate vaccinations.

Just as we've seen and our communities there has been some hesitancy from our for many to accept the vaccine.

We continue to provide educational resources to all our employees and residents in order to encourage to encourage getting vaccinated.

I will move next to discuss our recent federal and state level business development updates and discuss some of the emerging needs and the market.

We are continuing to evaluate the impact of the executive order signed by President <unk> and issued in January that directly to the attorney general to not renew and department of Justice contracts with privately operated criminal detention facilities.

2 agencies the department of Justice utilize our services the Federal Bureau of prisons or.

And the United States Marshal service, our U S MFS.

As a reminder, the <unk> takes custody of inmates who have been convicted for federal crimes and the U S. MFS is responsible for prisoners, who are awaiting trial and federal court.

The <unk> has experienced a significant decline and inmate populations since 2013, and simply does not have as much as and the need of for prison capacity from the private sector.

The decline and <unk> populations has attendance defined by COVID-19.

We currently have 1 prison contract with the BOP accounting for approximately 2% of our total revenue.

Marshals service populations have remained relatively consistent in recent years, so their capacity needs remain unchanged and.

In fact, the nationwide Marshal population has increased.

We continue to believe that the marshals do not have sufficient detention capacity to satisfy their current needs without much of the capacity we provide.

We began the year with for contracts with the marshals that expire in 2021.

The first of which was our 2016 bed northeast, Ohio Correctional Center.

In May we entered into a new 3 year contract with Mahoney County, Ohio to utilize up to 990 beds at our northeast, Ohio Correctional Center.

This new contract served as a replacement to the previous direct contract with United States Marshal servers for up to 992 beds to house federal detainees.

Mahoning County is responsible for its own county inmate populations as well as total detainees and academy is using the northeast, Ohio facility to address their population needs.

We continue to own and operate the northeast, Ohio Correctional Center under the new contract for Monte County, and and existing contract with the state of Ohio that currently runs through June of 2032.

Our second marshals contract set for exploration was for 96 beds at our 660 for bed Crossroads Correctional Center and Montana.

And July we entered into and amended the contract with the state of Montana utilize all the capacity at the process facility, including the 96 beds recently vacated due to the exploration of our previous contract with the marshals.

The amended contract was extended through June of 2023 with additional extension options by mutual agreement through August of 2029.

Our remaining 2 contracts with the Marshalls with exploration dates this year, our 600 bed West, Tennessee detention facility and our 1033 bed level of detention center expiring in September 2021, and December of 2021, respectively.

We do not know if the marshals will ultimately relocate the federal detainee populations, we care for at these facilities, but we continue to explore various options that would enable the marshals to continue to fulfill its important mission, while maintaining access to our facilities.

But we are also evaluating options for other government agencies.

Our third federal partner is immigration and customs enforcement or ice, which is not impacted by the previously mentioned and executive order.

They continued to be the government partner with the most significant impact from COVID-19 on their capacity utilization.

However, recent highest heightened activity along the southwest border has caused significant volatility and their utilization levels.

Nationwide Ics detainee populations have doubled since the start of the year.

We have experienced a similar impacted our facilities under contract with ice for our facility utilization levels remained materially below historical averages.

The largest driver of their lower utilization levels has been inaccurate or title 42 since March of last year, which for Vince nearly all of its island claims at the country's borders and ports of entry in order to prevent the spread of COVID-19.

And instead titled 42 allows for individuals apprehended at the south from quarter to immediately be expelled to Mexico.

And as Ministry of changes and court decisions have occurred since the original enactment of titles and 42, which have enabled and unaccompanied minors and some family units to enter and remain in the United States, while their immigration cases are adjudicated.

These changes have little to no impact on the demand for our services by highest because we do not house unaccompanied minors and any of our facilities.

We have 1 facility and Dilley, Texas opened during the Obama by the administration and 2014, which has a family mission.

However, we provide that facility to ice on a fixed price basis.

We primarily provide highest with statistic capacity for adult populations and it is unclear when title 42 will no longer be apply to adults.

Certain factors such as criminal histories or previous deportations may compel the government to keep individuals and custody instead of applying and title 42.

These situations appear to be the primary driver of the increase and ice utilization, we have experienced and the first half of this year.

The emergence of the Delta variant of the COVID-19 virus has likely extended the use of titles and 42.

Given the rapidly changing trends and government responses to this variant across the country. We are not currently and are positioned to opine on the potential timeline for a reopening of the southwest border.

Whenever that time comes we believe there will be a significant surge and the need for detention capacity.

Our facility support is by providing safe and appropriate housing and care for individuals and the AUC works through the various processes associated with the individuals immigration case deportation order or initial processing.

While we have no involvement or influence on anyone's immigration related case. We know these matters are often quite complex and typically you cannot be adjudicated and a few hours.

This result, and a need for various solutions and a diverse portfolio of real estate across the country to provide housing and care for individuals while there and ice custody.

Our facility serve as a critical component of the real estate infrastructure needed by ice to help them carry out their mission.

And just after the second quarter ended we entered into a new 2 year contract extension with ice at our 300 bed Elizabeth detention Center in New Jersey.

This was our first contract extension or renewal with ice and 2021 and this facility is particularly critical for ice due to recent losses of most of its strategic capacity and the region.

The elusive detention center had successfully serve ice for multiple decades, and we are pleased to continue to provide that service into the future.

Moving now to state level developments and opportunities I will begin with a recent contract renewal, resulting from a competitive re bid with the state of Hawaii.

On July 1 we received a notice of award from Hawaii to care for up to 1800 inmates at our <unk> thousand 896 beds World Correctional facility.

The contract will have a 3 year term.

We are deeply honored and grateful to be able to continue our multi decade partnership with the state of Hawaii.

Hawaii also continuous determined the best approach to replaces Oahu community Correctional Center, the largest jail facility and the states.

The existing facility has exceeded its useful life and the state is in need of a new modern facility to meet current and future needs.

We remain actively engaged with the state regarding various solutions, we could deliver and anticipate a competitive procurement and 2022 to replace the current facility.

Recently, the state of Arizona issued a request for proposal for up to 2706 beds for medium and close security inmates.

The state intends to close his oldest prison facility and Florence due to its outdated condition operational and maintenance cost concerns.

And instead of deploying taxpayer funds to build new capacity. The RFP will allow this day to evaluate alternative capacity available from the private sector.

We will respond to the procurement with our best option and believe the state Department of Corrections rehabilitation and reentry is poised to move quickly on the procurement.

My final state level update come from Alabama.

As a reminder, and February of 2021, we entered into 230 year lease agreements with the state for the development of 2 correctional facilities, which was subject to the successful completion of financing and we were suing for these projects.

Shortly after the close of the second quarter, we received notice from the state of from the state of its decision to terminate the leases effective August 6.2021.

As a result of the lease termination during the third quarter, we expect to report asset impairment charges of $4 million to $6 million for pre development activities.

Of course, we were very disappointed to receive this news.

However, it is clear that a crisis continues to exist and Alabama's presence today.

And that crisis has brought forth a range of well, meaning solutions aimed at addressing the needs of those impacted.

To that and core civic was proud to put forward a real and immediate solution that would have delivered desperately needed modern corrections and infrastructure to replace the laminated aging facilities originally and design with 1 purpose in mind to warehouse prisoners not to rehabilitate returning citizens.

And while it is clear that our proposal would provide a meaningful and immediate solution. We understand that alternatives have put forth and respect the safe decision to pursue those as they work to address the needs of the individuals and their care and and dedicated employees, who watch over them every day.

For nearly 40 years, we are providing meaningful solutions to over half of the states and our nation.

Like Alabama, many of those states correction systems, we're facing humanitarian crisis and core inhibition over the conditions of confinement for the people and their care.

As always we stand ready to assist the state of Alabama and anyway, we can and are grateful to the leaders of the day for their thoughtful consideration of our solution.

I'll close out my comments, expanding and what I mentioned earlier and that is discussing the progress we made during the second quarter towards our capital allocation strategy of reducing overall debt and along with that the sale of certain non correctional real estate assets.

And the second quarter, we sold 3 large and 2 small government leased real estate assets, representing over 1 million square feet for a combined total gross proceeds of $328.7 million.

The 3 large assets were acquired only 3 years earlier at $293.6 million and were sold for an aggregate price of $326 million or a cap rate of 6.2%.

The sale of these assets allowed us to accelerate our debt reduction strategy, while also better aligning our portfolio of real estate assets with our strategic decision to revoke a REIT status at the start of this year.

As a C corp, we viewed ourselves as no longer being in a competitive position to own these type of assets and the ability to recycle the capital we have invested presented a unique opportunity.

There is currently a really strong robust market for government leased real estate assets with many buyers, which has increased the value of these assets over time.

The buyers of these types of assets are either.

Or other organizations and a tankard tax advantaged position similar to Reits.

The combination of high valuations plus competing buyers paying no federal taxes made exiting this market a very attractive option.

Upon closing the sale of these assets, we were able to fully repay a $161.9 million and non recourse mortgage notes associated with 2 of the assets and.

And generate net cash proceeds of $125 million after mortgage note repayment premiums and transaction related costs.

The net cash proceeds were used to pay down a portion of the drawn balance on our revolving credit facility and $527 million of additional open market purchases of our unsecured bonds due in 2023, our closest dated bond maturity.

So as mentioned earlier with all of these actions we were able to take our leverage ratio down to 3.3 times for the 12 months ending June 32021.

1 final comment.

I would really like to express my deep appreciation and grateful and those 2 are of course, <unk>, both year and FSC and around the country.

Their passion and heroic efforts supporting individuals and our care. During this pandemic has been inspiring to see and for that I remain thankful and deeply honored to work alongside them.

I'll now turn the call over to Dave to provide a more detailed look at our financial results and the second quarter of 2021 as well as factors that could affect our business for the remainder of this year Dave.

Thank you Damon and good morning, everyone.

And the second quarter of 2021, we reported net income of <unk> 13 per share for 25 of adjusted earnings per share excluding special items we.

And we generated 46, a normalized <unk> per share and <unk> per share of <unk> 45.

Adjusted EBITDA was $101.7 million from the second quarter of 2021, compared with $101.1 million from the prior year quarter.

Special items during the second quarter of 2021, Inc.

