Q1 2022 CoreCivic Inc Earnings Call
Yeah.
Good morning, My name is Tamara 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 of course, it makes Q1 2022 earnings 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 would like to ask a question during that time. Please press Star then the number one on your telephone keypad. If you would like to withdraw your question.
That's the starkey than the number two thank you I would now like to turn the call over to Cameron Hopewell course of X managing director of Investor Relations. Mr. Hopewell, you may begin your conference.
Thanks Samira.
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 first quarter of 2022, and we will provide you with other 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 Litigation Reform Act or.
Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our first quarter 2022 earnings release issued after market yesterday in our Securities and Exchange Commission filings, including forms 10-K, 10-Q, and 8-K reports you.
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 supplemental financial data that we provide on the investors page of our website at <unk> Dot com.
With that it is my pleasure to turn the call over to our President and CEO Damon <unk> Damon.
You Camra and good morning, everyone and thank you for joining us today for our first quarter 2022 earnings conference call.
Go into our agenda for the call. We will provide you details of our first quarter financial performance recent developments related to the COVID-19 pandemic.
Hey, guys 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 I will discuss our updated full year 2022 financial guidance.
I will then turn the call over to our CFO , Dave Garfinkle, who will review, our first quarter financial results and full year 2022 guidance in greater detail and we will update you on our ongoing capital structure initiatives.
In the first quarter of 2042, we generated revenue of $453 million, which was consistent with the prior year quarter. Despite the non renewal of contracts with United States Marshals service or U S. MFS at our Lubbock detention center, and our West Tennessee detention facility in 2021.
The non renewal of our contract with Marion County, Indiana at the managed only Marion County jail effective January 31 2022.
The sale of five facilities in our property segment during the second quarter of 2021.
Collectively these eight facilities accounted for $28 million.
$28 million reduction in revenue in the first quarter of 2022 versus the prior year quarter.
In the first quarter of 2022, we generated normalized funds from operations or <unk> of $41 5 million or <unk> 34 per share compared with 53 million or <unk> 44 per share in the first quarter of 2021.
Now the decline was driven by the non renewal of the three contracts that I just mentioned.
Transition to populations at our La Palma Correctional facility pursuant to a new contract with the state of Arizona.
The sale of five non core properties since the first quarter of 2021 and an increase in interest expense due are due to our issuance of 675 million of unsecured senior notes during 2021.
Dave will provide more detail regarding the financial impact of these transactions.
In early January of this year, we were awarded a new contract with the state of Arizona to care for up to 2000 and 706 adult Bell residents at our La Palma Correctional Center for the Arizona Department Corrections rehabilitation and reentry.
The new contract has an initial term of five years and includes an option to extend the term for an additional five years.
This new contract represents the largest contract awarded to the private sector by any state corrections agency in over a decade.
We began receiving individuals' from the state of Arizona in early April and expect the transfer profit process to be completed in the fourth quarter of 2022.
Upon achieving normalized utilization based on the contract, we expect to generate $75 million to $85 million annualized revenue.
However, because of the preparation to receive the Arizona inmates, including a reduction in the average daily population of immigration and customs enforcement or ice detainees under facility facility that operating income decreased $2 4 million during the first quarter of 2022 compared to the first quarter of 'twenty.
'twenty one.
Hello, La Palma facility currently supports submission advised by carrying for approximately 900 detainees.
As a result, we are actively collaborating with both Arizona permanent corrections rehabilitation and reentry and ice to ensure we continue to successfully transition the resident populations from ice detainees to inmates from the state of Arizona.
However, it is really important to note that COVID-19 related occupancy restrictions mandated by ice are still currently in place and prevent us from maintaining the same level of ice detainees weak here or at the La Palma facility by moving them to other facilities, we own in the region.
This is a seriously complex transition and I couldn't be more proud of the successful efforts of our staff at the La Palma facility.
Thus far this year.
I would now like to take some time discussing our updated full year 2022 financial guidance.
We are now forecasting full year 2022 normalized <unk> per share in the range of $1 45 to $1 60.
And adjusted funds from operations or <unk> per share in the range of $1 38 to $1 53.
The midpoint of each metric represents a reduction of <unk> per share compared with the initial full year 2022 financial guidance, we issued in February of this year.
Our guidance reflects the uncertainties associated with the timing of the reversal titled 42 a.
A public health order that has been in use since March of 2020 to deny entry at the United States Southern border to asylum seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of COVID-19.
On April one the center for disease control and prevention or CDC terminated titled <unk>, 42, and targeted a resumption of pre pandemic federal immigration policies effective may 23.
There have been various legal challenges and currently a federal judge has issued a temporary restraining order blocking the cdc's termination of <unk> 42.
The.
<unk> is expected to result in an increase in number of documented people permitted to enter the United States to claim asylum.
And could result in a significant increase in a number of people apprehended entertained by ice which continues to be our largest government customer.
The likelihood of pilot or 40 to be terminated appears to have increased during the first quarter of this year.
However, it is difficult to predict when totaled 42 will ultimately be terminated so the range of our guidance remains quite wide and assumes a gradual increase in utilization levels in the second half of this year.
We are also forecasting a continuation of the challenging labor market, including above average wage inflation.
One notable change is higher nursing related expenses that we previously estimated due to a national nursing shortage.
Last year, we invest as the largest wage increases the company has given to our course, a big team in over a decade.
And we see that trend is continuing through 2022.
In just the first quarter, we saw a number of correction systems across the country to provide their staff with all cycle wage increases in some cases with double digit increases.
We are working diligently with our government partners to ensure we can continue to provide wage increases to remain competitive in the market and have largely been successful.
However, we have to respond to the local employment markets in real time, while negotiating contractual amendment, there's typically a multi month process.
