Q3 2021 Corecivic Inc Earnings Call
Please standby we're about to begin.
Good morning, My name is Ali and I will be your conference operator as a reminder, this call is being recorded at this time I'd like to welcome you to the of course, the VIX third quarter 2021 earnings 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 you'd like to ask a question. During this time simply press Star then the number one on your telephone keypad. If you would like to withdraw your question. Please press star two.
Thank you I would now like to turn the call over to Cameron Hopewell course, civics managing director of Investor Relations. Mr. Hopewell, you may begin your conference.
Thank you Alan 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.
On the call today on the call today will focus on our financial results for the third quarter and provide you with other general business updates.
During today's call our remarks, including our answers to your questions ongoing forward looking statements pursuant to the safe Harbor provisions of the private Securities and Litigation Reform Act, our actual results or trends may differ materially as a result of a variety of factors, including those identified in our third quarter 2021.
Our earnings release issued after market yesterday and in our SEC filings, including forms 10-K, 10-Q, and 8-K reports.
You are also cautioned that any forward looking statements reflect management's current views only and that the company undertakes no obligation to revise or update such statements in the future.
On this call. We will also discuss certain non-GAAP measures a reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the quarterly supplemental financial data report posted 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 Hanger Dana.
Thank you Cameron good morning, everyone and thank you for joining us today for our third quarter 2021 earnings Conference call.
Going to our agenda for the call. We will provide you with a breakdown of our third quarter financial performance.
Discuss business development opportunities.
And the latest developments with our government partners.
We will also provide you with an update on our capital allocation strategy and our continued response to the COVID-19 pandemic.
Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will review our financial results in greater detail.
Our third quarter revenue of $471 $2 million represented a 1% increase over the prior year quarter. Despite the sale 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 to manage only contracts with local governments in the state of Tennessee during the fourth quarter of 2020.
And then the five quarters since we announced the change in our capital allocation strategy, we have substantially improved our credit profile, reducing our net debt balance by approximately $730 million during a time of unprecedented challenges.
We remain committed to reaching and maintaining a total leverage ratio or net debt to adjusted EBITDA of 225 times to 275 times.
Using the 12 trailing 12 months ended September 32021, our total leverage ratio was two seven times.
Just one year ago, our total leverage ratio was at 4.0 time. So we have made significant progress.
And the last time, our total leverage ratio was below three times was in 2012 nine years ago.
While we have touch the high end of our targeted leverage range. We remain committed to continue to reduce debt to ensure we remain comfortably within the range.
Our EBITDA has shown to be durable since the beginning of the pandemic, but there are many other factors that can cause our net leverage ratio to fluctuate quarter to quarter, such as changes in our net cash balance due to semi annual interest payments on our debt capital expenditures for changes in working capital.
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.
I believe this is evidence by our recent $225 million unsecured bond issuance, which price nearly a 100 basis points lower than the bonds. We issued back in April of this year.
However, within the next few quarters, we could also be in a position to shift our capital allocation strategy to one that once again returned a portion of our cash flows to our shareholders and less aggressively de levers.
We believe the valuation of our equity remains well below its fair value and we feel strongly that once we achieve our debt reduction goals, we could create substantial value for our shareholders by repurchasing shares.
In 2009, one of my first acts as CEO was to seek authorization from our board of directors for an equity repurchase program. So I have a full appreciation of the potential value creation that the current stock presents.
Fully appreciating the potential opportunity we have further progress to make with our current debt reduction strategy.
We continue to see criminal justice related populations meaningfully below their pre pandemic levels.
The declines have been mostly been due to a reduction in new intakes rather than earlier releases.
Governments have acted fast or to transfer certain residents assigned to our reentry facilities to nonresidential statuses, such as furloughs home confinement or <unk> to create additional space for enhanced social distancing within our facilities.
However, during the third quarter, we did see many of our state customers increase their utilization of our facilities, which contributed to modest increases in our oxy compared with the prior year quarter.
Our safety segments occupancy was 73, 2% in the quarter, an increase of 110 basis points compared with the prior year quarter and our community segments occupancy was 56, 4% up 180 basis points.
As courtroom operations gradually reopen and operations normalize we anticipate this trend of utilization to continue.
And with that we are leaning way forward on increasing our staffing level levels in anticipation of higher utilization rates of our partners.
This of course will likely have a material impact on margins as we go into 2022.
Normalized funds from operations or <unk> for the third quarter was <unk> 48 per share a decline of 8% compared with the third quarter of 2020.