<unk> included a net gain on the sale of 5 real estate assets impairment on our managed only contract COVID-19 expenses and expenses associated with the shareholder litigation settlement disclosed last quarter.

Adjusted amounts also include expenses associated with debt repayments and refinancing transactions for the debt repaid in connection with our April bond issuance as well as the repayment of nonrecourse mortgage debt associated with 2 of the 5 properties, we sold during the quarter.

Financial results and 2021 reflect a higher income tax provision under our new corporate tax structure compared with the prior year when we elected to qualify as a REIT for.

For illustration purposes, and our supplemental disclosure report posted and are on our website. We have duplicated the presentation of adjusted net income normalized funds from operations and <unk> for each quarter and full year of 2020 calculated on a pro forma basis to reflect such metrics applying and an estimated effective tax rate of 27.5.

<unk>.

Adjusted net income per share and the second quarter of 2021 and 25.

Compares to <unk> 23 on a pro forma basis applying this estimated effective tax rate for the second quarter of 2020, while normalized <unk> per share and the second quarter of 2021 a 46.

And compares to <unk> 47 on a pro forma basis for the prior year quarter and <unk> <unk> per share for the second quarter of 2021 to <unk> 45 <unk>.

Compares to <unk> 48 on a pro forma basis for the prior year quarter.

So while there are multiple special items associated with successful transactions completed during the quarter that allowed us to check off several of the goals. We established at the beginning of the year core operating results compared with the prior year quarter can be summarized primarily by an increase and facility EBITDA, excluding COVID-19 expenses of $4.5 million and higher.

G&A expenses contributing to our net increase and adjusted EBITDA of $6 million.

The $4.5 million increase and facility EBITDA was net of a reduction and facility EBITDA of $3.2 million attributable to the sale of 42 GSA leased properties that we sold and the fourth quarter of 2020, and the 5 additional properties sold and the second quarter of 2021.

And therefore, excluding these sales facility EBITDA increased $7.7 million or 6.4% from the prior year quarter.

While occupancy and our safety and community facilities continues to reflect the impact of COVID-19 down to 71, 6% and the second quarter of 2021 compared to 74, 9% and last year's quarter. It is up from 69, 9% and the first quarter of 2021.

The impact of Covid, 19 began and the second quarter last year as populations, primarily ice declined sequentially throughout 2020.

As the federal and state Court systems have begun to return to normal operations and as the numbers of undocumented people encountered at the southern border have increased we have begun to see those populations return.

Operating margins were 26, 8% and the second quarter of 2021, compared with 23, 5% and the prior year quarter.

Although we have excluded the impact of COVID-19 expenses on our adjusted per share results that are included and the operating margins and per mandate statistics presented in our supplemental disclosure report.

Excluding COVID-19 expenses, which included $6.3 million of hero bonuses to our facility staff and the prior year quarter. The total facility operating margin for our safety and community segments was 27% for the second quarter of 2021, compared with 25, 3% for the second quarter of 2020.

Our staffing levels reflect lower occupancy compared with the prior year and most of our facilities remain unrestricted movement because of the pandemic, reflecting the modified services, we are able to provide.

Turning to the balance sheet, we continued to make significant progress on our debt reduction strategy. During the second quarter of 2021, we successfully completed the sale of 5 non core properties generating a $125 million and net proceeds after the repayment of non recourse mortgage notes associated with 2 of the properties and other.

And related costs, which we used to pay down debt.

We reported a gain on the sale of these 5 assets of $38.8 million during the second quarter and defeasance costs on the 2 non recourse mortgage notes of $33 million include.

Including the net proceeds generated from the sale of 42, GSA leased properties and the fourth quarter of 2020, we have generated $152.8 million from the sale of non core assets. After the payment of nonrecourse mortgage notes and transaction costs exceeding the goal. We set in August 2020, when we announced our intention to revoke or.

Election, and revised our capital allocation strategy.

And as mentioned last quarter and April we accessed the debt capital markets issuing $450 million of unsecured notes maturing in 2026, we used the net proceeds of approximately $435.1 million. After the original issuance and underwriting discounts and transaction cost to redeem all of the.

<unk> $250 million of unsecured notes that were scheduled to mature in 2022, including the make whole amount extending our weighted average maturities.

In addition, we repaid $149 million of the $350 million unsecured notes scheduled to mature in 2023 and in aggregate purchase price of $151.2 million and privately negotiated transactions.

And during June we repurchased an additional $27 million of the 2023 notes at par and a privately negotiated transaction, reducing the outstanding balance of the 2023 notes to $174 million.

As of June 30, we had $163 million of cash on hand, and $674 million of availability on our revolving credit facility, which matures in 2023.

Our leverage measured by net debt to EBITDA was 3.3 times using the trailing 12 months down from 3.9 times using the trailing 12 months at the end of the third quarter of 2020, when we announced our revised capital allocation strategy and targeted leverage of 2 and a quarter to 2 and 3 quarters times.

Including the repayments of the mortgage notes associated with the aforementioned sale of noncore assets, we have reduced our net debt balance by over $300 million and the first 6 months of 2021 during.

During the second half of 2021, we estimate that we will pay down and additional $100 million of debt with cash generated from our operations.

We incurred $24.7 million of maintenance capital expenditures during the first half of the year, leaving $40 to $45 million for the remainder of the year, which is consistent with the estimates we provided last quarter.

And without the capital contribution to the Alabama project as Damon described we have no other material capital commitments.

While we are disappointed with Alabama decision without the $100 million of corporate capital. We previously modeled for the project, we expect to reach our targeted leverage sooner at which point, we will evaluate opportunities to return capital to our shareholders. The.

And the challenges encountered and constructing desperately needed criminal justice infrastructure, and the United States exemplified in Alabama, and further demonstrates the importance of the very valuable real estate portfolio of Correctional and detention facilities, we own across the country.

Beyond capital expenditures and debt repayments, we are not yet reinstating financial guidance because of uncertainties associated with COVID-19, the application of the administration's various executive actions and policies related to immigration and criminal justice as well as the challenging employment market.

The country continues to make progress on vaccinations for COVID-19, and our operations. We are beginning to return to more normal operations.

However, we cannot predict the impact of a resurgence in COVID-19 infections caused by the Delta variant, which likely contributed to the extension by the administration of titled 40 to the policy, causing the southern borders remain effectively closed to asylum seekers and adults crossing the southern border without proper documentation or authority and an effort to prevent the spread.

With COVID-19.

Disruptions to the criminal Justice and immigration systems, including further extensions of titled 40 to create challenges and forecasting our residential populations.

Further recruiting and retaining staff has always been difficult and our industry due to the unique and challenging work.

However, like many companies staffing and the current environment has become increasingly difficult.

Even though we provided wage increases effective July 1 for most of our staff at the highest level that we've provided and several years, we could be required to incur additional wage adjustments and certain markets to help ensure sufficient staffing levels and.

We intend to work with our government partners and follow National and local health standards, and enabling us to reinstate programs and normal movement within our facilities, requiring higher staffing levels and impacting our margins absent higher occupancy.

Conversely, our government partners are experiencing the same staffing challenges, which has contributed to some of the per diem increases we were able to achieve as more budget dollars are allocated to help address rising wages.

And by successfully signing a new contract with Mahoning County, and our northeast, Ohio Correctional Center, and expanding the contract with Montana at our Crossroads Correctional Center, we have successfully resolved 2 of the 2021 contract explorations and with the U S Marshal service the.

The remaining 2021 contract explorations with U S Marshal service and our 600 bed West, Tennessee detention facility and at our 1033, <unk> 11 worth detention center in Kansas expire in September and December respectively. We do not yet know if the U S. Marshals will vacate these 2 facilities.

We continue to work with U S Marshal service and various government agencies to meet their needs the solutions of which could be unique for each facility.

At this stage of the discussions and it's too early to predict the ultimate outcome for the financial impact for us if any.

We currently estimate our income tax expense to reflect a normalized effective tax rate of 27, 5% each quarter, although we estimate our cash taxes to be approximately 20% for the year because of net deductions for special items.

Finally, when modeling our financial results for the second half of 2021. It is important to remember the properties, we sold and the fourth quarter of 2020, and the second quarter of 2021 generated approximately $30 million of EBITDA, and 2020, and $9.3 million of EBITDA and the first half of 2021.

As we continue to manage through the impact of COVID-19 returned to normal operations and see how the administration reacts to the dynamic situation on the southern border. It is our current intention to reinstate annual guidance in February 2022.

I will now turn the call back to the operator Casey to open up the lines for questions.

Thank you and if you would like to ask a question.

Please please for my preference Star 1 on your telephone keypad now, okay and as speaker phone. Please make sure that your mute function is turned off and <unk>.

For signal to reach our equipment and again Thats Star 1 if you would like to ask a question.

Our first question will be taken from Joe.

With noble capital.

Good morning, gentlemen, thanks for taking my question.

Good morning, Joe.

Alright, and I wanted to start off a little bit on the population.

Yes.

And running.

We're running story here on the ice and the and the guaranteed contract minimums from La.

Looking.

And.

The overall population.

For all of your your facility you'd see them starting to increase quarter over quarter here. So I was wondering where do we stand and on the ice and the contract.

<unk>.

And then you facility as Matt those where are we how far below are we and other ones any additional detail that would be great.

Joe. Thanks for your question. This is Damon and now taking with Dave a little bit on.

The answer here, let me just first talk globally about ice marshals and then actual pops for our system and that David talk a little bit about your question on where we stand relative to our fixed monthly payments based on oxi levels within those contracts.

So at a high level Marshal service and it did kind of between 66% and 64000 and nationwide and their populations and thats from a that's an increase from where they were last summer about 56000 and so.

And kind of a sense of where they were versus where they are today.

Switching over to ice as I mentioned, they've almost doubled so they were I think were right around 14000 towards in the last year or this year to day, there were right around 28 or 29000 nationwide and.

And then specifically for core civic.

As of the I.

And I guess is probably as of Friday of last week, we were about 8000 within our assistant with ice and then about 9200 with the Marshal service within our system. Thank you and that gives you a high level numbers for both ice and marshals and then specifically for core civic what we've got and our facilities, but I'll, let Dave talk a little bit about kind of where that compares to where we are.