Finally, our 2022 guidance also reflects a larger earnings disruption at our La Palma Correctional Center than previously estimated.
Although as I mentioned, we successfully began the complex transition inmate populations from the state of Arizona into the facility in April of 2022.
<unk> to a new management contract. We currently expect detainee populations from ice to declined more rapidly than previously forecasted.
Dave will provide greater details about our first quarter financial results as well as some of the more significant assumptions included in our updated full year 2022 financial guidance. Following the remainder of my comments.
We will start our operational and business development discussion with a brief update on the impact of COVID-19, our ongoing response and our expected operational adjustments as we reached the end of the pandemic.
We continue to see criminal justice related populations meaningfully below their pre pandemic levels.
The declines have been mostly due to a reduction of new intakes rather than early releases.
The trends have not yet begun to meaningfully reverse but we expect this to occur over the coming months into the next few years.
During the first quarter the state customers within our core civic safety facilities maintained relatively stable utilization, whereas our average daily state residential populations, increasing by about 5% for the first quarter of 2021.
Utilization from ice was higher in the first quarter of 2042 than in the prior year quarter, which offset the reduction in utilization due to the non renewal of the United States Marshals service contracts that are left.
And west Tennessee facilities.
Collectively our safety segment Sidoti utilization was 71, 7% in the quarter, an increase of 40 basis points compared to the prior year quarter.
Occupancy in the community segment increased to 55% from 51, 6% in the prior year period.
As courtroom operations normalize, we anticipate increased need and utilization to continue to both segments.
This trend along with the anticipated termination of title 42 is motivating us to raise staffing levels in anticipation of higher capacity utilization as we move through the year.
Pertaining directly to COVID-19 after January through the rest of the first quarter. There was a continued decline in positive cases across the country and a rate of hospitalization has substantially declined.
The rate of positive cases in our facilities has remained relatively low across both residents and employees.
We believe the rate of vaccinations are fully staffed and resident populations and a well established safety protocols. We put in place continue to help mitigate the transmission of COVID-19.
Leading health experts appeared to be do appear to have mixed opinions on how close we are to reaching the end of the pandemic phase of COVID-19.
However, the nation appears to be moving in a positive direction.
We remain focused on following our safety protocols and working closely with our government partners should additional operational policy changes be required.
Our most substantial challenges of today's operating environment continues to be attracting and retaining qualified employees.
Nationwide the civilian labor force participation rates remains below pre pandemic levels, which is presented staffing challenges for many of orders over the last two years.
Although we have seen the workforce participation rate increase at an accelerated pace over the last few months, we still anticipate multiple quarters of being this being our most significant challenge.
However, we have been nimble in our response to staffing challenges. We have responded to the challenge by aggressively developing new and creative hiring and retention strategies.
And as a national employer in the private sector, we have a lot of tools in the toolbox that we are deploying in this environment.
These include increasing wages housing solutions side on our retention bonuses and multiple other incentives and programs that allow us to effectively compete in each local market.
We have worked with many states to increase starting wages for our correctional officers by well over double digit percentages.
We have seen these efforts to be effective in many markets, but we know there is more work to be done.
We expect wage inflation to remain elevated in 2022, and we are working closely with our government partners to be able to continue to invest in our employees and facility operations as high inflation persists.
It is important to note that our government partners have been very collaborative and is therefore by supporting our request for pretty increases that reflect above average wage inflation in the current market.
I will move next to discuss the recent federal and state level business development updates.
Beginning first with our federal customers within the Department of Justice, The Federal Bureau, prisons, or B O P and the U S marshals.
<unk> has experienced significant declines in their inmate populations in the last decade decade, which is a trend that is not expected to reverse.
In response to this long term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners.
Our last remaining prison current track with the B O P is our Mcrae facility in Georgia, which expires in November of this year, representing less than 2% of our total revenue.
We continue to believe that contract will not be renewed.
And have already begun marketing the facility as a potential solution to other government partners.
We are proud to continue supporting the <unk> mission through the provision of services that multiple REIT residential reentry facilities in our community segment.
Which will represent the exclusive source of revenue for the MLP following the anticipated non renewal of Macquarie.
As for the U S marshals their prison populations have remained relatively consistent in recent years, so their need for capacity around the country remains unchanged.
U S. MFS continues to navigate the impact of the executive order signed by President Biden and issued in June in.
In issued in January of 2021 that directed the attorney general to not renew department of Justice contracts directly with the privately operated criminal detention facilities.
In 2022, we have no direct contracts with the U S. Msos are set for exploration and now we have only two remaining contracts directly with the United States Marshals Service Center is set to expire in later years.
We continue to work closely with the U S. M. S to ensure the capacity needs are being met in order to support their critical public safety mission.
Ics, our third federal partner and as it is within the department of Homeland Security.
They continue to be the governor partner with the most significant impact from COVID-19 on their capacity utilization.
Nationwide ice detainee populations remain well below the historical levels since the spring of 2022 and that trend remained unchanged in the first quarter of 2022.
As a result, our facility utilization levels continue to remain materially below historical averages.
Current utilization levels are also well below the number of beds funded through their annual budget appropriation process.
At the end of March of 2022, Iced attained approximately 20000 individuals nationwide while they are funded for approximately 34000 detainees.
The largest driver of their lower utilization levels has been the enactment of title 42 since March of 2020, which I touched on earlier.
There have been administrative changes and court decisions have Kurt that of course is the original enactment of total 42, which have enabled unaccompanied minors and many family units to enter and remain in the United States.
However, these changes had essentially no impact on the demand for our services by ice because we only provide the tissue capacity for individual adult populations.
On April one 2022.