However, this decline was primarily driven by our decision to convert to a taxable C Corporation effective January one of 2021 from a REIT.
We have added disclosures in our third quarter supplemental financial information document available now on our website, which provides a.
Which provides our pro forma results for 2020, reflecting income taxes fencing income tax expense excuse me by applying our estimated tax rate to pretax income in the prior year.
When compared to pro forma results for the third quarter of 2020, our adjusted earnings per share normalized <unk> per share and <unk> per share increased 33%, 9% and 15% respectively.
Our adjusted EBITDA of $100 9 million increased 7% compared to the third quarter of 2020 and again. This is after the sale of 47 non core assets since the end of the third quarter of 2020.
Dave will provide greater details about our third quarter financial results, including reconciling between our GAAP and normalized results. Following the remainder of my comments.
We will start our operational and business development discussion with a brief update on the impact of the COVID-19 pandemic and our ongoing response.
While the rate of positive cases around the nation was significantly increase and due to the delta variant dirt during the third quarter, we only experienced a small temporary increase in positive cases that some of our facilities.
The most substantial impact of the emergence of the Delta variant was that it temporarily slow the timeline for normalizing facility operations to remove various protocols that were enacted in response to the pandemic.
Yeah.
As we move for move towards normalizing operations. The most substantial challenge in todays environment is attracting and retaining qualified employees.
No different from our government partners own Correctional systems. The current employment market has caused staffing challenges for us at many locations across the country.
We have responded to the challenge by aggressively developing new and creative hiring and retention strategies.
And be in the private sector and a multistate national employer, we have a lot of tools, we can deploy in this environment.
These include increasing wages sign on and retention bonuses and multiple other programs that can increase engagement a sense of shared mission and overall job satisfaction.
Our government partners have been very collaborative in this effort by supporting our request for per diem increases that reflect above average wage inflation in current market.
Across the company. This year, we have provided the large largest wage increases in my 12 years as CEO and we are committed to utilizing all necessary resources to address this challenge.
We are also following closely the recent vaccination mandates issued by various states and the federal government, including the September 19, 2021 executive order on ensuring adequate COVID-19 safety protocols for federal contractors.
We are working diligently evaluate into the new guidance being received from our government partners and ensure we are positioned to fully comply.
For our inmate detainees and resident populations, we do not have the ability to mandate vaccinations.
Just as we've seen in our communities there has been some hesitancy for many to accept the vaccine. So it should come as no surprise that the rate of vaccination acceptance is similar to that of the general public.
We continue to provide educational resources to all our residents in order to encourage more to get vaccinated.
I'll move next to discuss some recent federal and state level business development updates.
We're continuing to evaluate the impact of the executive order signed by President Biden issued in January that directly to the attorney general to not renew department of Justice contracts with privately operated criminal detention facilities.
Two agencies of the department of Justice utilize our services, the Federal Bureau of prisons or <unk>.
In the United States Marshal service or 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 in federal court.
The <unk> has experienced a significant decline and then MA population since 2013.
It simply does not have as much of a need for prison capacity from the private sector.
The decline in <unk> populations has intensified by COVID-19.
We currently have one prison contract with the.
Accounting for approximately 2% of our total revenue.
Marshals service populations have remained relatively consistent in recent years, so their capacity needs remain unchanged.
In fact nationwide Marshal population has increased over the past year.
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 four contracts with the marshals that expire in 2021.
In the first half of the year, we were able to enter into new contractual arrangements for our northeast, Ohio Correctional Center, and Crossroads Correctional Centre in Montana to remain operational and serve various government partners, where both facilities previously had direct contracts with the marshals.
At the end of September 2021, our contract with the marshals at our 600 bed West, Tennessee detention facility expired and a federal detainee populations were transferred to alternative locations, including approximately 202, our Tallahatchie County Correctional facility in Mississippi.
We have elected to retain our staff from the west Tennessee to tissue facility as we pursue an active procurement for the facility with an existing government partner.
The only remaining marshals contract I have yet to discuss is that our 33 bed legwork detention center expiring in December of 2021.
Of note. We are currently in discussions with other potential government partners to utilize the level of facility in the event that we are unable to reach a solution that enables the marshal service to fulfill its mission at this facility.
Our third federal partner is immigration serve customer.
Immigration customs enforcement or ice, which is not impacted by the previously mentioned executive order.
They continue to be the governor partner with the most significant impact from COVID-19 on their capacity utilization.
However, recent activity along the southwest border has caused significant volatility in our utilization levels.