And fixed payments that are tied to oxy levels, yes. Thanks Damon for during the second quarter of growth and 21, we were about 3200.

And as below the guarantee levels.

As of Friday that number had been reduced to about 2200.

Okay, great. Thank you thank you for that and on the.

And 2 facilities and the use.

Marshalls and.

And hopefully we were able to work out a solution for them.

And here in West, Tennessee, and 11 work.

Is there.

Nearby available capacity day declined Q.

Renew there that they could easily switch are we back into kind of the.

Same situation, where we were in northeast, Ohio, where.

And there really wasn't any excess amount of capacity nearby.

That facility that they could put.

The detainees and and I was just wondering how.

How much capacity available and is around those 2 facilities that if they decided not to renew that they could move teeth and make too.

And Joe Good. Good question. This is Damon again, and so and both of those locations West, Tennessee, which is a mace and Tennessee and the western part of the state and the <unk>, which is up and the northeast part of the state of day to Kansas, We've bid and both those communities for about 30 years and so we have a pretty good sense of what the available capacity is.

Kind of locally both and eastern Kansas and West, Missouri for the <unk> facility, and then West Tennessee for.

That facility and our general view is that yes capacity is pretty pretty limited.

For various reasons, 1 of which is just certain systems, maybe just are at capacity or maybe overcapacity is they don't have any additional capacity but.

1 other kind of recent and this is and obviously example, but an important important 1 and that is COVID-19 and thats affected a lot of local systems. How do we think about kind of oxy kind of near term not only with the past 18 months, but also how it has affected their populations and neuropathy with the Delta variant. So so our general view continues to be that.

And pretty limited alternatives locally.

<unk>.

Provide capacity for the for the <unk> service and those 2 locations, but I guess, what I'll also say that the review and analysis we did.

And engaged and we deal with various partners with both northeast, Ohio, and Montana I mean, we're very.

<unk> about the outcome from both those locations.

And as you know that the solutions that we did and both of those locations for very different but we continue to talk to various other partners and also maybe some new partners about that capacity is ultimately the Marshal service fine maybe alternatives.

And those respective areas that allow that maybe to take the population down are completely out at both of those facilities better and that you think you'd add to that Dave and doubt name and that should cover.

Great. Thanks, Thanks for that.

So you guys had mentioned in your prepared remarks.

And how.

Take a look at the safety segment net operating income margin Inc.

Kris 300 basis points in the quarter and how some of that is less COVID-19 expenses from us as per Diem increase I was wondering if you can give us a little more color and detail as to even though you had declining populations. How you were able to show improved net operating margins there.

Yeah, I'll tag team with Dave again on this 1 Joe, but 1 thing I will say it and Dave alluded to this a little bit, but we really had been.

Really grateful for our state partners.

And as they went through their respective legislative sessions around the country, where there was deep appreciation both by the governor and legislators about this labor market and how it's made a challenged and all life for public sector facilities, but also private sector facilities. So with that there has been.

Pretty meaningful increases that we saw on our per day rates on various day contracts around the country, which we were able to quickly turnaround and deliver his salary increases for our employees and so some of that obviously is cost but also I think it was just a general appreciation to some of the work that we do with our within our facility and the value we provide our government partner so.

And just general recognition.

For all of that work was noted around the around the country, but I guess, let you add to that day.

Obviously, many negative <unk>.

Implications for COVID-19, but 1 of the ones and Correctional setting are unfortunately, the reduction and the number of services and programs.

We're able to provide in order to minimize our movement of the inmates and detainees and residents around the facility. So if youre not having classrooms. For example, youre not you don't have the teacher's onboard and youre not paying their salary well while the programs are not going on so we've started.

And to see some of that.

<unk> returned to normal operations, we continue to see that we will see if the delta variant.

It takes a couple of steps back with that but we're looking forward to reinstating those services, which will then result in higher staffing levels and I think you'd see margins I don't know if they'd return to pre pandemic levels.

<unk>.

I think right now, they're probably elevated margins because of the lack of the intensity of services that we're providing the facilities to restrict the movement and the integration and interaction of the inmates and staff.

Okay, Great and 1 more from me and I'll jump back into queue I'd like to go.

Back to Alabama.

Maybe you could give us a little more color on the process. They are looking at and I know this is something the legislature.

Looked at in the past, but it seems to have been unsuccessful in terms of allocating funds for building prisons.

We know that Alabama is under.

Doj lawsuit about their presence.

What other alternatives at least and the short term.

Could there be for Alabama could day for instance, make use of some of your idle facilities to at least.

Comply with the lawsuit and the federal lawsuit and.

Any additional color there on Alabama would be appreciated. Thank you.

Thanks, Joe for that question Damon again, and let me let me just per Se, we really have been grateful for the dialogue and work that we've had with the governor and her staff along with the Commissioner and the department of Corrections staff I have.

Right.

Appreciation for the difficult situation and they have.

Find themselves in.

As you as you know I worked in our credit facility when I first started the company and so having.

New modern facility that is more humane for the residents and safer for staff and it's something very top of mind for me just because I have been there and done that so I have an appreciation for what they're trying to do and Alabama and and continue to be on the sidelines here the cheerleader for for their efforts because yes. They are still very much in a crisis they've got a challenge with.

And your facilities, but also as you noted they've got and continuing to pressure from the department of Justice.

On.

Pushing them trying to modernize their facilities and make it a much more humane environment.

It would be hard for me to speculate and say exactly kind of what the governor and legislature since youre going to do and in coming weeks and months as it's been reported and the press. They are actively talking <unk> b and the governor and legislative leadership about kind of the path forward.

I am encouraged here and the legislature there is good appreciation and understanding that they do need to do something where maybe that hasnt always been the case pack and in Alabama for that as an encouraging sign.

Our position right now is to continue to keep engaged with.

The department and.

As they go kind of down this path with the governor and legislature, while theyre trying to figure out and potentially new alternatives for a more but I would say mid to long term solution and the state and we stand ready to provide any any solution that it may emerge or maybe serve as a bridge to those kind of longer term solutions, but hoping you would add from the day, obviously stay the same.

And we stand ready we can provide a number of solutions for them I know its alabama that once and Alabama solution.

And we do have capacity, we're able to provide out of state capacity. If that's the direction. They take I don't think that Thats, where theyre going with it but we stand ready to help them with whatever solutions.

And they need.

Okay. Thanks, guys, I'll, let Phil and I'll ask some questions and jump back in queue.

Yes, Sir okay. Thanks, Jeff.

Our next question will come from and Marin with sacks.

Thank you.

So a couple of questions.

I'm just waiting for my arms around.

And the.

Situation and the outbound lineup.

Hey, Dan and extrapolate it generally.

And infrastructure that we see and country could you give us any sense on piano.

Perhaps in terms of average age of your infrastructure versus what is currently available.

And government entities or directionally any kind of sense.

We are the general.

Or because it seems that there are probably pretty extensive needs not all in Alabama and other states as well.

Yes, Great question. This is Damon again, and yes, our sense based on our research and there is thousands of beds around the country that are kind of and similar situation, where they're old antiquated, maybe unfortunately, they haven't gotten the dollars to appropriate for preventive maintenance so.

And some locations, we find that facility or maybe only 30 or 40 years old, but maybe there has not been much if any dollars and spent 2 to maintain them. So unfortunately, they're there they're kind of useful life has been accelerated just because those maintenance programs have not been it's been in place. So our average age and keep me honest per day, I think our average age of our portfolio.

Leo for our credit facilities is about 20 years.

On average, though and you compare that with various HSA, probably most states have an average age is probably in the range of 75% to 50 years and H for their system. Some little younger so I'm a little older.

I mean, there are thousands of beds and the United States today that our facility that are well over 100 years old and I mean, we're well position and providing solutions primarily for either existing capacity within our system, where they maybe you could take a older facility offline and use our facility and move into it or we go develop and.

<unk> solution like we did and Kansas a couple a couple of years ago. So finally, I would just say.

And just kind of put a dollar amount and.

And the global discussion you mentioned was infrastructure and we've estimated that there's probably.

15% to $20 billion and development opportunity and United States day to replace old antiquated Correctional facility assets and the various 50 states, but anything you'd add to that Dave you mentioned, Kansas, but that was exactly the situation and Kansas too.

18, when we won the award there to construct a new prison and for.

The state their oldest prison was over 150 years old.

Actually said that was constructed during the Lincoln administration. So a lot of states are in a situation where they don't have modern correctional facility to provide safe humane conditions for inmates and staff. It is also what's driving Arizona to go out with their RFP for 'twenty 700 inmates their Clos.

<unk>.

And another large facility and the state and.

Need to alternative more modern correctional infrastructure for those populations.

And that's what's driving Damon mentioned in his script, Hawaii, and Oahu, replacing their largest jail on the Hawaiian Island. So.

And yes, there is many many.

Correctional systems throughout the country that have old outdated.

Correctional infrastructure.

And there is going to have to be something done whether it's.

And we can provide a solution whether it's constructing a new facility or providing bed capacity. We've got over 7000 beds of idled capacity that could be utilized to accommodate those populations.

And it probably less expensive than what they're currently spending considering.

And then it's a government run facility that it's old.

And current deferred maintenance.

And all kinds of operational and utilities expenses. So forth. So we can provide a more cost effective solution with more modern capacity and where they all add to it and I was just checking my notes of existing state partners with core civic.

We've got 4 of our existing state partners that have 6 facilities that are over 100 years old and and all of our state partners, except for 2 and facilities that are over 50 years old. So again there is unfortunately.

A lot of kind of kicking the can down the road on a lot of systems that just have not been able to get the dollars to modernize their correctional systems.

Okay. Thanks, Brian.

Thank you.

We'll take our next question from Dan <unk> with <unk> financial incorporated.

Good morning, guys and thank you for taking the questions.

My questions have been answered, but I had a follow up to the 1 on margins. So margins were obviously, our operating margins were obviously improved this quarter.

Wanted to know what it's going to look like as some of those programs that you guys.

Rolled off as those come back online what costs are going to be associated with actually bringing those back online and then how are higher population levels.

Kind of a post COVID-19 universe going to help offset some of those costs.

Thank you guys back to us and again, you guys back to historical margins and Thats all from me.