Are the CDC terminated title 42 and plan for the resumption of regular migration policy at our southern border on May 23rd of this of this year.
The cdc's directed to terminate titled forward. It to you remains blocked by a temporary restraining order issued by a federal judge just last week.
The new hearing on titled 42 is currently scheduled for next week.
May 13th.
While we cannot predict the outcome of legal challenges or the ultimate timing of when titled 42 is terminated it is clear that title 42 as a pandemic specific policy that will not be carried on a post pandemic.
Its termination is expected to result in an increase in the number of undocumented people permitted to enter the United States to a claim the silo.
And we will likely result in a significant increase in the demand of detention capacity.
Our facility support is by providing safe appropriate housing and care for individuals at the agency works through the various processes associated with an individual's immigration case.
We're patient 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 take days or weeks to be adjudicated once brought to a court.
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 the real estate infrastructure needed by ice to help them carry out their mission.
We also continued to pursue a formal procurement for a new case management nonresidential alternative to detention or H T D program.
Specifically for young adults that was issued in January of this year.
The program is intended to provide case management services for anticipating lower risks young adults.
<unk> 18 to 19 within a framework that promotes compliance with their immigration obligations until removal or other resolution to their immigration cases.
This program is designed to assist young adults, who age out of custody of the office of refugee resettlement O. R. O. R are the agency that is responsible for carrying for unaccompanied minors apprehended along the southwest border until they reach age 18.
We are.
<unk> responding to this procurement and we know these case management services are consistent with the type of case management services, we provide in our community segment.
The elevated rates of apprehensions, along the southwest border continue to create challenges, which are expected to increase the government demand for both residential and strategic capacity and nonresidential atvs.
So it needs arrive, we believe we are well positioned to deliver solutions to ice.
Moving now to state level developments and opportunities as I mentioned earlier, we recently began receiving inmates from the state of Arizona under our new contract.
It is important to remind you that this opportunity was not a result of population growth.
But instead was the result of a need to replace outdated and inefficient government Allen Correctional assets that have far exceeded their useful lives.
Arizona will be closing the facility originally constructed in the early 19, hundreds and moving into our La Palma facility, which is only 14 years old.
We see this same issue across the country and we anticipate additional correctional systems will appreciate the benefits of updating their correctional infrastructure to improve safety for staff and residents.
Increased access to life changer rehabilitative programming.
And improve health outcomes with modern facilities.
In recent months, we have seen the states of Florida, Georgia, and Alabama actively considering avenues for closing outdated state owned facilities in order to modernize their systems.
Dave budgets across the country are strong and with many states forecasting significant budget surpluses.
These robust market conditions could push states to make the bold choices necessary to address long standing issues within their corrections infrastructure.
And we believe we can help deliver on many of these solutions.
We remain actively engaged with states across the country to ensure they are educated on the solutions we can provide.
Important for positioning the company to be able to deliver those solutions is the strength of our balance sheet.
We remain committed to our targeted total leverage ratio or net debt to adjusted EBITDA range of 2.25 times to 275 times.
Using the trailing 12 months ended March 31, 2022, our total leverage ratio was two seven times within our target range.
We have made meaningful progress in reducing our overall leverage due to the strong and stable cash flows the company generates and we expect our leverage to continue to decline over time.
Our credit facility is scheduled to expire in April 2023, and we are actively looking to extend its maturity.
Dave will provide a more detailed status update on those efforts.
We currently have no drawn balance on our revolving credit facility and only a 168 million outstanding on our term loan a so we will significantly reduce the current 1 billion size of our credit facility.
As a C Corp, we no longer need a <unk> of the current size and we believe we are positioned to enter into a new credit facility cost effectively.
As I stated earlier, we remain committed to continue to reduce leverage as well and as mentioned earlier, we have reached our target range.
The valuation of our equity remains well below its fair value and we feel strongly that once we have a new credit facility in place, which we are a couple of weeks away from completing we could create substantial value for our shareholders by repurchasing shares.
And to be very clear this plan and timing is not impacted by our adjustment of guidance today.
Finally, we continue to believe our capital allocation strategy is the most prudent approach for 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 sources of capital.
Before concluding I would like to bring to your attention to report we have recently issued that provide additional financial information and an increased level of transparency to the investment community.
We recently published our fourth annual 2021, ESG report, which details of various life change and reentry and vocational programming are amazing and passionate team provides to our residents throughout the year.
The report also provides an overview of our recently update human rights policy and management practices.
Key environmental performance metrics, and our dei accomplishments and goals along many other important topics.
They can focus on our <unk> initiatives during the first quarter, we published our first racial equity audit reports.
It has been reported royalty that core civic as one of the very few companies in the United States that has proactively embraced the process of having a ratio of equity audits conducted by a third party. Following a request for my shareholder two years ago.
The audit process is quite comprehensive and we believe that resulted in a significant amount of positive actual items for the company and our people to pursue.
Both of these reports are available in the social responsibility portion of our website. So I hope you have an opportunity to review these reports.
I'll now turn the call over to Dave to provide a more detailed look at our financial results in the first quarter of 2020 to.
Discuss in detail our updated full year 2022 financial guidance.
And provide additional financial updates.
Dave Thank you Damon and good morning, everyone in the first quarter of 2022, we reported net income of <unk> 16 per share or 14% of adjusted earnings per share.
34 of normalized <unk> per share and <unk> per share of <unk> 37.
Adjusted or normalized per share amounts exclude a gain on sale of real estate assets of $2 $3 million for the sale of two underutilized residential reentry centers in Denver generating net proceeds of $9 $3 million during the quarter.
Several discrete factors contributed to the 10 cent decline in adjusted or normalized per share results compared with the prior year first quarter.