Nationwide ice detainee populations doubled during the first half of 2021, and we experienced a similar utilization increase at our facilities under contract with ice.
During the third quarter of 2021 ice detainee populations remained relatively flat.
As a result, our facility utilization levels continue to remain materially below historical averages.
The largest driver of their lower utilization levels has been the enactment of title 42 since March of 2020, which forbids nearly all asylum claims at the country's borders and ports of entry in order to prevent the spread of COVID-19.
Instead title 42 allows individuals apprehended at the southwest border to immediately be expelled to Mexico or the individuals' country of origin.
Administrative changes and court decisions have occurred since the enactment of title 42, which have enabled unaccompanied minors and some family units to enter the inter and remain in the United States, while their immigration cases are adjudicated.
As I discussed last quarter. These change have essentially no impact on the demand for our services by ice because we do not house unaccompanied minors in any of our facilities and our one one facility with family mission is provided to is on a fixed price basis.
We primarily provide ice with detention 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' in custody instead of apply entitled <unk> 42.
These situations appeared to be the primary driver of the increase in ice utilization, we have experienced this year.
Whenever title 42 is rescinded we believe there will be a significant surge in the need for detention capacity.
Our facility support ice for providing safe appropriate housing and care for individuals as the agency works through the various processes associated with an individual's 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 they take days or weeks to be adjudicated.
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 they are in ice custody.
Our facility serve as a critical component of their real estate infrastructure needed by ice to help them carry out their mission.
Finally, we know there has been a great deal of coverage of a minimum wage ice detainee lawsuit faced by our largest competitor in Washington State.
We don't have a facility in Washington, and so we aren't subject to litigation related to the Washington minimum wage statute.
We do have a pair of similar lawsuits in California, but those are both stayed while one of them is on appeal in the ninth circuit.
We don't have trial dates scheduled for those and the timing of any future litigation activity is uncertain.
We don't generally comment on litigation and this will be my only comment on this subject during this call, but as our competitor has pointed out very similar litigation has been dismissed and that dismissal has been upheld on appeal by the fourth circuit Court of Appeals.
We also have other litigation around the U S related to the ice voluntary work program are also known as V WP, but those lawsuits don't raise minimum wage claims.
The VW P is a ice contract requirement.
And as the VW piece name suggests is voluntary.
<unk> art force or <unk> to participate in the VW P.
<unk> provide an opportunity to avoid idleness.
<unk> learned new skills and earn money at or above the ice prescribed minimum daily rate.
Moving now to state level developments and opportunities our first mentioned, our new lease agreement with the state of New Mexico for our 596 bed Northwest New Mexico Correctional Centre that we announced in September.
The new lease has an initial term of three years, but it includes automatic extension options that could extend the lease term through 2041.
So new lease commenced on November one and we successfully transition operations at the facility to the state.
So you will see that property reclassified from our safety segment to the property segment during the fourth quarter.
We continue to pursue an opportunity with the state of Arizona, which adds an active procurement for up to 2700 beds for medium and close security inmates.
The state intends to close its oldest prison facility in Florence due to its outdated condition operational and maintenance cost concerns.
Instead of deploying taxpayer funds to build new capacity the outstanding request for proposal will allow the state to evaluate alternative capacity available from the private sector.
We have responded to the procurement and believe the state's department of corrections rehabilitation and reentry is poised to move quickly on the procurement.
The only other opportunity I will mention is in Hawaii.
The state continues to determined the best approach to rate to replace the Oahu community Correctional Center, the largest <unk> facility in the state.
The existing facility has exceeded its useful life and the state is in need of a new modern facility to meet the current meet its current and future needs.
We remain actively engaged with the state regarding various solutions, we could deliver and we anticipate a competitive procurement in 2022 to replace the current facility.
Yes.
Two final comments before I turn the call over to Dave.
<unk> <unk>.
<unk> recently released their list of America's most responsible companies for 2021, and we were so very honored to learn of our placement on this list.
At the beginning of their report they note and I quote as this difficult year comes to an end. It's good to remember that were all part of a community neighbors family friends first responders, we depend on appreciate and hope to be helpful to each other.
Many corporations also step up they care about being good citizens and give back to the communities. They operate in in quote.
They are ranking goes through a rigorous four step process, starting with a review of the top 2000 publicly public companies based on revenue then afterwards, a detailed review of company ESG reports and their relevant kpis along with a reputation a survey of 75.
<unk> U S residents.