Yes, Thanks, Ben for that question. This is Dave there won't be any any activation expenses associated with bringing those programs back online and it's really just bringing the staff back into the facility.

And so.

Obviously, that's incremental expense, we are not paid incremental dollars to reinstate those programs and that would be the negative impact on margins.

Keep in mind also if youre looking at the second quarter of 2020, we had $6.3% or $6, 2 and then $6.3 million and the hero bonuses that I mentioned in my opening remarks.

Included in the margins reported in the prior year. So if you excluded those.

And <unk> bonuses I think the margin and the prior year would've been 25, 3% so.

It was it was dragged down by those $6.3 million.

And hero bonuses.

And I think I missed the part of your question day.

Cover everything.

Yes, you covered most of it I was just asking if increased population Joe populations for the universe, Yes, yes, yes, sorry about that yes, I mean, it is we have a.

Leveraged operating model so.

We have fixed and variable expenses, but typically youre not incurring incremental fixed expenses with increases in residential populations. So that does typically result in <unk>.

Incremental margins when youre topping off a facility, it's the opposite when you're and facilities.

Facilities experiencing reduction and population so yes, it's quite possible.

Possible and and maybe even probable that the reduction and margins attributable to bringing the staff back into the facility to reinstate the program will be offset by higher populations. If we experienced those higher populations.

Perfect very helpful. Thanks, very much guys.

And welcome.

We'll take our next question from Henry Coffey with Wedbush.

Good morning, and thank you for taking my question.

If we think about it in percentage terms or something that's easy to grasp how close are you given that most of your contracts have a floor.

How close are you to that floor.

Or put differently.

What would be the percentage growth and population until the additional revenue kicks in and obviously given that it's a facility by facility issue.

Difficult to be precise but.

Yes. Thank you for that question so.

And so yes, Dave talked us through a little bit on kind of what the number is I guess and on a per day basis are Amanda.

Population basis, but I'll, let you do a little bit of the math, there, but yes, I guess I'm trying to think of how to answer that question in terms of occupancy.

It does because most of our federal facilities or the federal or the facilities that have those occupancy guarantees of the fixed monthly payments to and again, it's for their benefit to ensure that they have capacity and event.

Have a surge and the future or need need higher populations. So as I mentioned it was about 3200 that they are currently below that that's probably.

Say stay close to 15000 beds that have that minimum fixed payment if that helps.

Yes that does help a lot.

And sort of a similar question about debt levels.

And wanted to put up and absolute number 2 it at about what level of corporate debt.

Are you going to sit back and be satisfied with the situation and then start looking at other return on capital measures and I know you've given us the ratio.

And I'm wondering if you could box it in a little bit in terms of what that maybe based on LTM and what that what that dollar number would look like and.

And then the second related question is for what besides cash flow from operations, what's going to be available to get you all to that dollar level.

And I'll just say.

I'll answer the second question first so yes, I'd say, probably now that we've.

And really has taken advantage of all the opportunities to sell assets that we've done here and I'll ask fixed 7 months there may be a couple more kind of onesie, twosies, but youre, probably pretty smaller dollar amount, but yes. The vast majority we think of the debt repayment is going to come from cash from operations. So, yes, and I would say, that's probably just real rough numbers I haven't.

And run run a calculator on it's probably $300 million to $400 million worth of debt.

And that maybe not even that much that we would have to reduce in absolute terms.

Again, we don't have guidance, so and just kind of go and buy a trailing 12 month like you said.

Before we get to our targeted leverage ratio. So in terms of timing Thats, probably a few quarters I'd estimate.

Again, we don't have guidance out there, but real ballpark I would say the end of 2022 is when we'd hit that targeted leverage ratio give or take a quarter or so.

Yes, that's the advantage of actually having a number in mind, because it's not that far away. Its 12.12 months for a year from now we'll be talking about this or maybe.

9 months from now we'll be talking about this.

Yes.

And that's exactly as you say second half of 'twenty..2 I think is probably a pretty good pretty good pretty good estimate.

And again going back to kind of the capital needs I mean, we've got the.

Normal kind of maintenance Capex, we will have for the for the enterprise. So that's normal course of business, but business development wise with Alabama and al on the sidelines and we've got the Arizona opportunity, but we don't we don't see any kind of near term and that's a near term at least next next 12.18 months any near term kind of visit from active is going to require.

And you kind of major capital need.

And let's be clear today.

And today sitting here, we believe our stock is undervalued so.

And if it doesn't move we're going to be disciplined and getting down to that targeted leverage ratio, but once we hit that targeted leverage ratio without the external capital needs. Because we've got 7000, essentially close to 8000 and idle beds for growth opportunities.

It's really using all of our cash flow to buy back stock if if if we're not for stock Hasnt responded.

What we see as and undervalued stock price and if it has and we will look for other ways like dividend reinstating a dividend to return capital to shareholders. So I think your point My point is we're not that far off from from getting a return of capital to shareholders.

Hi.

So and Alabama, Okay, and Thats not to.

Yes.

Problem initial problem. Besides the politics was.

Inability or unwillingness of.

The New York money center firms to get the bond deal done how much.

How much actual municipal capital would need to be raised.

Whether it be at Alabama, Arizona, or some theoretical situation and are there other non new York based firms for.

Firms that have a strong presence and Alabama firms that have a strong presence in Arizona that would be committed to getting this kind of municipal finance done or is it just the shut down market and the institutions aren't willing to play at all.

Thats a great question and I'll take you begin with Dave on this let me answer the second half first and that is absolutely. Yes, there's been a lot of folks been knocking on our door with all the news coming out and last 6.7 months with Alabama, and say Hey sign US up we know a way to get a transaction done and we've done it before.

For we've had great success with this project for that project. So so yes, we've actually been pleasantly surprise amount of inbound interest with all the noise coming out of Alabama about firms that we can partner with to do transactions now it could be and municipal bond financing and it could be there's obviously a lot of different markets and we could take advantage of so we're encouraged.

By that so we have not loss R. Our appetite of our pace to go ahead and develop new opportunities with various states that and want to modernize their infrastructure just because they can for a reason.

And it done it themselves or have difficulties do it themselves and I should say and then the final thing I would just say as you can go back to Kansas.

And I think we did a private placement transaction on that facility for $160 million, we had $1 billion and interest. So there clearly is a strong investor appetite to finance these type of projects.

So we like so we're very encouraged by that not only that transaction, but also some of them and stuff that we've gotten and from inbound interest from various firms who want to work with us that to your point, maybe or not and the.

Kind of a new Yorker area, maybe other parts of the country that it feels strongly not only by these projects but also.

Tremendous ESG opportunity I mean, just think about your firm and the team picture of modernizing and Correctional system that is safer more humane for residents more program space more medical and mental health space and safer for staff and who wouldn't want to be and that team picture to show, what we've been able to do and a certain.

<unk>. So so so we've got and again people kind of lined up who want to be part of that process and be part of that.

Net solution, but I'll, let you add to that David Yes. We did we had we had Alabama base investment banks, we had other investment banks not based and Alabama, we had publicly traded investment banks private investor.

And the investment banks.

We had and investment banking team lined up to replace the banks that decided not to do the Alabama project, who actually visited facilities of ours. They did their due diligence they did their homework. They understood. The project the situation that Alabama's in.

For the department of Justice lawsuit and all the things that.

We're going to be rectified through the governor of Alabama plan and they were ready so that.

That was not an inhibitor and disrupted the project mid project, which were frustrated about as is Alabama, but we did have replacement bankers ready to go.

And to pick up for the.

The project.

So the capital doors are open and the challenge is having the sort of dialogue required with the community to understand this.

No new prison and this is not new.

Just to really understand what's going on and I assume that process is going on and Alabama now.

Yes, absolutely yes.

The key thing here is and Alabama and at the same case and Kansas too is that this is about modernizing their system so not necessarily.

Looking to 2 increase in fact, that's not the case. It was just more we've got old antiquated facilities that are 500, 100 plus years old.

<unk> got to modernize.

Understood very helpful. Thank you for answering my questions.

Richard Henry Thank you.

Our final question comes from Jordan Sherman with Ranger Global.

Sure.

Yes, I wanted to confirm something I apologize if I missed the commentary around the west Tennessee facility does that contract expires end of September.

Where does that excess cash.

And what happens if we get to the end of September and we Havent finalized things, where we definitely finalize things before them.

Great question. So yeah short answer is that it.

And that will come to some conclusion, just like it did and Montana and Ohio, So I see it playing out pretty similar as it did and those 2 locations, which is probably during the month of August and then going into September.

And we'll continue our dialogue now and with a Marshal service for other jurisdictions that are interested in and that capacity along a parallel path and Marshal service will still continue to kind of evaluate their alternatives either were they could use maybe.

And federal capacity with 1 of their.

Partner agencies, or maybe local county facilities. So it's still still under underway and we're actively engaged with all the various parties.

Okay, and then separately because it seems like a century ago that we had conversations about this and <unk>.

And recall.

What if anything has happened and this is happening has happened will happen there.

Yes, great Great question I would tell you what I have not heard anything recently, but as you probably know I mean, they just.

Our system that had been very challenged and the path with OLED and quite a facility, but also some of the challenges <unk> had with some of the recent recent hurricanes and so.

We definitely keep the lines of communication open interestingly not to your question, but.

And kind of recent activity, we have been marketing.

Your appointment opportunities with folks on the island that maybe you want to work for core civic we have.

A pretty good amount of folks that work and our system from Puerto Rico, when we had operations down there back in the 90. So so that's a long way and with that initiative along with some other activity, we're keeping lines and vacation open and stand ready to meet kind of any of their either emerging needs, where kind of long term opportunities where they want to modernize their system.

Got it.

It's a good thing that wasn't going to save them any money. So I could see why they put that off.

Yes.

Okay Alright.

Anything else on the Arizona, obviously live and everything else.

Other state opportunities percolating.

Is there anything that you can mention.

And that's what I can mention but yes, great question, Yes, we've got a couple of other states that are engaged and us on either increase capacity and then may be 1 or 2 new states, but nothing.

Thats and public at the moment.

Alright, great. Thanks, Thanks very much.

Yes, Sir.