The first two factors are attributable to repositioning our balance sheet for our revised capital allocation strategy.
During 2021, we sold five properties that generated almost $5 million of EBITDA in the first quarter of 2021.
And accounted for a per share reduction of approximately <unk> <unk> per share from the prior year quarter.
Second during the second and third quarters of 2021, we completed the issuance of $675 million of 8.25% senior unsecured notes using the net proceeds primarily to repay shorter term debt with lower interest rates, resulting in a reduction of approximately <unk> <unk> per share for higher interest expense.
These two discrete items were dilutive to earnings, but strengthen the balance sheet by lowering overall debt levels by $287 million and extending our weighted average maturities.
Lastly, as we have previously disclosed transitions of populations at our La Palma facility and contract terminations that are 11 worth West, Tennessee, and the managed only Marion County jail facilities accounted for a reduction in EBITDA of $9 million or <unk> <unk> per share from the prior year quarter.
Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, but increased to 76% in the first quarter of 2022 from 69, 9% in the prior year quarter. Despite the contract terminations at the West Tennessee facility on September 30th 2021, and our <unk>.
<unk> on December 31, 2021, both of which remained idle during the first quarter of 2022.
Occupancy declined from 72, 5% in the fourth quarter of 2021, largely due to the contract termination of 11 work facility.
The impact of COVID-19 began in the second quarter of 2020 as populations, primarily ice declined sequentially throughout 2020.
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 contain the spread of COVID-19.
This policy known as titled 42 has continued through today and ice detainee populations, therefore remained well below historical levels.
Additional but more moderated sequential declines in ice detainee populations during 2021 and into 2022 were offset by higher state inmate populations, which increased four 9% from the first quarter of 2021 to the first quarter of 2022 as states began to emerge from COVID-19.
Pre pandemic, our occupancy was 81, 9% translating into a decrease in our average daily population by over 8000 residents compared with the first quarter of 2022.
With depressed occupancy levels, we are in a position to significantly grow earnings whenever the impact of COVID-19 subsides.
Operating margins were 22, 5% in the first quarter of 2022, compared with 25, 1% in the prior quarter at 28, 4% in the fourth quarter of 2021.
The decrease in our operating margin percentages, primarily reflects incremental expenses, resulting from increases in wage rates, including most notably during the first quarter of 2022 for registry nursing due to a shortage of nursing staff across the country.
The increases in wage rates, where necessary to help address depressed staffing levels and labor shortages, we experienced in 2021, which have not yet recovered our.
Our government partners are experiencing the same staffing challenges, which has contributed to some of the per diem increases we've been able to achieve.
Operating margins were also impacted by the preparation for the transition of inmate populations at our La Palma Correctional Center, the second largest facility in our portfolio pursuant to a new contract with the state of Arizona.
Relative to the fourth quarter of 2021 margins in the first quarter are seasonally lower because we incur about 75% of our annual unemployment taxes in the first quarter when base wages reset.
We also experienced higher employee benefits expenses compared with the fourth quarter.
Longer term, we expect operating margin percentages to trend toward those we experienced pre pandemic of approximately 25%.
Turning to the balance sheet as of March 31, we had $378 million of cash on hand, an increase of $79 million from the end of 2021.
Leverage measured by net debt to EBITDA was $2 seven two times using the trailing 12 months down from 395 times, when we announced our capital reallocation strategy in the third quarter of 2020.
We have repositioned the balance sheet over the previous couple of years to sustainably return capital to shareholders by paying down debt and paying off near term maturities and pressing towards progressing toward and now within our targeted leverage of two in a quarter to two and three quarters times, even as we continue to make incremental investments in our staff.
A substantial portion of our outstanding debt is at fixed interest rates and we have an intense and ability to pay down our variable rate debt further protecting our earnings from the rising interest rate environment, and we have no need to access the capital markets in the near term.
The steps we've taken to reposition the balance sheet have also enabled us to reduce reliance on our bank credit facility, we expect.
To obtain a new bank credit facility in the coming weeks, reducing the size from $1 billion to about a third.
To about a quarter to one third of its current size.
We have no borrowings on the revolver portion of the facility and $167 $5 million outstanding on the term loan a portion, which we expect to pay down upon closing of the new facility.
Once the new credit facilities in place, giving us the clarity necessary to transition our capital allocation strategy to the next phase we expect to seek authorization from our board for a share repurchase program.
Moving lastly to a discussion of our 2022 financial guidance for the full year 2022, we expect to generate adjusted EPS of <unk> 63 to 77.
<unk> per share of $1 45 to $1 60 at <unk> <unk> per share of $1 38 to $1 53.
Our revenues were $2 million below the point estimate of our internal forecast for the first quarter and our per share results were <unk> <unk> lower than our internal forecast. In addition to these differences our guidance reflects the continuation of a challenging labor market, including above average wage inflation and most notably higher nursing related.
Fences than previously estimated due to a shortage of nurses across the United States.
Our guidance also reflects a larger disruption of earnings at our 3060 bed La Palma Correctional Center than previously estimated accounting for almost half of the net reduction to our per share guidance.
Although we successfully began the complex transition of inmate populations from the state of Arizona into the facility last month pursuant to a new management contract for up to 2000 and 706 inmates from the state of Arizona, we are projecting a faster transition of ice detainee populations out of the facility than previously forecasted as.
As of last night, our populations at La Palma included 529, Arizona inmates and 799 ice detainees.
This transition is a significant undertaking and earnings and cash flows are subject to further volatility until the occupancy of inmates from the state of Arizona reaches stabilization not currently expected to occur until the end of the year, which has been factored into the range of our guidance.