This list is a who's who of companies I have long observed admired and have inspired to emulate and I am deeply grateful and proud of every single core civic team member for their tireless passion for our mission that has allowed us to achieve this well deserved recognition.
Finally.
We shared last month that core civic cofounder and industry visionary Teton Hodo passed away on October 20.
2021.
None is a fierce advocate for correctional professionals and for the safety and wellbeing of Justice involved individuals' Dawn was instrumental and creation and the creation and implementation of industry recognized standards that greatly improved conditions for incarcerated people and those who care for them.
He will be missed by everyone, who knew him and remember truly as a hero in the field.
Prior to co founding core Civic then known as Corrections Corporation of America with business men time between 1983, Don had a long and prestigious career in the corrections industry, including as commissioner of corrections for the state of Arkansas and later the director of corrections for the Commonwealth of Virginia.
Dawn's rise to industry leader came through a time of uncertainty in America.
Not long before he began serving as the commissioner of corrections in Arkansas, The landmark hold versus solver decision declared the entire state of Arkansas prison system unconstitutional.
At that time, there were over 40 states that had some level of control or oversight by the federal government do to inhumane conditions.
This need for higher standards is what sparked the birth of core civic and ushered in improved conditions across the country.
Dawn's experience gave him extensive insight into monitoring systems to emphasize rehabilitation and education and he used that experience at core civic.
Don was absolutely the right person at the right time to create a better way and lead our profession into the modern era.
And of course <unk> is so very grateful for his leadership for our wonderful company, but I am also personally grateful for his mentoring and friendship with me.
I'll now turn the call over to Dave to provide a more detailed look of our financial results in the third quarter of 2021 as well as factors that could affect our business for the remainder of this year.
<unk>.
Thank you Damian and good morning, everyone in the third quarter of 2021, we reported net income of 25 per share or 28 of adjusted earnings per share 48 of normalized <unk> per share and <unk> per share of <unk> 47.
Adjusted or normalized per share amounts exclude an impairment charge of $5 $2 million for pre development activities associated with the Alabama project that we are no longer pursuing.
As disclosed last quarter.
Financial results in 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 into supplemental disclosure report posted on our website. We present the calculations of adjusted net income normalized funds from operations and <unk> for each quarter and full year of 2020 on a pro forma basis to reflect such metrics applying an estimated effective tax rate of 27, 5%.
Adjusted net income per share in the third quarter of 2021 of 28 <unk>.
Compares to 21 on a pro forma basis applying this estimated effective tax rate for the third quarter of 2020, while normalized <unk> per share of <unk> 48.
Compares to <unk> 44 on a pro forma basis for the prior year quarter and <unk> <unk> per share of <unk> 47 compares.
Compares to <unk> 41 on a pro forma basis for the prior year quarter.
Adjusted EBITDA, which is obviously before income taxes was $109 million in the third quarter of 2021, compared with $94 6 million in the prior year quarter the.
The growth in adjusted EBITDA and the aforementioned per share metrics were achieved despite the sale of 47 properties. Since the end of the third quarter of 2020, and the execution of numerous refinancing transactions that were collectively dilutive for the quarter as we paid down low cost short term variable rate bank debt with the proceeds from the proper.
Sales and issue new unsecured senior notes and have higher interest rates than the debt we repaid.
The property sales and refinancing transactions lowered our overall debt levels extended our weighted average debt maturities and repositioned the balance sheet for long term success. The 47 properties that we sold accounted for $7 $3 million of EBITDA in the prior year quarter. Therefore, excluding these sales adjusted EBITDA increased 13.
$6 million or 16% from the prior year quarter, demonstrating strong core operating results.
Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, but increased to 72, 1% in the third quarter of 2021 from 79% in the prior year quarter and increased from 71, 6% in the second quarter of 2021.
The impact of COVID-19 began in the second quarter of last year as populations, primarily ice declined sequentially throughout 2020 as the southwest border was effectively closed to asylum seekers and adults attempting to cross the southern border without proper documentation or authority in an effort to prevent the spread of COVID-19 as the.
Federal and state Court systems have begun to return to normal operations and is the number of undocumented people encountered at the southern border has increased the utilization of our facilities as increased.
Operating margins have trended similarly.
27, 2% in the third quarter of 2021, compared with 23, 8% in the prior year quarter and 26, 8% in the second quarter of 2021.
The increase in our operating margins reflects the continuation of lower cost trends combined with higher occupancies.