This concludes today's question and answer session is for all of today's call. Thank you for your participation and you may now disconnect your phone lines.

Okay.

[music].

Good morning, My name is Casey and I will be your conference operator as a reminder, this call is being recorded.

Like to welcome you to course of Inc. Second quarter 2021 earnings conference call.

That's it and placed on mute to avoid any background noise. After the Speakers' remarks, there will be a question and answer session. If you would like to ask a question. During this time simply press Star then the number 1 on your telephone keypad, if you'd like to withdraw your question Press Star 2. Thank you at this time I would like to now turn the conference over to Cameron Hopewell core civics managing director.

<unk> of Investor Relations. Mr. Hopewell, you may begin your conference.

<unk> materially as a result, and a variety of factors, including those identified and our second quarter 2021 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 and the future.

And on this call. We will also discuss certain non-GAAP measures a reconciliation of the most comparable GAAP measurement is provided on our corresponding earnings release and included in the supplemental financial data on the investors page of our website <unk> dot com with that it's my pleasure to turn the call over to our president and CEO Damon Heininger Damon.

Thank you Tamara and good morning, everyone and thank you for joining us today for our second quarter 2021 earnings Conference call.

We will also provide you with an update of our continued response to the COVID-19 pandemic.

Particularly relevant due to the emergence of the latest Delta variants.

Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will review our financial results in greater detail.

We are maintaining our target of reaching a total leverage ratio or net debt to adjusted EBITDA of 2 and 2.

And 225 times to 275 times.

Using the trailing 12 months ended June 30 of 2021, our total leverage ratio was 3.3 times.

At the same time last year, our total leverage ratio was 3.9 times. So we have made significant progress.

We continue to believe our capital allocation strategy is the most prudent approach to positioning the company to generate long term value through a stable capital structure and continue to cost effectively and meet the needs of our government customers with less reliance on outside partners.

We continue to see criminal justice related populations declined mostly due to a reduction and new intakes rather than early releases.

The year over year over year rate of decline and oxy and our safety and community facilities have slowed because the prior year quarter was also impacted by the COVID-19 pandemic.

Our safety segment occupancy was 72, 5% in the quarter down 330 basis points versus the prior year quarter and our community segment Oxy was 58, 1% down 420 basis points.

However, our safety Oxy increased 140 basis points over the first quarter of 2021, and our community segment <unk> increased by 650 basis points versus the first quarter of 2021.

Normalized funds from operations or <unk> for the second quarter was <unk> 46 per share a decline of 18% compared with the second quarter of 2020.

However, this decline was primarily driven by our decision to convert to a taxable C Corporation effective January 1.2021 primary REIT.

We have added disclosures and our second quarter supplemental financial financial information document available on our website, which provides our pro forma results of 2020, reflecting income tax expense by applying our estimated tax rate to pre tax income in the prior year.

Comparing our second quarter 2021, and normalized <unk> of <unk> 46 per share to our pro forma second quarter 2000, Twenty's normalized <unk> 47 per share. It shows a decline of just 2%.

Our adjusted EBITDA of $101.7 million was also resilient, increasing 1% compared to the second quarter of 2020.

Our GAAP results included some larger than average special items, including $52 million and expenses related to debt repayments and refinancing refinancing transactions.

These charges were the result of the repayment of our $250 million and unsecured bonds due in October 2022.

These charges were partially offset by a $39 million gain we recognized from the sale of 5 GSA leased real estate assets, which we have excluded from our adjusted results.

Dave will provide for will provide greater details about our second quarter financial results and.

<unk> and reconciling between our GAAP and normalized results following the remainder of my comments.

We will start our operational and business development discussion with an update on the impact of COVID-19, pandemic and our ongoing response.

Last quarter I spoke about 2 trends the increasing availability of the vaccine and a substantially lower rate of positive cases across the country, where tour, leading many correct assistance to beginning moving towards normalized and their facility operations over time for the various protocols enacted in response to the COVID-19 pandemic.

These protocol changes included returning to classroom based learning and rehabilitation programs and person and visitation and reduce math requirements for vaccinated staff and and base just to name a few.

With the current rate of positive cases, now increasing across the country. The emerges emergence of the delta variant and changing guidance from leading health experts. It is likely that the pandemic protocols will remain in place longer in order to mitigate the risk of virus transmission.

Throughout the second quarter, the number of active cases within our facilities for I remain low and we continue to expand the doses of vaccine administered to our staff and resident populations.

Our latest data shows we have a minister at approximately 27000 doses.

Today, the vast majority of our positive cases are and ice facilities and.

And most of these individuals arrive at our facility Covid positive.

We do testing during our intake process. So we can identify these individuals before they joined the facility's general population.

Proactive testing and quarantine protocols have helped us to reduce the potential for wider spreading of the virus.

We are also following closely the recent vaccination mandates issued by various government and private entities to their employees.

While we have made <unk> available to our employees and there is currently ample community access to free vaccinations and until recently, we had not taken the position of mandating vaccinations.

For our inmate detainees and resident populations, we do not have the ability to mandate vaccinations.

Just as we've seen and our communities there has been some hesitancy from our for many to accept the vaccine.

We continue to provide educational resources to all of our employees and residents in order to encourage to encourage getting vaccinated.

I will move next to discuss our recent federal and state level business development updates and discuss some of the emerging needs and the market.

We are continuing to evaluate the impact of the executive order signed by President by the issued in January that directly to the attorney general to not renew and department.

The department of Justice contracts with privately operated criminal detention facilities.

2 agencies of the department adjusted utilize our services and the Federal Bureau of prisons or.

And the United States Marshal service, our U S MFS.

As a reminder, the <unk> takes custody and <unk> been convicted for federal crimes and the U S. MFS was responsible for prisoners, who are awaiting trial and federal court.

The <unk> has experienced a significant decline and inmate populations since 2013, and simply does not have as much as the need of for prison capacity from the private sector.

The decline and <unk> populations has a tendency by COVID-19.

We currently have 1 prison contract with the BOP.

Accounting for approximately 2% of our total revenue.

Marshals service populations have remained relatively consistent in recent years, so their capacity needs remain unchanged and.

In fact, the nationwide Marshal populations has increased.

We continue to believe that the Marshalls do not have sufficient attention capacity to satisfy their current needs without much of the capacity we provide.

We began the year with for contracts with the marshals that expire in 2021.

The first of which was our 2016 bed northeast, Ohio Correctional Center.

And may we entered into a new 3 year contract with Mahoney County, Ohio to utilize up to 990 beds at our northeast, Ohio Correctional Center.

This new contract served as a replacement to the previous direct contract with United States Marshal servers for up to 992 beds to house federal detainees.

Boding County is responsible for its own county inmate populations as well as federal detainees and Academy is using the northeast, Ohio facility to address their population needs.

We continue to own and operate the northeast, Ohio Correctional Center under the new contract for multi county.

And and existing contract with the state of Ohio that currently runs through June of 2032.

Our second marshals contract set for exploration was for 96 beds at our 660 for bed Crossroads Correctional Center and Montana.

And July we entered into and amended the contract with the state of Montana to utilize all the capacity at the process facility, including the 96 beds recently vacated due to the exploration of our previous contract with the marshals.

The amended contract was extended through June of 2023 with additional extension options by mutual agreement through August of 2029.

Our remaining 2 contracts with the marshals with exploration date. This year, our 600 bed West, Tennessee detention facility and our 1033 bed Legwork detention center expiring in September 2021, and December of 2021, respectively.

But we are also evaluating options for other government agencies.

Our third federal partner is immigration and customs enforcement or ice, which is not impacted by the previously mentioned and executive order.

They continue to be the government partner with the most significant impact from COVID-19 on their capacity utilization.

However, recent height heightened activity along the southwest border has caused significant volatility and their utilization levels.

Nationwide ICT detainee populations have doubled since the start of the year.

We have experienced a similar impacted our facilities under contract with ice by our facility utilization levels remained materially below historical averages.

The largest driver of their lower utilization levels has been the enactment of titles and 42 since March of last year, which for Vince nearly all asylum claims at the country's borders and ports of entry in order to prevent the spread of COVID-19.

And instead titled 42 allows for individuals apprehended at the south from quarter to immediately be expelled to Mexico.

And as Ministry of changes and court decisions have occurred since the original enactment of titles and 42, which have enabled unaccompanied minors and some family units to enter and remain in the United States, while their immigration cases are adjudicated.

These changes have little to no impact on the demand for our services by ice because we do dot house unaccompanied minors and any of our facilities.

We have 1 facility and Dilley, Texas opened during the Obama administration, and 2014, which has a family mission.

However, we provide that facility to ice on a fixed price basis.

We primarily provide highest with strategic capacity for adult populations and it is unclear when title 42 will no longer be applied to adults.

Certain factors such as criminal histories or previous deportations may compel the government to keep individuals and custody instead of applying and title 42.

These situations appear to be the primary driver of the increase and ice utilization, we have experienced and the first half of this year.

The emergence of the Delta variant of the COVID-19 virus has likely extended the use of titles and 42.

Given the rapidly changing trends and government responses to this variance across the country. We are not currently and are positioned to opine on the potential timeline for a reopening of the southwest border.

Whenever that time comes we believe there will be a significant surge and the need for tissue capacity.

Our facility support is by providing safe and appropriate housing and care for individuals as the AUC works through the various processes associated with the individuals' immigration case deportation order or initial processing.

While we have no involvement or influence on anyone's immigration related case. We know these matters are often quite complex and typically cannot be adjudicated and a few hours.

This results in a need for various solutions and a diverse portfolio of real estate across the country to provide housing and care for individuals while there and ice custody.

Our facility serve as a critical component of the real estate infrastructure needed by ice to help them carry out their mission.

Just after the second quarter ended we entered into a new 2 year contract extension with ice at our 300 bed Elizabeth detention Center in New Jersey.

This was our first contract extension or renewal with ice and 2021 and this facility is particularly critical for ice due to recent losses of most of the strategic capacity and the region.

The Olympus detention center has successfully served <unk> for multiple decades, and we are pleased to continue to provide that service into the future.

Moving now to state level developments and opportunities I will begin with a recent contract renewal, resulting from a competitive re bid with the state of Hawaii and.

On July 1 we received a notice of award from Hawaii to care for up to 1800 inmates at our 896 beds World Correctional facility.