The range of our guidance also reflects uncertainties associated with the timing of the reversal of titled 42.
On April one 2020 to the center for disease control and prevention terminated titled 42, and began preparing for a resumption of regular migration at the southern border effective May 23 2022.
However, the reversal titled 42 has been subject to legal challenges and on April 25th a federal judge issued a temporary restraining order blocking its termination as Damon mentioned the next hearing on title 42 is next week.
The termination of title 42 is expected to result in an increase in the number of undocumented people permitted to enter the United States to claim asylum and could result in an increase in the number of people apprehended and detained by ice our largest customer.
However, given the legal challenges it is difficult to predict when title 42 will be terminated and how that termination will impact utilization of our facilities.
Further the timing and magnitude of any changes, resulting from the termination of title 42 make it difficult to fully assess our staffing requirements for the balance of 2022.
That said, we have elected to lean forward to increase staffing at critical locations to ensure that we are able to meet any increased demand for our services that may present, having a negative impact on the second quarter.
If there are meaningful delays in the utilization of our bad inventory. These investments will create a drag on our overall results until such time as we see bed utilization increase.
The EBIT guidance in our press release enables you to calculate our annual effective income tax rate of 25% to 29% and provides you with our estimate of total depreciation and interest expense.
We expect 2022, G&A expenses to be comparable to or slightly lower than 2021.
During 2022, we expect to incur $63 5 million to $66 million of maintenance capital expenditures in line with 2021 and essentially unchanged from our previous guidance. We also.
Back to incur 15 million to $16 million for facility renovations, including $3 million to $4 million at hallmark for the new Arizona contract down from $19 $1 million of renovations in 2021.
With depressed occupancy levels, we are in a position to significantly grow earnings without the need to construct new capacity or deploy new capital.
We have a strong balance sheet significant liquidity and continued to generate strong cash flows. Despite the challenging labor labor environment and uncertainties of one titled 42 will be lifted.
Although we believe it was necessary to adjust our earnings guidance Accordingly, our long term capital allocation strategy is unaffected by these potential short term disruptions.
I will now turn the call back to the operator Samira to open up the lines for questions.
If you would like to ask a question. Please signal by pressing star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment again, all star one to ask a question.
And we will take our first question from Joe Gomes with Noble capital markets. Please go ahead.
Good morning, David and Dave.
Good morning.
Yes.
So I wanted to start.
With the wage inflation and adding on more employees here the nurses.
<unk>.
I'm, assuming this is continuing to go and impact right now.
David you mentioned that Youre, giving real time wage increases but.
It takes months to negotiate with the government partners.
When when you.
Hopefully get your per diem increases would you expect to offset all of the wage increases or just a portion of it that youre, giving today.
Yeah, Great Great question.
Short answer is vast majority of it it won't be exactly dollar for dollar on the state side. It will be on the federal side with those contracts get reimbursed with equity adjustments, but pretty darn close but your question's a good one and let me expand a little bit to what I said in my script and that is.
We have seen a really favorable engagement with our state partner support wage increases because they've had to do the same thing within their own public facilities.
So states like here in Tennessee, and in Colorado, and Arizona, We've got a couple of other states where target to the discussion about the need to increase wages has been very productive and very positive.
And the increases that we've done is it pretty consistent with what public sector facilities have done themselves and with that full reimbursement for those increased costs of rages, but it but it is a little different on timing on the state contracts. So let me give you an exact exact.
Example of that so here in Tennessee, when it became very clear that we were able to wage salary raise wages for our staff because the public sector facility, we're going to do that we did that right before Christmas.
And so those wages happened I think around December 16th because we wanted to do it real time to really put a jolt in our system and try to get more people in the pipeline and get more people within our facilities. So we lean forward to go ahead and do those salary increases knowing that it would be days and weeks before we get the contracts all paper to get reimbursement so on ACA.
Dollar amount to give you a number for that example for the wages that we paid out that were higher level in the first quarter versus the timing of reimbursement there was about a million dollar delta. So it was about $1 million drag for earnings before the first quarter. So that's all going to wash out but at least gives you a cabinet or kind of a mine visual of the timing of.
Even though we get clarity from the customer to reimburses. It may take a little while for contracts to get signed and then we can start billing for reimbursement.
But let me also let me touch on a little bit on the retro side, so I want to expand a little bit because this is a phenomenon not unique to core civic being in Nashville, We see a lot of health care companies and see what they report relative earnings and also some of the headwinds they have with the labor market and this this phenomenon with nursing and the need for retrofitting.
<unk> during the first quarter appears to be pretty universal as we again see what's going on within the healthcare community.
So just get a little more detail on that if you go back to January of 2019 from now about 40 months our largest.
For months or I guess, our largest four months that had the highest number of vacancies was December of last year and January and February and March of this year. So those four months, where the highest four months of the last 40 months.
And so what we have to do in real time, because we want to make sure we don't Miss a beat relative to quality and the services, we need to provide in our health services departments around the country, we work with our operations team and our health care team to go ahead and allow them to use registry nursing.
During that period of time, where we have vacancies.
Was notable in its probably an obvious point, Joe but what was notable is that there's probably no other occupation in the United States, where someone can step in or out of a job in the health care system, if you're a nurse like an L. P in Oregon, and if you're worried about your personal safety you can step out maybe for say 30 days, especially if there is.
Worry about your personal safety because of Covid and as we all know.
The Amazon variant peaked really towards the end of January and that appears to happen now in our facilities, but also around the country are health care systems. So we saw this dramatic increase for the need of registry, because we had such high vacancy rates during that period of time again, we didn't want to Miss a beat on the quality side and so obviously increase of Mali utilization, but also.
In dollars.