Many of our facilities continue to operate with pandemic related capacity and operating restrictions that are modifying the services that we are able to provide impacting margins compared with normal operations.
Staffing in this challenging labor market has become increasingly difficult and we have provided annual as well as additional off cycle wage increases and special incentives to help address depressed staffing levels.
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 is more budget dollars are allocated to help offset the wage increases.
Turning to the balance sheet as of September 30th we had $456 million of cash on hand, and $786 million of availability on our revolving credit facility, which matures in 2023.
During the third quarter of 2021, we issued an additional $225 million aggregate principal amount of 8.25% senior unsecured notes due 2026.
The issuance constituted a tack on to the original 8.25% senior notes, we issued in April 2021, or $450 million aggregate principal amount.
The additional 8.25% senior notes were priced at $102, two 5% of their face value, resulting in an effective yield to maturity of 765%.
While we believe this effective yield was still high relative to the stability of our cash flows and credit ratings.
Compares favorably to the issuance in April when the notes were priced at 99% of face value, resulting in an effective yield to maturity of eight 5%.
As a reminder, the net proceeds from the April issuance were used to fully repay $250 million of 5% senior unsecured notes that were scheduled to mature in 2022 and to repurchase in privately negotiated transactions of $176 million of the $350 million outstanding principal balance of our four and five.
Five 8% senior unsecured notes that are scheduled to mature in 2023.
We continue to be steadfast on our debt reduction strategy paying down $188 million of additional debt during the third quarter alone net of the change in cash, including the $112 million outstanding balance on our revolving credit facility, which remains undrawn today.
Subsequent to quarter end, we repaid $90 million of the outstanding balance on our term loan b, reducing its outstanding balance to $133 4 million.
Including the repayments of the mortgage notes associated with the aforementioned sale of noncore assets. During the nine months ended September 32021, we have reduced our total net debt balance by over $500 million and our net recourse debt balance by $334 million.
Our leverage measured by net debt to EBITDA was two seven times using the trailing 12 months down from four times using the trailing 12 months at the end of the third quarter of 2020, when we announced our revised capital allocation strategy and decision to revoke a reelection.
As Damon mentioned the last time, our leverage was below three times was 2012, which was the last year, we operated as a taxable C Corporation prior to our conversion to a REIT in 2013.
Notably 2012, followed an aggressive stock repurchase program in 2009 through 2011, when we repurchased over $5 billion of stock or equal to half our market capitalization today.
As a REIT from 2013 through 2020, we cannot implement a meaningful share repurchase program.
It is possible, we could slip slightly above our targeted leverage ratio of two in a quarter to 275 times in the fourth quarter. When we are scheduled to make almost $40 million of semiannual interest payments on our unsecured notes about $15 million and social security payments that were deferred under the cares Act and capital expenditures.
Consistent with our previous guidance, but we expect to be sustainably within the range on a quarterly basis thereafter.
We have made great strides in enhancing our capital structure by accessing the debt capital markets addressing near term maturities selling noncore assets, reducing debt and positioning the balance sheet to enable us to take advantage of growth opportunities and return capital to shareholders. These.
These steps have enabled us to reduce our reliance on bank capital and we intend to address the 2023 maturity of our bank credit facility next in order to provide us with the clarity needed around our future liquidity and to ensure the implementation of our capital strategy remains on track.
Our intention is to reduce the size of our bank credit facility and extend the maturity, enabling us to continue operating with optimal flexibility and cost efficiency.
We continue to get increasing clarity around many of the uncertainties that existed when we suspended our financial guidance and currently anticipate providing full year 2022 guidance in February when we report our financial results for the fourth quarter and full year 2021.
I've already highlighted some of the factors experienced in the third quarter that could have an impact on our financial results for the fourth quarter. These.
These include the anticipation of modestly higher occupancy levels as the country continues to emerge from the pandemic.
Demand for our detention facilities could also result from lifting titled 40 to the health care policy, causing the southern border to remain effectively closed in an effort to prevent the spread of COVID-19.
However, the timing of when the federal government entitled <unk>, 42, which is evaluated every 60 days is difficult to predict and therefore likely won't have a material impact in the fourth quarter.
We also anticipate higher staffing levels as we return our correctional detention and reentry facilities to normalized pre pandemic operations.
Longer term as we look towards 2022, we will endeavor to hire in anticipation of increases in occupancy, which could have a negative impact on our margins at least until we experience further increases in occupancy.
We continue to anticipate a challenging labor market, which could require us to provide further wage increases and other incentives in certain markets necessary to attract and retain qualified staffing levels.