The contract will have a 3 year term.

We are deeply honored and grateful to be able to continue our multi decade partnership with the state of Hawaii.

Hawaii also continuous determined the best approach to replaces Oahu community Correctional Center, and the largest jail facility and the stage.

The existing facility has exceeded its useful life and the state is in need of a new modern facility to meet its current and future needs.

We remain actively engaged with the state regarding various solutions, we could deliver and anticipate a competitive procurement and 2022 to replace the current facility.

Recently, the state of Arizona issued a request for proposal for up to 2706 beds for medium and close security inmates.

The state intends to close its oldest prison facility in Florida due to its outdated condition operational and maintenance cost concerns.

Instead of deploying taxpayer funds to build new capacity. The RFP will allow this day to evaluate alternative capacity available from the private sector.

We will respond to the procurement with our best option and believe the state Department of Corrections rehabilitation and reentry is poised to move quickly on the procurement.

My final state level update comes from Alabama.

As a reminder, and February of 2021, we entered into 230 year lease agreements with the state for the development of 2 correctional facilities, which were subject to the successful completion of financing and we were.

<unk> for these projects.

Shortly after the close of the second quarter, we received notice from the state of from the state of its decision to terminate the leases effective August 6.2021.

As a result of the lease termination during the third quarter, we expect to report asset impairment charges of $4 million to $6 million for pre development activities.

Of course, we were very disappointed to receive this news.

However, it is clear that a crisis continues to exist and Alabama's presence today.

That crisis has brought forth a range of well, meaning solutions aimed at addressing the needs of those impacted.

To that and core civic was proud to put forward a real and immediate solution that would have delivered desperately needed modern corrections and infrastructure to replace to lap a dated aging facilities originally and design with 1 purpose in mind to warehouse prisoners not to rehabilitate returning citizens.

And while it is clear that our proposal would provide a meaningful and immediate solution, we understand and alternatives have put forth and respect the state decision to pursue those as they work to address the needs of the individuals and their care and and dedicated employees, who watch over them every day.

For nearly 40 years, we provide a meaningful solutions to over half of the states and our nation.

Like Alabama, many of those states correction systems were facing humanitarian crisis and core inhibition over the conditions of confinement for the people and their care.

As always we stand ready to assist the state of Alabama, and any way, we can and are grateful to the leaders of this day for their thoughtful consideration of our solution.

And the second quarter, we sold 3 large and 2 small government leased real estate assets, representing over 1 million square feet for a combined total gross proceeds of $328.7 million.

The 3 large assets were acquired only 3 years earlier at $293.6 million and were sold for an aggregate price of $326 million.

Or a cap rate of 6.2%.

As a C corp, we viewed ourselves as no longer being in a competitive position to all of these type of assets and the ability to recycle the capital we have invested presented a unique opportunity.

There is currently a really strong robust market for government leased real estate assets with many buyers, which has increased the value of these assets over time.

The buyers of these type of assets are either re.

Or other organizations and a package tax advantaged position similar to <unk>.

The combination of high valuations plus competing buyers pay and no federal taxes made exiting this market a very attractive option.

Upon closing the sale of these assets, we were able to fully repay a $161.9 million and non recourse mortgage notes associated with 2 of the assets and generate net cash proceeds of $125 million. After mortgage note repayment premiums and transaction related costs.

And so as mentioned earlier with all of these actions we were able to take our leverage ratio down to 3.3 times for the 12 months ending June 32021.

1 final comment.

I would really like to express my deep appreciation and grateful and as to our course of Vic team, both year and FSC and around the country.

Their passion and heroic efforts supporting individuals and our care. During this pandemic has been inspiring to see and for that I remain thankful and deeply honored to work alongside them.

And.

Thank you Damon and good morning, everyone.

And the second quarter of 2021, we reported net income of <unk> 13 per share for 25 of adjusted earnings per share excluding special items.

We generated <unk> 46, a normalized <unk> per share and <unk> per share of <unk> 45.

Adjusted EBITDA was $101.7 million from the second quarter of 2021, compared with $101.1 million from the prior year quarter.

Special items during the second quarter of 2021, Inc.

The net gain on the sale of fiber loss data assets impairment on our managed only contract COVID-19 expenses and expenses associated with the shareholder litigation settlement disclosed last quarter adjusted.

Financial results and 2021 reflect a higher income tax provision under our new corporate tax structure compared with the prior year. When we elected to qualify as a REIT for illustration purposes, and our supplemental disclosure report posted and are on our website. We have duplicated the presentation of adjusted net income normalized funds from operations and <unk>.

<unk> for each quarter and full year of 2020 calculated on a pro forma basis to reflect such metrics applying and an estimated effective tax rate of 27, 5%.

Adjusted net income per share and the second quarter of 2021 of 25.

Compares to 23 on a pro forma basis applying this estimated effective tax rate for the second quarter of 2020, while normalized <unk> per share and the second quarter of 2021 of <unk> 46 compares.

Compares to <unk> 47 on a pro forma basis for the prior year quarter and <unk> <unk> per share for the second quarter of 2021 of <unk> 45.

Compares to <unk> 48 on a pro forma basis for the prior year quarter.

G&A expenses contributing to our net increase and adjusted EBITDA of $6 million.

And therefore, excluding these sales facility EBITDA increased $7.7 million or 6.4% from the prior year quarter.

The impact of Covid, 19 began and the second quarter last year as populations, primarily ice declined sequentially throughout 2020.

Operating margins were 26, 8% and the second quarter of 2021, compared with 23, 5% and the prior year quarter.

Although we have excluded the impact of COVID-19 expenses on our adjusted per share results. They are included and the operating margins and per mandate statistics presented in our supplemental disclosure report.

Turning to the balance sheet, we continued to make significant progress on our debt reduction strategy. During the second quarter 2021, we successfully completed the sale of 5 non core properties generating $125 million and net proceeds after the repayment of nonrecourse mortgage notes associated with 2 of the properties and other.

And related costs, which we used to pay down debt.

We reported a gain on the sale of these 5 assets of $38.8 million during the second quarter and defeasance costs on the 2 nonrecourse mortgage notes of $33 million include.

Including the net proceeds generated from the sale of 42, GSA leased properties and the fourth quarter of 2020, we have generated $152.8 million from the sale of non core assets. After the payment of non recourse mortgage notes and transaction costs exceeding the goal. We set in August 2020, when we announced our intention to revoke or.

Election, and revised our capital allocation strategy.

As mentioned last quarter and April we accessed the debt capital markets issuing $450 million of unsecured notes maturing in 2026, we used the net proceeds of approximately $435.1 million. After the original issuance and underwriting discounts and transaction cost to redeem all of the.

$250 million of unsecured notes that were scheduled to mature in 2022, including the make whole amount and extending our weighted average maturities.

In addition, we repaid $149 million of the $350 million unsecured notes scheduled to mature in 2023 and in aggregate purchase price of $151.2 million and privately negotiated transactions.

And during June we repurchased an additional $27 million of the 2023 notes at par and a privately negotiated transaction, reducing the outstanding balance of the 2023 notes to $174 million.

As of June 30, we had $163 million of cash on hand, and $674 million of availability on our revolving credit facility, which matures in 2023 or.

Including the repayments of the mortgage notes associated with the aforementioned sale of non core assets, we have reduced our net debt balance by over $300 million and the first 6 months of 2021.

During the second half of 2021, we estimate that we will pay down and additional $100 million of debt with cash generated from our operations.

We incurred $24.7 million of maintenance capital expenditures during the first half of the year, leaving 40% to $45 million for the remainder of the year, which is consistent with the estimates we provided last quarter.

Without the capital contribution to the Alabama project as Damon described we have no other material capital commitments.

While we are disappointed with Alabama decision without the $100 million of corporate capital. We previously modeled for the project, we expect to reach our targeted leverage sooner and at which point, we will evaluate opportunities to return capital to our shareholders.

The country continues to make progress on vaccinations for COVID-19, and our operations. We are beginning to return to more normal operations.

We cannot predict the impact of a resurgence in COVID-19 infections caused by the Delta variant, which likely contributed to the extension by the administration of titled 40 to the policy, causing the southern borders remain effectively closed to asylum seekers and adults crossing the southern border without proper documentation or authority and an effort to prevent the spread.

With COVID-19.

Disruptions to the criminal Justice and immigration systems, including further extensions of titled 40 to create challenges and forecasting our residential populations.

Further recruiting and retaining staff has always been difficult and our industry due to the unique and challenging work.

However, like many companies staffing and the current environment has become increasingly difficult.

Even though we provided wage increases effective July 1 for most of our staff at the highest levels and we've provided and several years, we could be required to incur additional wage adjustments and certain markets to help ensure sufficient staffing levels and.

We intend to work with our government partners, and followed national and local health standards, and enabling us to reinstate programs and normal movement within our facilities, requiring higher staffing levels and impacting our margins absent higher occupancy.

The remaining 2021 contract explorations with U S Marshal service and our 600 bed West, Tennessee detention facility and at our 1033 bed Leavenworth detention center in Kansas expire in September and December respectively. We do not yet know if the U S. Marshals will vacate these 2 facilities.

We continue to work with the U S Marshal service and various government agencies to meet their needs the solutions of which could be unique for each facility.

At this stage of the discussions it is too early to predict the ultimate outcome for the financial impact for us if any.

I will now turn the call back to the operator Casey to open up the lines for questions.

Thank you and if you would like to ask a question.

Please please press star 1 on your telephone keypad now can you just seeing a speaker phone. Please make sure that your mute function is turned off to allow your signal to reach our equipment and again Thats Star..1 if you would like to ask a question.

Our first question will be taken from Joe Gomes with noble capital.

Good morning, gentlemen, thanks for taking my question.

Good morning, Joe.

And I wanted to start off a little bit on the.

Population.

And.

And are running.

Running story here on ice and the guaranteed contract minimums and from <unk>.

Looking.

Net.

The overall population.

For all of your your facility you'd see them stock.

Starting to increase quarter over quarter here. So I was wondering where do we stand and on the ice and the contract minimums and any facilities met those.

Or are we how far below are we and other ones any additional detail that would be great.

Joe. Thanks for your question. This is Damon and I'll tie it in with Dave a little bit on.