We had to pay hourly for nurses that were in the registry program. So that's a long way of saying it I can't say definitively, but in the days and weeks since that kind of a high point and vacancies that we had early this year. It is dissipating and I'd say I can't say definitively, but it looks like it's pretty darn correlated with the peak in the war.
Around Amazon that you had maybe a lot of health care workers for whatever reason worried about the personal safety. They stepped out of working on those studies for a period of time and now they are starting to come back and so we're again, we've got work to do and we've been doing work for a couple of years on the salary and wages.
Incentives to recruit retain medical staff, but we do think there was kind of a blip here, where you had that big Spike short lived with <unk> earlier. This year that created some pressure on health care workers and systems around the country, both for us and around the around the country, but anything you'd add to that Dave.
All of that is.
You read my train of thought, but the only thing I'd add in our guidance. We continue to use registry nursing, we've got a similar level at a baked into Q2 and it weans or diminishes as the year goes by it's very difficult to get reimbursements to your direct question.
When you are talking about increasing salaries.
That's a little bit easier to get reimbursed that it would be for registry nursing, which is meant to be a temporary solution until you can hire the nursing staff full time, so that's where you see a little bit of the leakage in the EBITDA is the utilization of those premium high rates are for registry nursing, which hopefully will be temporary.
Solutions until.
We can get the nursing staff online full time.
Okay. Thanks for that clarity.
Could you just switch gears for a moment here on the alternatives to detention.
Ice has been.
Quoted as saying.
Once titled 42 disappears that.
That program are those programs could go from 200000 people participating in them to over 600000.
What is your ability to handle some of that increase.
They were to come to you and say Hey, we want you guys to the park.
Dissipate and some of this and to monitor some people here on the ATV side I mean as you know.
Can you could you handle a 100000.
And if so what's kind of the cost of trying to ramp up to that type of a level for you.
Yeah, Great Great question short answer is absolutely.
We've been doing.
Similar programs with city and County, and state for many years in our community segment.
So we know what's needed a relative to the services and technology, but also a case management again case management is not something we only doing community. We also do a lot of that in the safety side too. So we have that competency really well defined and very very capable, but yet to kind of second part of your question absolutely. We've got the scale I mean, we are a nation.
Wide employer, we've obviously got 17 million in square footage and real estate around the country that could be leverage for a program like that if it did have that type of need and in scale.
But also from a from a capex perspective, I'll save some capex that we have invested to get ourselves prepared for these opportunities, but is not as great. As you know with what you would need in a kind of property or a safety kind of opportunity where you build a new prison at maybe $100 million capex need that type of capex in that type of a <unk>.
<unk> to get yourself prepared for those opportunities in advance is not that great, but I guess anything you'd add to that Dave no nothing to that.
Okay. Thanks for that.
Sure.
You're talking about the U S marshals service and part of that.
As you mentioned David.
The reduced number of people in the court system now the intake level has been low we're not so much as.
The fact that people are getting released early has been driving some of the utilization down I mean as you look around the.
In the nation.
We're kind of like is your impression of where we are getting back to a normalization on the court.
System side, so that maybe we would start to see that the intake level start to get back to a more normal level.
Yeah, that's a great great question.
Let me maybe.
Maybe take a tad different angle on the answer here and just give you a perspective. So we watch obviously other companies in other industries that are similar to health care is a very similar industry to ours, but I'd say also.
The hotel.
Companies very similar multistate labor they've got needs.
Need for high quality service and as you as you know in the last year, probably quarter saw Marriott actually released their earnings I'll take your last 24 hours everybody has seen a pretty significant increase in earnings performance coming out of the pandemic I'd say for US is the age of your question I think for US, we're probably another quarter or two.
From that kind of dynamic where you see significant movement populations I mean, we're seeing incremental populations I've noted in my script to improve on the state side, but go back to is I mean, we are still under COVID-19 restrictions on occupancy we still have a cap on oxy within it within our facilities.
And as I mentioned earlier, we think those are somewhat linked to the kind of timing on titled 42. So that you know that feels like probably.
Probably Q3, maybe Q4 to where you start to see.
Movement, because they released some of these restrictions to kind of go back to where they were kind of pre.
Pre pandemic, so anything you'd add to that Dave.
Just to emphasize the state populations. It does feel like they are beginning to normalize and the biggest impact on the federal side or the COVID-19 related occupancy restrictions, which you may know they try to keep their occupancy no more than 75%. So you would think once titled 42 gets lifted.
Let's continue to pray that the COVID-19 cases decline and we get through the pandemic than you would expect those occupancy restrictions to be lifted and thats really been the biggest impact on our business and so again going back to pre pandemic occupancy if we got back to that level.
Somewhere around a $40 million to $50 million increase in EBITDA just to get back to those levels. So we're looking forward to a lifting of the occupancy restrictions.
Because it does feel like operations throughout the country are starting to normalize post pandemic and so that would be one of the last things that that we see get lifted.
One thing I would add though.
And Joe you and I may have talked about this recently, but we look at.
Population data that come from the Bureau of.
Just the statistics and one thing they noted in their recent report.
Is that GL population. So these are a city or county facilities jail populations year over year have increased by 17%.
And I don't know if that's the highest increase ever but we think it's probably the highest increase year over year in lease probably 20 or 30 years. So what's notable about that is that that's telling us that theres individuals that had been arrested requirement to local level, but of course had been closed and ability for their cases be adjudicated have been stalled because of COVID-19.
In 19.
We are seeing active kind of reopening of courts in normal operations resume here in the last 90 days. So I think those individuals that have been maybe held up.
Local jails, just because <unk> not been able to hear their cases are starting to.