Call, however that our federal facilities at our federal facilities, we are entitled to equitable adjustments to per diem rates to compensate us for any increases in wage rates mandated by the department of labor, providing a potential hedge against increasing wage rates at such facilities.
By signing a new contract with Mahoning County at our northeast, Ohio Correctional Center, and expanding the contract with Montana at our Crossroads Correctional Center, we have successfully resolved two of the four 2021 contract expirations with the U S Marshal service.
The contract with the U S Marshals service at our 600 bed West, Tennessee detention facility expired September 30, and was not renewed.
As we previously disclosed we responded to a request for proposal to utilize the west Tennessee facility, and we remain optimistic and signing a new contract.
We have temporarily redeployed most of the staff at this facility to other facilities, we operate while we negotiate the contract in order to provide minimal disruption and ramping back up operations, but depending on the outcome and timing of a decision as well as the pace of utilization, we could experience a reduction in earnings in the fourth quarter of up to.
<unk> per share compared with the current with the third quarter.
Our last contract with U S. Marshals expiring in 2021 is in our 1033 bed 11 worth detention center in Kansas, which expires in December we are in discussions with other potential partners to utilize the 11 worth facility in the event. We are unable to reach a solution that enables the U S marshals to fulfill its missing at this facility.
Since the contract doesn't end until the end of the fourth quarter. However, we don't expect a material impact in the fourth quarter, even if a contract is not renewed.
During the third quarter, we responded to a request for proposal from the state of Arizona to care for up to 2700 inmates. The state plans to transfer from our facility owned and operated by the Arizona Department of Corrections rehabilitation and reentry. We are optimistic in our contract award near the end of the year, which would obviously be more impactful in 2022.
<unk>.
Compared with the third quarter, we expect higher interest expense as a result of the additional issuance at the end of September of $225 million of our 8.25% senior notes somewhat offset by the $90 million repayment in October of our term loan B, which has a total effective rate of 7%.
We currently estimate our income tax expense to reflect a normalized effective tax rate of 27% to 28%, although we estimate our cash taxes to be approximately 20% for the year because of net deductions for special items.
I will now turn the call back to the operator.
Kelly to open up the lines for questions.
Thank you. Thank you I would like to ask a question. Please signal by pressing star one.
Sheldon keypad, if youre using a speakerphone. Please make sure you mute function is turned off you'd like to.
Just didn't know TUI care equipment.
My question has been answered you may remove yourself with rising star Q again.
Star One if you would like to ask a question.
We will take our first question from Joe Gomes from Noble capital Joe. Please go ahead.
Yes.
Can you hear me now.
Ken now Joe Thank you.
Oh, okay.
Previously you said good morning.
Good morning, Joe.
Not here.
Good morning, Joe.
Good morning, Thanks for taking the question, so really nice job on achieving the target leverage ratio early in my opinion.
It would seem to speak not only to your focus on deleveraging, but also the stability of the business. Overall you did mentioned you wanted to see further progress.
On the debt reduction before you started implementing some of the other capital allocation programs such as share repurchases I was wondering if you might.
Give us a little more color as to how much progress you are looking at it whats your.
Your thought.
On what you want to see before you might implement something like a share repurchase program.
Yes, Great question, Joe This is Damon and thank you for this.
So yes, we are.
I'll ask below the target range as you know with the numbers, we released last night, So and Dave I think did a really good job of kind of walking through.
Some of the puts and takes that I think we will see both in the fourth quarter of this year go into early next year. So it still feels like it's I think we've said previously is still feels like that we're probably a couple of quarters away to where we could comfortably kind of be embedded within that with that range. So it's a different way here. We are starting the fourth quarter could that be kind of <unk>.
Second and third quarter.
Next year, that's possibility again, we're really really pleased with the progress we've had great alignment from the management team on kind of working on various activities, obviously that drive that number in a positive. They noted notably the transactions. We did early this year with the divestment of the noncore assets.
You had asked me that Dave and the credit facility as I mentioned in my script.
Matures in 2023, we'd really like to amend and extend our credit facility to get that behind us that will give us the clarity on liquidity and cash.
Capital resources going forward I think we've done a really really good job positioning the balance sheet to return capital to shareholders. We've addressed the short term maturities are for several years out now so that that risk is really been a limited from the balance sheet completely so getting through the credit facility.
In my mind give us a lot more clarity to move forward and that would fall in line with the timing that David mentioned.
Okay. Thanks for that insight.