On the answer here, let me just first talk globally about ice marshals and then actual pops for our system and the day to talk a little bit about your question on where we stand relative to our fixed monthly payments based on oxi levels within those contracts.

High level.

Marshal service as being kind of between 66% and 64000 and nationwide and their populations and thats from a that's an increase from where they were last summer about 56000, and so give you and kind of a sense of where they were versus where they are today.

Switching over to ice as I mentioned, they've almost doubled so they were I think were right around 14000 towards in the last year early this year to day, they were right around 28 or 29000 nationwide and.

And then specifically for our core civic.

As of the.

I guess is probably as of Friday last week, we were about 8000 within our system with the ice and then about 9200 with the Marshal service within our system. So again. It gives you a high level numbers for both ice and marshals and then specifically for <unk>, what we've got and our facilities, but I'll, let Dave talk a little bit about kind of where that compares to where we are.

Our fixed payments that are tied to oxy levels, yes. Thanks Damon for during the second quarter of growth in 'twenty..1 we were about 3200 detainees below the guarantee levels.

As of Friday that number had been reduced to about 200.

Okay, great. Thank you thank you for that and on the.

The 2 facilities and the U S Marshalls and.

Hopefully we were able to work out a solution for them here.

<unk> and <unk>.

And kind of see and 11 work.

Is there.

Near by available capacity and if they declined Q.

Renew there that they could easily switch are we back into kind of the.

Same situation, where we were in northeast, Ohio, where.

And there really wasn't any excess amount of capacity nearby.

That facility that they could put.

And the detainees and and I'm just wondering how.

How much capacity available and is around those 2 facilities that if they decided not to renew that they could move teeth and may too.

Net Joe Good question. This is Damon again, and so and both of those locations West, Tennessee, which is the base and Tennessee and the western part of the state and the <unk>, which is up and the northeast part of state and city, Kansas, We bid and both those communities for about 30 years and so we have a pretty good sense of what the available capacity is.

Kind of locally both and eastern Kansas and West, Missouri for the <unk> facility, and then West Tennessee for.

That facility and our general view is that yes capacity is pretty pretty limited.

For various reasons, 1 of which is just certain systems, maybe just are at capacity or maybe overcapacity. If they don't have any additional capacity but.

1 other kind of reason and this is and obviously example, but an important port and 1 and that is COVID-19 and that's affected a lot of local systems. How do you think about kind of oxy and kind of near term not only with the past 18 months, but also how it has affected their populations and neuropathy with the Delta variance. So so our general view continues to be that.

We're pretty limited alternatives locally where we can provide.

Provide capacity for the for the March service and those 2 locations, but I guess, what I'll also say that.

And review and analysis, we did.

And engaged and we deal with various partners with both northeast, Ohio and Montana.

Very.

Please about the outcome from both those locations.

And those respective areas that allow that maybe to take the population down are completely out at both of those facilities federal and that you can add to that Dave and I doubt name and that should cover.

Great. Thanks, Thanks for that.

And so you guys mentioned in your prepared remarks.

And how let's just take a look at the safety segment net operating income margin Inc.

Kris 300 basis points, and a quarter and how some of that last COVID-19 expenses summers and as per Diem increase and I was wondering if you can give us a little more color and detail as to even though you had declining populations. How you were able to show improved net operating margins there.

Yeah, I'll tag team with Dave again on this 1 Joe, but 1 thing I would say it and Dave alluded to this a little bit, but we really have been.

Really grateful for our state partners.

And as they went through their respective legislative sessions around the country, where there was deep appreciation both by the governor and legislators about this labor market and how it's made a challenge not only for public sector facilities, but also private sector facilities.

So with that there has been.

Pretty meaningful increases that we saw on our per day rates on various day contracts around the country, which we were able to quickly turnaround and deliver as a salary increases for our employees and so some of that obviously is cost but also I think it was just a general appreciation to some of the work that we do with our within our facilities and the value we provide our government partner so.

And just general recognition.

For all of that work was noted around the around the country, but I guess, let you add to that day.

And obviously many negative impact.

Implications for COVID-19, but 1 of the ones and the Correctional setting are unfortunately.

Reduction and the number of services and programs.

And we're able to provide and order to minimize our movement of the inmates and detainees and residents around the facility. So if youre not having classrooms for example.

Got you don't have the teachers onboard and youre not paying their salary well while the programs are not going on so we've started to see some of that.

Returned to normal operations, we continue to see that we will see if the delta variant takes.

Takes a couple of steps back with that but we're looking forward to reinstating those services, which will then result in higher staffing levels and I think you'd see margins I don't know if they'd return to pre pandemic levels.

But.

I think right now, they're probably elevated margins because of the lack of the intensity of services that we're providing the facility to restrict the movement and the integration and interaction of the inmates and staff.

Okay, Great and 1 more for me and I'll jump back into queue I'd like to go and circle back to Alabama.

And maybe you could give us a little more color on the process Theyre looking at and I know this is something the legislature has looked at and the past for it seems to have been unsuccessful in terms of allocating funds for building prisons.

We know that Alabama is under.

And Jay lawsuit about their presence.

What other alternatives at least and this short term.

Could there be for Alabama could day for instance, make use of some of your idle facilities to at least.

<unk>.

Comply with the lawsuit and the federal lawsuit and.

And any additional color there on Alabama would be appreciated. Thank you.

Appreciation for the difficult situation they have.

Find themselves in.

As you as you know I worked in our credit facility when I first started the company and so having.

New modern facility that is more humane for the residents and safer for staff and it's something very top of mind for me just because I've been there and done that so I have an appreciation for what they are trying to do and Alabama and and continue to be on the sidelines here the cheerleader for for their efforts because yes. They are still very much in a crisis they've got a challenge with.

The new facility.

But also as you noted they've got and continuing to pressure from the department of Justice.

And on.

Pushing them trying to modernize their facilities and make it and much more humane environment.

So it would be hard for me to speculate and say exactly kind of what the governor and legislature since youre going to do and in coming weeks and months as has been reported and depressed or actively talking I would say they would be and the governor and legislative leadership about kind of the path forward I am encouraged here and the legislature. There is good appreciation and understanding and that they do need to do.

Something where maybe that hasn't always been the case pack and in Alabama for that as an encouraging sign.

Our position right now is to continue to keep engaged with with the department and.

As they go kind of down this path with the governor and legislature, while they're trying to figure out the potential new alternatives for a more of and I'd say mid to long term solution and the state and we stand ready to provide any any solution that it may emerge or maybe serve as a bridge to those kind of longer term solutions, but hoping you would add to that day I was going to say the same.

And we stand ready we can provide a number of solutions for them I know its alabama that once and Alabama solution.

We do have capacity, we're able to provide out of state capacity. If that's the direction. They take I don't think that Thats, where theyre going with it but we stand ready to help them with whatever solutions.

They need.

Okay. Thanks, guys, I'll, let Phil and I'll ask some questions and jump back in queue.

Yes, Sir okay. Thanks, Jeff.

Our next question will come from and Marin with sacks.

Thank you.

So a couple of questions.

I'm just waiting for my arms around.

The.

Situation and the outbound lineup.

Take that and extrapolate it to the general.

And the infrastructure that we see in this country could you give us any sense from piano.

Perhaps in terms of average age of your infrastructure versus what is currently available.

And government entities or directionally, and any kind of sense.

And where the Genoa.

Or because it seems that there are probably pretty extent non.

And all in Alabama, and other states as well.

Yes, Great question. This is Damon again, and yes, our sense based on our research and there is thousands of beds around the country that are kind of in similar situations where their old their antiquated maybe unfortunately, they haven't gotten the dollars to appropriate for preventive maintenance so.

And some locations, we find that facility or maybe only 30 or 40 years old, but maybe there has not been much if any dollars and spent 2 to maintain them. So unfortunately they are there.

They're kind of useful life has been accelerated just because those maintenance programs have not been it's been in place. So our average age and keep me honest per day I think our average age of our portfolio for our crush facilities is about 20 years.

On average, though and you compare that with various HSA, probably most states have an average age is probably in the range of 75% to 50 years and H for their system.

And we'll younger some a little older but I mean.

There are thousands of beds and the United States today that our facility that are well over 100 years old and.

And I mean, we're well position and providing solutions primarily for either existing capacity within our system, where they may be you could take a older facility offline and use our facility and move into it or we could develop a new solution like we did and Kansas a couple a couple of years ago. So finally, I would just say.

Just kind of put a dollar amount.

And kind of and the global discussion you mentioned was infrastructure and we've estimated that there's probably.

About 15% to $20 billion and development opportunity and I say to day to replace old antiquated Correctional facility assets and the various 50 states, but anything you'd add to that Dave you mentioned, Kansas, but that was exactly the situation and Kansas.

2018, when we won the award there to construct a new prison and for this.

And the state their oldest prison was over 150 years old. We affectionately said that was constructed during the Lincoln administration. So a lot of states are in a situation where they don't have modern correctional facility to provide safe humane conditions for inmates and staff. It is also whats driving.

Ana to go out with their RFP for 'twenty 700 inmates their closing.

Another large facility and the state and.

Need alternative more modern correctional infrastructure for those populations.

That's what's driving Damon mentioned in his script, Hawaii, and Oahu, replacing their largest jail on the Hawaiian on and so.

Yes, there is.

Many many.

Correctional systems throughout the country that have old outdated.

And correctional infrastructure and.

And there is going to have to be something done.

Whether it's.

And we can provide a solution whether it's constructing a new facility or providing bed capacity. We've got over 7000 beds of idle capacity that could be utilized to accommodate those populations.

And it probably a less expensive than what they're currently spending considering.

And then it's a government run facility that is old.

And current deferred maintenance.

And all kinds of operational and utilities expenses. So forth. So we can provide a more cost effective solution with more modern capacity and where they all add to and I was just checking my notes, but of existing state partners with core civic.

We've got 4 of our existing state partners that have 6 facilities that are over 100 years old and and all of our state partners except for to have facilities that are over 50 years old. So again there is unfortunately, a lot of kind of kicking the can down the road on a lot of systems that just have not been able to get the dollars to modernize their cash.

<unk> systems.

Okay. Thanks, Brian.

And.