Get back to normal operations. The net I think in turn should look at look be looked at as a leading indicator for populations down the road for our system and public sector facilities at the state level.
Okay, and if I could sneak one more in here.
So on the guidance.
One of the things you mentioned was the uncertainty about when titled 42, it's going to be.
Removed.
I mean.
Yes, the kind of the question is but it's always been a question of when it would be removing uncertainty of when it would be removed what was the previous guidance. What are you guys assuming that titled 42 would have already been removed or would would.
It would be.
Gone here sooner than what Youre now your current guidance is I'm, just trying to get a better understanding of why.
Certainty about titled 42, being removed is having an impact on the guidance.
Yeah, I'd say, probably good question a couple of answers to that one O. One of which is yes, we did and obviously when we did the guidance back in early February we didn't know anything definitive on timing and now obviously that's come with the anticipated removal at May 20, <unk> again held up because of a.
A judge is going to be.
Consider through a hearing next week. So so obviously, we didn't know that in February but we did assume kind of a broad range of outcomes potentially the timing of title 40 twos. It out was all takes into account, but I would say and I noticed a little bit in our.
In my script and that is where we're leaning forward.
In a couple of locations in anticipation. So obviously, that's created a little bit of impact from the earnings profile. This year.
I would say kind of to say that differently, we were probably leaning in as much forward in early early February because we were just days are coming out of the omicron variant and the impact that was having on policy and public health officials on social <unk> and also making sure that facility has operated in a way to make sure. They are limited this.
Spread of the pandemic. So so whereas we are in early February we've taken some outcomes into account relative to the timing of title 42.
Didn't lean quietest four on staffing, but now that we've got a little more definitive kind of timeline on the timing of title 42, potentially being lifted and likely need in certain parts of the country. We have told our operations and HR team to go ahead and turn on the pipelines to staff at higher levels, but anything you'd add to that and so that would impact.
Q2, because.
Even if titled 42 gets lifted under the current terms, which would be may 23rd you don't really see increases in populations at least until the end of the second quarter and then even have surpassed the first tier fixed monthly payments for some of our federal facilities, but we did increase actually.
<unk> in the back half of the year, a gradual increase in federal population, specifically ice detention populations.
So it was just more than offset by the increase in labor that David just described for leaning forward and the increase in labor for the for the premium that we pay per registered nursing.
Great really appreciate all the insight guys I'll get back in queue.
Yes, Sir Thank you Joe.
And as a reminder, if you find that your question has been answered you may remove yourself from the queue by pressing star two and.
And we will take our next question from Kirk Ludtke with.
<unk> capital. Please go ahead.
Hello, everyone.
Good morning, good morning.
Thank you for the presentation is very helpful.
Couple of follow ups with respect to.
Alternatives to detention.
Do you see a scenario where monitoring cannibalize.
Your ice population.
No Sir yes.
It's been a a tool in the toolbox for ice going back I guess when the start of the program was probably about 15 years ago, but I see it as a kind of a complementary tool to the need for detention capacity. There is always going to be need I think for us.
Monitoring programs like that and for capacity that we have in places primarily on the southwest border and I and I would say is it provider for <unk> solutions for ice for almost 40 years.
The the configuration within our facilities may change a little bit maybe for a female's maybe for males. As you know we've done a family solutions to different times in Texas.
But the need for.
Thoughtful humane environments for detention for different needs based on policy.
Over the years I think will always be a very important tool for the policy leaders leadership with a nice general if you'd add to that Dave.
I don't have anything to add.
Great. Thank you.
And you mentioned that.
You expect to recover the vast majority of the.
The wage increases that you are.
That you are providing.
From your customers.
Is there a potential for you to recover those wage increases retroactively.
In some cases, so let me let me just as a reminder, how it works because it's pretty different at the federal and state level. So the federal level.
If the department of labor issues, new what they call wage termination and it takes a correctional officers in a certain region of the country on an hourly rate up 10% year over year.
We are required by contract to immediately incorporated in the contract and deliver that increase to our employees, but also we're allowed under contract on that exact same day to get fully reimbursed per dollar for dollar. So so so those happen instantaneously. So that's all well defined and it's been part of.
Our contracts for almost 40 years, so that that side is pretty straightforward on the on the state side, it's a little bit of.
The timing of the increases that the state does and again.
We try to work closely with them to do it in parallel because we know with one increases over the other on timing from a from a timing perspective, it is going to impact the other from a labor perspective. So we tried to somewhat toward side increases we're doing with them, but also having a conversation conversation on a parallel side I'll make sure we get reimbursed for it so in some cases it.
Maybe reimbursement relatively quickly after do increases.
And it could be we.
We do a contract amendment to get reimbursed and it is retroactive, but it's a little bit kind of case by case by state by state, but anything to add to that.
Yes, it does vary by.
Contract by state so typically a state will.
Yep.
Provide a wage increases are up sorry.
Per diem adjustment as a certain date and they've typically been July one which has coincided with their budget years, but just this past year, we have seen more off cycle per diem increases than than I've ever seen.
Going back to my 20 year history with the company. So it's been an unusual environment for.
Because for our customers as well, they're seeing the same challenges and their staff and they're making adjustments other than the typical July 1st period of time, but again one other thing to add July one is typically when we have per diem increases that adjust based on CPI as you know CPI has been.
As high as it's been in decades, so it should be a good year for our per diem increases as Damon mentioned states are flushed with cash they are in good financial situations. So that should make the appropriations process easier again, it's never easy because they're always trying to balance their budget with the competing budget priorities, but.
We are optimistic in the second half of the year, Dave raise a good point earlier I really want to amplify on that is yes. This is probably the biggest off cycle increases we've seen a pretty <unk> adjustments and salary increases on our state contracts, probably prominent probably ever if not in the last 20 years.