The vaccine mandate.
I don't know how deep.
You can go into.
What percent of the core civic employees are vaccinated.
Especially at the facilities.
Are there any concerns on your part.
That contract we get terminated.
You can't get every one to be fully vaccinated.
And.
I know that.
There's a lot of confusion out there over who some of these mandates apply to or don't apply to but.
Simply does the mandate also apply to the <unk>.
<unk>.
All of their their staffing also has to be.
Back to Nate.
Yeah. So several questions there Joe this is Damon again so.
So a couple of observations one is that we have had vaccination acceptance rates a little behind what you see kind of generally in the public but probably no surprise here in the last probably 30 to 60 days with some of the mandates that have been required.
Notably all of the attention has really been on the at the federal level, but we have had some <unk>.
Local jurisdictions and are required to so it gave us a pretty good indication of how to approach it be thoughtful on how we communicate to employees, you'll give them various options not only for the vaccine, but maybe other of employment opportunity. So we had a pretty good playbook before.
The executive order was signed at the federal level. So so we've got work to do we're clearly.
Working really hard to make sure we get educate our employees advisors and appropriately and also leadership as they go through the.
Process, if they've got a either a physical or health a combination that needs to be considered or religious combination and again those are policies that are well established just because we're a public employer.
So we're working through that progress I would tell you I think we are making good progress on that side as I. Just said earlier, we're starting to see a pretty meaningful uptick in vaccination rates with within the organization again, it's focused primarily on our federal contracts with ice marshals and as you know we just have that one contract on the safety side with the with <unk>.
Mccray.
I think again, we're making good progress on anything you'd add to that Dave.
I think covers.
I'm, assuming it would but.
Theres a lot of it seems to be exactly does this apply this made it also apply to the BOP.
<unk>.
Staff people that work there.
Yes, my understanding it's yet federal employees, and then federal contractors Archie obviously, we fall in the second bucket. So so that would be the case. So I do not have I don't think this is your question I do not have a sense of how they're doing it and what.
What their levels are but yes, my expectation does.
Does apply to them.
Okay.
You talked to.
Some detail here on the staffing environment in <unk>.
Got lots of different levers that you can pull to try and help with that.
What are we talking about here in terms of.
Increased wages are bonuses sign on bonuses or whatever other types of.
Things that you are offering to get people I mean.
In this type of environment again, it's not just you guys are almost every company I talk to these days is the issues with staffing in some way shape or form.
But.
Corrections as a little more difficult than in normal times. So.
Maybe you can give us a sense of what are you having to do out there in order to attract.
The staff that you need it.
Yes, great Great question. So we're.
To your point, we're just like everybody else in the country dealing with some level of labor challenges.
Either public or private private companies and I've I've made it really could sort of point this past year to talk to a lot of my peers, especially here in the national business community and I've gotten a few good nuggets, along the way that we've.
Plagiarize and used in our playbook as we think about kind of labor opportunities, but having said that everyone I've talked to here locally they are dealing with similar challenge, especially my friends here in the health care community. So I would say our playbook consists of a couple of things one of the things that you you would expect of any employer so looking at base salary.
<unk> and wages looking at benefits and then the whole range of incentives if thats a referral bonus if that's a.
Retention bonus.
And when we're looking at any incentive that either we've used in the past or what we're seeing.
Used by other employers regardless of the industry that maybe.
Transferable and.
Helpful with with our challenges, but I'll also say and we've got a few proprietary things that I won't go into great detail, but we've done a couple of pilots.
This summer going into fall that has shown some pretty good results. So.
So we're looking at some things and these are things that.
Probably said you can't do so it will be in a private employer with a multistate operation. There's a few things that we can do pretty creatively that potentially gives us some help on the on the labor side. So what you say it very clearly.
Two our HR and operations leadership any idea they have but also anything youre seeing in kind of the larger market again with employers even outside our industry bring it to the table.
And let's do analysis determined that risk reward and make a decision and.
I had a call with our board our board of Directors last week, and I was telling them that we've done about 35 or 40 kind of different actions to deal with individual facilities in certain regions that are dealing with late labor challenges and give you a sense in a normal year pre COVID-19 that would be in a category of maybe five less and less in a hand, a handful so were due.
And a lot of actions very quickly.
After we do some analysis to make sure our leadership at the field level. We've got all the tools they can to be successful in their mission and with that.
As I mentioned in my comments potentially increased utilization from our partners to levels closer to where they were pre COVID-19 say anything you'd add to that Dave.