Thank you.

Yes.

We'll take our next question from Ben Briggs with Stern exponential incorporated.

Good morning, guys and thank you for taking the questions.

Most of my questions have been answered, but I had a follow up to the 1 on margins. So margins were obviously, our operating margins were obviously improved this quarter.

Wanted to know what it's going to look like and some of those programs that you guys.

Rolled off as those come back online what costs are going to be associated with actually bringing those back online and how our higher population levels.

Kind of a post COVID-19 universe going to help offset some of those costs.

Thank you for you guys back to US and gave you guys back to historical margins and Thats all from me.

So obviously thats.

Incremental expense, we are not paid incremental dollars to reinstate those programs and that would be the negative impact on margins now keep in mind also if youre looking at the second quarter of 2020, we had $6.3% or $6, 2 and $6.3 million and the hero bonuses that I mentioned in my opening remarks.

Included in the margins reported in the prior year. So if you excluded those.

Hero bonuses I think the margin in the prior year would've been 25, 3% so.

It was it was dragged down by those $6.3 million and.

And here of bonuses and.

And I think I missed a part of your question day.

For everything.

Cool.

Yes, you covered most of it I was just asking if increased population general populations for the universe, Yes, yes, yes, sorry about that yes, I mean, it is we have a leveraged operating model so.

We have fixed and variable expenses, but typically youre not incurring incremental fixed expenses with increases in residential populations. So that does typically result in incremental margins when youre topping off a facility. It's the opposite when your facility.

Facilities experiencing reduction and population so yes, it's quite possible.

Part of that is very helpful. Thanks, very much guys.

Youre welcome.

And.

We will take our next question from Henry Coffey with Wedbush.

Good morning, and thank you for taking my question.

If we think about it in percentage terms or something that's easy to grasp how close are you given that most of your contracts have a floor. So.

How close are you to that floor for.

Put differently.

What would be the percentage growth and population until the additional revenue kicks in and obviously given that it's a facility by facility issue.

Difficult to be precise but.

Yes. Thank you for that question so.

So, yes, Dave talked us through a little bit on kind of what the number is I guess and on a per day basis.

Population basis, but I'll, let you do a little bit of the math, there, but yes, I guess I'm.

And trying to figure how to answer that question in terms of occupancy.

Because most of our federal facilities other federal or the facilities that have those.

And it's the guarantees of the fixed monthly payments to <unk> and <unk>.

And it's for their benefit to ensure that they have capacity and event that they have a surge and the future or need need higher populations.

As I mentioned it was about 3200.

There are currently below that Thats probably.

And stay close to 15000.

<unk> that have that minimum fixed payment if that helps.

Yes that does help a lot.

Sort of a similar question about debt levels.

Wanted to put out and absolute number 2 it at about what level of corporate debt.

How are you going to sit back and be satisfied with the situation and then start looking at other return on capital measures and I know you've given us the ratio.

And I'm wondering if you could.

And a little bit in terms of what that maybe based on LTM and what that what that dollar number would look like and.

And then the second related question is for what besides cash flow from operations, what is going to be available to get you all to that dollar level.

And I'll just say I'll.

I'll answer the second question first so yes, I'd say, probably now that we have.

And really taken advantage of all the opportunities to sell assets that we've done here and the last 6.7 months there may be a couple more kind of onesie, twosies, but youre, probably pretty smaller dollar amount, but yes. The vast majority we think of the debt repayment is going to come from our cash from operations. So, yes, and I would say, that's probably just real rough numbers I haven't.

And run a calculator on it's probably $300 million to $400 million worth of debt.

And that maybe not even that much that we would have to reduce in absolute terms.

Again, we don't have guidance, so just kind of go and buy a trailing 12 month like you said.

Before we get to our targeted leverage ratio. So in terms of timing, that's probably a few quarters I'd estimate.

Again, we don't have guidance out there, but real ballpark I would say the end of 2022 is when we'd hit that targeted leverage ratio give or take a quarter or so.

Yes, that's.

The advantage of actually having a number in mind.

It's not that far away. Its 12.12 months for a year from now we'll be talking about this or maybe.

9 months from now we'll be talking about this.

Yes, yes.

Yes, exactly yes, let's say second half of 'twenty, 2 I think is probably a pretty good pretty good pretty good estimate.

And again going back to kind of the capital needs I mean, we've got.

Normal kind of maintenance Capex, we will have for the for the enterprise. So that's normal course of business, but business development wise with Alabama and al on the sidelines and we've got the Arizona opportunity, but we don't we don't see any kind of near term and as a near term at least next next 12.18 months any near term kind of visible and active is going to require.

And you kind of major capital need yeah, and let's be clear today.

And today sitting here, we believe our stock is undervalued so.

It's really using all of our cash flow to buy back stock if if if we're not for stock Hasnt responded.

To what we see as and undervalued stock price and.

And if it has and we will look for other ways by dividend reinstating a dividend to return capital to shareholders. So I think your point My point is we're not that far off from from getting a return of capital to shareholders.

Hi.

So and Alabama, Okay, and Thats not to.

The problem initial problem. Besides the politics was the inability or the unwillingness of.

The New York money center firms too.

Get the bond deal done how much.

How much actual municipal capital would need to be raised.

Whether it be at Alabama, Arizona, or some theoretical situation and are there other non new York based firms for.

It's a great question and I'll take you begin with Dave on this let me answer the second half first and that is absolutely. Yes, there's been a lot of folks been knocking on our door with all the news coming out and last 6.7 months with Alabama, and say Hey sign US up we know a way to get a transaction done and we've done it before.

And we've had great success with this project or that project. So so yes, we've actually been pleasantly surprise amount of inbound interest with all the noise coming out of Alabama about firms that we can partner with to do transactions now it could be and municipal bond financing and it could be there's obviously a lot of different markets. We could take advantage of so we're encouraged.

By that so we have not lost our our appetite of our pace to go ahead and develop new opportunities with various states that and want to modernize their infrastructure just because they can for a reason.

Get it done for themselves or have difficulties do it themselves I should say and then the final thing I would just say as you can go back to to Kansas.

And I think we did a private placement transaction on that facility for $160 million, we had $1 billion and interest. So there clearly is a strong investor appetite to finance these type of projects.

So like I said, we're very encouraged by that not only that transaction, but also some of the stuff that we've gotten and from inbound interest from various firms who want to work with us that to your point, maybe or not and the.

Kind of New York area, and maybe other parts of the country that it feels strongly not only by those projects, but also.

Tremendous ESG opportunity I mean, just think about our firm and the team picture of modernizing and Correctional system that is safer more humane for residents more program space more medical and mental health space and safer for staff, I mean, who wouldn't want to be and that team picture to show, what we've been able to do and a certain.

<unk>. So so so we've got it and again people kind of lined up who want to be part of that process and be part of that.

Net solution, but I'll, let you add to that Dave Yes. We did we had we had Alabama base investment banks, we had other investment banks not and based on Alabama, We had publicly traded investment banks private investor.

The investment bank.

We had a and investment banking team lined up to replace the banks that decided not to do the Alabama project, who actually visited facilities of ours. They did their due diligence they did their homework they understood. The project the situations that Alabama's in.

For the department of Justice lawsuit and all the things that.

We're going to be rectified through the governor of Alabama plan and they were ready so that that was not an inhibitor and disrupted the projects mid project, which were frustrated about as as Alabama.

But we did have replacement bankers ready to go.

And to pick up for the.

The project so.

And the capital doors are open and the challenge is having the sort of dialogue required with the community to understand this.

No new prisons and this is not new.

And just to really understand what's going on and I assume that process is going on and Alabama now.

Yes, absolutely yes.

And the key thing here is in Alabama and at the same case and Kansas too is that this is about modernizing their system so not necessarily.

Looking to 2 increase in fact, that's not the case. It was just more we've got old antiquated facilities that are 50 to 100.100 plus years old.

We've got a modernized.

Understood very helpful. Thank you for answering my questions.

Absolutely. Thanks, Henry Thank you.

Our final question comes from Jordan Sherman with Ranger Global.

Yes, I wanted to confirm something I apologize if I missed the commentary around the west Tennessee facility does that contract expires end of September.

Where does that excess and what happens what happens if we get to the end of September and we havent finalized things, where we definitely finalized things before them.

Great question. So yeah short answer is is that.

And that will come to some conclusion, just like it did and Montana and Ohio.

See it playing out pretty similar as it did and those 2 locations, which is probably during the month of August and then going into September.

We will continue our dialogue not only with the Marshal service for other jurisdictions that are interested and that capacity along a parallel path and Marshal service will still continue to kind of evaluate their alternatives either were they could use maybe.

Total capacity with 1 of their <unk>.

Partner agencies, or maybe local county facilities. So it's still still under underway and we're actively engaged with all the various parties.

Okay, and then separately and it seems like a century ago that we've had conversations about this and <unk>.

And recall.

Okay.

What if anything has happened and is happening has happened will happen there.

Yes, great Great question I would tell you what I have not heard anything recently, but as you probably know.

Our system that had been very challenged and the path with OLED and quite a facility, but also some of the challenges <unk> had with some of the recent recent hurricanes. So we.

We definitely keep the lines of communication open interestingly not to your question, but on a.

And kind of recent activity, we have been marketing.

Flow and opportunities with folks on the island that maybe we want to work for core civic we have a pretty a pretty good amount of folks that work in our.

And from Puerto Rico, when we had operations down there back in the 90, so so at the long way and with that initiative along with some other activity, we're keeping lines for vacation open and and stand ready to meet kind of been either either merging needs are kind of long term opportunities, where they want and modernize our system.

Got it.

It's a good thing that wasn't going to save them any money. So I could see why they put that off.

Okay great.

Anything else on the Arizona, obviously live and everything else and a few other state opportunities percolating.

Is there anything that you can mention.

And that's where I could mention but yes, great question, Yes, we've got a couple of other states that are engaged and us on either.

<unk> capacity, and then may be 1 or 2 new states, but nothing.

And Thats a public at the moment.

Alright, great. Thanks, Thanks very much.

Yes, Sir.

This concludes today's question and answer session as well as today's call. Thank you for your participation and you may now disconnect your phone lines.

Q2 2021 Corecivic Inc Earnings Call

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