And so.
Typically when we're talking to a state about the need to make it a just salaries is usually of well, let's go ahead and kind of baked that into the budget process in the spring and make effective July one, but again as being great discussion with our state partners.
In many cases, we need to act quickly.
And we're again. This is this is a message that we're delivering exactly the same way as the perfect corrections leadership assay into their governor.
So it is really really notable that we've been able to really successful getting salary increases, but also quickly get reimbursed from our state partners.
Great. Thank you I suspect.
It varies by customer but.
Is the pass through.
Already reflected in the guidance.
Well as I said, it's a little.
Little choppy, because again going back to my Tennessee example.
We've had a couple of increases early this year, we're anticipating a few more later this year. So the timing of the increase versus the time to reimbursement I think theres, probably almost all of them. There is going to be a little bit of a lag some little more notables and others. So I think probably keep me honest here David is probably probably later this year early next year, we're going to get kind of a clean kind of a view of okay red.
Canoes are aligned with the reimbursement that we've got salary increases, but there is going to be a few quarters, probably this quarter next quarter, where again, we're going to have a little higher expenses not get fuller reimbursed, but at all wash out here probably later this year and again going back to my point on the registry nursing, that's probably not something we get reimbursed or because it's not baked into our salaries. It's temp.
Larry solutions to use registry nursing. So the main main factors contributing to the reduction in our guidance was an increase in registry nursing as well as.
Faster ramp down of the ice populations at our La Palma facility as I mentioned that was about half of it was there.
There are other puts and takes but of the 10 cents on each and the La Palma decline was about half.
Our registry nursing was certainly the lion's share of the the balance.
Two together well over to Cynthia.
Great. Thank you and then one last one.
It sounds like you may be adding head.
Headcount this year and if so can you give us a sense for how many people in and the cadence.
And then I will get back into queue. Thank you.
Don't have that at my fingertips, but maybe offline we could we could share a lot more color on that.
But I mean, we have assumed again in our guidance.
Our ramping up of the staffing levels. So that is all factored in again, it's a wide guidance I appreciate that but.
Because we've had to make some significant assumptions on labor costs.
Titled 42, and other things but.
That should be baked into our guidance with an increasing our staff staffing levels throughout the balance of the year. It sounds good got it yes, there's a lot of a lot of a lot of variables more variables unusual in this.
I would say, yes, you said it you Sir thank you. Thank you.
Thank you Kurt.
And we will take our next question.
Ben Briggs with <unk> financial please go ahead.
Hey, good afternoon, guys and thank you for holding the call and taking the questions.
Very helpful.
You guys got a good start to you.
So a couple from me again I wanted to touch on this on a labor issue that I know.
<unk> been asked that a few times, but I just want to make sure I have.
Right, so that I understand it so.
So.
Are you guys paying you mentioned that you are paying some signing and retention bonuses.
But I imagine, you're probably seeing a little bit of wage pressure at the corporate level also is that impacting your operating margins or are you reimbursed for those signing in retention bonuses as well.
So that's a good point those those would not be reimbursed for the most part either again, sometimes the negotiation comes down to not dollar for dollar we're not proving out every expense item in our P&L to our customers. So it's not it's more of an art than a science, but generally speaking you are right I mean, we're getting a CPI increase.
And that's not necessarily going to cover special incentives that we may put in place until we can stabilize the workforce. So.
That's another good example, like the registry nursing, where youre paying a premium for registry nursing thats temporary hopefully.
The incentives were putting in place for a signing bonus and.
And things like that including at the corporate level.
We've done a good job managing overall G&A expenses, so they're not actually going up.
Even.
Much at all from the prior year.
When you look at the facility level signing bonuses.
Special gift bonuses are shift premiums things like that you are right that's impacting the margins in a negative way.
Okay. So the good thing about it.
They are.
The good thing about those though is they can be temporary so youre, providing those until you can stabilize your workforce. So when you ultimately fill those positions those things can fall away. So it's not a permanent part of your cost structure.
Right right.
Okay. Thank you for that that's very helpful.
Next thing is so you mentioned that you've got two remaining direct U S. Marshals service contracts, neither one of which expire in 2022.
I don't think I saw it in your disclosures when do those direct U S marshals service contract expires.
Yes, Sir so they are there there'll be in our supplemental which may go out is.
Is that today.
So it'll be.
The two facilities one in Arizona May of 'twenty. Three September September is given September 23, excuse me and then.
In 2025, Nevada.
Okay and of that 25, that's very helpful. And then I think the last one from me is going to be I know that you guys discussed kind of plans for addressing the revolver and extending that maturity and then also addressing this term loan a.
Due in April of 2023 with balance sheet cash and you have plenty of balance sheet.
378 million of cash on the balance sheet versus like a 50% to $90 million run rate pre pandemic.
There is also the four and five eights notes due 2023 of the unsecured notes that theres about 174 million out on.
Those come due.
Within a couple of weeks of that term loan a I wanted to know are you planning on addressing that with balance sheet cash at the time as well or do you have other plans for that.
Yes short answer yes, so the credit facility, we feel really good about today as we mentioned in the script that should be put in place.
In the very near term.
The 23 notes that you described.
They have a make whole associated with them.
Until February of 'twenty, three so we would expect to use cash on hand to pay off those notes.
As soon as we can without a make whole.
Okay. That's very helpful and that's it for me I will back up.
Thank you thanks, so much.
And that concludes today's question and answer session.
Thank you very much. We appreciate you joining our call today and look forward to talk to you in the coming months. Thanks, everyone.
And this concludes today's call. Thank you for your participation you may now disconnect.
Yes.
[music].
Yes.
[music].