There are incentives just goes the list goes on and on our HR Department has a phenomenal job coming up with some creative solutions overtime premium you pay for experience employee housing. That's just a long laundry list of things that we can pull out which as Damon mentioned these things are much more easily done in the private sector then.
Our public sector counterparts are able to do because they have to get appropriations for for budget purposes.
Special appropriations, so things like that.
We think it actually could end up generating new businesses some of our some of those state partners.
Having the same challenges on staffing and may end up sending some inmates to our facilities.
Theyre not able to staff their facilities adequately so yes.
All of the above.
Okay, Great and one more if I may please.
You talked about the West Tennessee facility, you have an RFP out there 11 worth youre talking to other people I think you have five other.
Series that are idle right now.
Yes.
Sure.
<unk> came to you entitled 42.
Expires.
You.
We see a need by ice for facilities.
Given the staffing challenges you just talked about I mean, how easily.
How long would it take for some of these idle facilities, if they were needed to actually be back up and running or do you have enough.
Existing facilities in.
Occupancy excuse me in the facilities that are currently running that you think that you probably wouldn't have to worry.
About opening.
One of the idled facilities.
Yes, that's a great question. Joe This is Damon again, so let me give you a couple of answers one.
One of which is.
West, Tennessee, and 11 worth even though lot more it's a little further down on the on the calendar.
Have not taken any employment actions relative to employees that work at those facilities, So most notably with west, Tennessee with that contract expiring in September.
We've kept that staff and.
Have them working not only to.
Do some maybe work around the facility to do some maybe training in anticipation of some various partners that may utility, but also they could support some other operations here within West West Tennessee.
And potentially we may do the same thing at <unk>, but also part of your question was relative to other facilities that may be currently vacant at the moment outside of West Tennessee.
We do have some challenges globally I would say on the labor market. So that's been well said.
But I will say again this is the benefit of being a large multistate.
Operator, and employer, we do have a couple of markets actually where the tailwind is with us on the employment side and so we basically have told every facility to turn on the spigot.
Wide open relative to employee staff, even if that means that they go over there kind of budgeted FTE count in anticipation that that staff. Then maybe you could use be used for other facilities as we were potentially activating or maybe other facilities that are going through a maybe increased nox seen indeed, some additional staffing while we ramp up the staffing their local.
So so we've got again the good news for US again be a multistate, we've got a lot of different options not only with programs and incentives in salaries and other things that we can do but also we've got like I say a few a few markets, where we've got the wind at our back and weaken.
Maybe over higher a little bit and use that staff and other parts of the enterprise. So anything you add to that Dave.
I think that covers it.
Well, thanks, guys for taking the questions I'll pass it along and let someone else ask thanks again.
Yes, Sir Thank you Joe Thank you Jeff.
And we'll go ahead and move on to our next question from Brian <unk> from Wedbush Securities.
Please go ahead.
Yes. Thanks for taking my question just one quick one for me.
Appreciate the color on the 2021 U S. Marshals contracts I was hoping you could just remind us about the contracts coming up in 'twenty, two and 'twenty three even beyond I guess, how youre thinking about those and any sort of commentary around them.
Yeah.
Yes, Sir Thank you for that question. This is Damon again, so we've got after west, Tennessee, and love them worth, which we talked extensively about it on this call.
The only other two after that are one in Arizona, which is in 2023 and then the final one would be in Nevada in 2025, so several years out.
It's a different way we have nothing next year after after level or so 2023 would be the be the next one so so those being so far off that really the focus for us and I'd say on behalf of the mortgage service has really been focused on the ones. In this current calendar year I suspect as we go into 2022.
Then we'll start having conversations about that.
The $1 23 and $1 25.
Thank you for that question.
And we'll go ahead and take our next question from Chris <unk> from Imperial Capital. Please go ahead.
Good morning, guys.
Good morning.
I would just add.
Follow ups on a couple of topics, New Mexico, <unk> worth and then and then staffing so three topics.
Mexico.
You've expressed some interest in the leasing model in the past.
This deal seems to be a step in that direction.
I know you don't comment by profitability.
The facility on profitability by facility, but maybe Directionally can you give us a sense for the economics of the new deal in and.
Maybe even more importantly, our other states considering.
This option, bringing bringing operations in house so to speak.
Yes, Sir. Thank you. This is Damon again appreciate those questions. So for the first part I would say I'm going through my mind of all facilities that we've converted from safety.
To properties like the one you just mentioned with the new Mexico.