Q3 2022 CoreCivic Inc Earnings Call
Okay.
Yeah.
Good morning, My name is Amy 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 of the third quarter 2022 earnings Conference call. All lines have been placed on mute to avoid any background noise. After the speaker's presentation, there will be a <unk>.
Question and answer session.
Like to ask a question. During this time simply press Star then the number one one on your telephone keypad. You will then hear an automated message advising your hand is raised 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 Amy.
Ladies and gentlemen, and thank you for joining us participating on today's call are David Harney, 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 today's call, we will discuss our financial results for the third quarter of 2022 developments with our government partners and 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 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 2022 earnings.
Lease 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 supplemental financial data on the investors page of our website <unk> Dot com.
With that it's my pleasure to turn the call over to our President and CEO Damon Hanger.
Thank you Cameron good morning, and thank you for joining us today for our third quarter 2022 earnings call.
Today's call I will provide you with details of our third quarter financial performance discuss with you our latest operational developments and update you on our capital allocation strategy.
And discuss the latest developments with our government partners, including the recent $130 million sale of our credit facility to the state of Georgia.
I will then turn the call over to our CFO , Dave Garfinkle, who will review, our third quarter financial results and full year 2022 guidance in greater detail and we will update you on our ongoing capital structure initiatives.
Before I give an update on our government partners, let me briefly pan out.
Big picture view of the past two years, but also a peek into 2023 and beyond.
As you know like the rest of the world.
Had to deal with the challenges of COVID-19 independent damage.
But you had a $24 seven operation for nearly 40 years I am proud of the team having strong systems processes and leadership in place to deal with the challenges that the pandemic brought us.
There was a challenging journey for sure and some difficult decisions were made along the way, but I am grateful and how the team navigated through this challenge and thankfully appears to be more easily manage going forward as the severity of the Covid has diminished.
I would note the change in sentiment from the lending institution.
The year and how it could possibly influenced our access to capital leases port growth and maintenance.
But.
But proactive work.
Corporate status, but also expanding.
And establish and do you think your relationship with by our team and supported by our board has been impressive to witness this past year.
We have to be.
Strong balance sheet <unk>.
And even stronger with a deliberate rate outlook.
Level.
A decade.
Going into 2020.
For the question.
And the ease of our submissions for our federal partners.
It's Mark service and immigration customs enforcement.
So we have shown multiple times the essential nature of Barclays.
Partner New expanded.
Our federal contracts.
Sure and this is not unique for sure but the concern some of the labor market and our ability to fill vacancies that came as a result of the pandemic.
I am extremely pleased with the progress our team has made in the last six months on this front.
As mentioned earlier this year, we have started leaning forward on raising our SaaS and levels at certain locations preparing for higher occupancy rates later this year and go into going into 2023, while filling vacancies at others.
With those goals, we have seen a double digit decline in our vacancy rate this year.
All the while as you have seen in our recent ESG report our programs team are achieving tremendous outcomes with the individuals in our care.
We had a 95% retention rate over the last five years of our management contracts.
So finally before I move on you have seen strong policy debates from this summer going into the election. This fall that adds significant focus on immigration and border security along with crime and criminal Justice among things like the economy and inflation.
We obviously, we will see what next week brings from the election, but nonetheless, we have strong steps to be well poised for the likely to use of our existing and possible new government partners.
Yes.
Now for an update of our government partners and beginning first with our final customers, which are within the department of Justice, which is the federal Bureau of prisons and.
In the United States Marshal service.
<unk> has experienced significant declines in near populations in the last decade.
In response to this long term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners.
In August we completed the sale of our 90 to 178 bed Mcrae Correctional facility to the state of Georgia for $130 million.
The mcquay facilities, our last remaining prison contract with <unk>, representing less than 2% of our total revenue.
Following the expiration of our contract at Mcrae, we only expect to generate revenue for the <unk> through the provision of residential reentry facility contracts.
As a reminder, the sale of our Mcrae facility is notable for a number of reasons.
First the credit facility currently has a management contract with the Federal Bureau of prisons that are scheduled to expire on November 30.
Contract that for the last few years was very clearly not going to be renewed by the DLP.
Second the asset sale provide a significant after tax cash proceeds that allow us to more quickly execute on our share repurchase authorization.
And pay down debt.
Third this is once again, a market opportunity, resulting from directional system seeking to modernize our facilities not the result of prison population growth.
This transaction was a great deal for the state of Georgia as it will help them take a drastic step to modernize their system.
Finally, and most importantly, this asset sale reinforces the significant underlying value of our correctional and detention real estate assets, which is not reflected in the valuation of our publicly traded debt and equity securities.
The sale price for Mcrae was nearly 66000 per bed, which when used to approximate the value of our nearly 71000 company owned.
Correctional beds indicates a $4 7 billion value that is nearly triple the price the public markets have applied to our equity.
While we do not expect to sell of our correctional or detention facilities to government entities to become a growing trend.
We view this as an excellent excellent opportunity to finalize our diversification away from printer contracts with the BLT recycle capital and create value due to the dislocation of the prices of our public securities and our assets true market values.
As for the United States Marshal service their prisoner populations have remained very consistent in recent years, so their need for capacity around the country remains unchanged and significant due to their reliance on contracted detention capacity.
So marshals were impacted by the executive order signed by President Biden and issued in January 2021 that directly to the attorney general to not renew department of Justice contracts directly with privately operated criminal detention facilities.
In 2022, we have no direct contracts with the margins that are set for exploration and now have only two total remaining direct contracts with the marshals that are set to expire in later years.
Both facilities provide significant past at each of the marshals that we believe would be very challenging to replace but we likely will not have resolution on potential contract extensions until we are closer to the existing contract expiration dates.
We continue to work closely with the marshals to ensure their capacity needs are being met in order to support their critical public safety mission.
Ics, our third federal partner and is within the department of Homeland Security.
Of any of our government partners their operations or capacity utilization needs were and continue to be the most significantly impacted by COVID-19.
Notably implemented oxy restrictions at their facilities to improve the ability for resident populations to social distance.
These occupancy restrictions remain in place during the third quarter of this year.
Nationwide ice detainee populations remained well below the historical levels since the spring of 2020 and that trend remained unchanged in the third quarter.
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 the annual budget appropriation process.
The AUC has nonetheless experienced budget challenges because of COVID-19 related and other unplanned expenditures outside of their control, which impacted the detention levels and actions on new contract Awards.
Taken this into account at the end of September I used attained approximately 26000 individuals nationwide.
Their new fiscal year started on October one and ice was funded at 34000 beds under a continued resolution that funds the federal government to December 16th.
We obviously, we will be watching and what their funding will be once the full year budget is enacted in December .
Today, we are experiencing increases in utilization by our federal partners, particularly ice across multiple facilities, where they are up nearly 26% quarter to date and.
And we expect this trend to continue.
This is a result of ice slowly beginning to relax their pandemic related oxy restrictions.
While this trend is occurring too late in the year to have a material impact on this year's financial results. We believe this is notable trend following three years of utilization levels well below historical norms.
We also continue to pursue opportunities to provide ice was nonresidential alternative to detention or ATV programs.
During the third quarter, a different provider was awarded a procurement for young adults, which was issued this January .
While we were not awarded the new contract. We remain engaged with is as we believe additional ATV programs could be developed.
We also know these case management services are similar to the type of case management services, we already provide and our community segment.
The elevated rates of apprehensions on the southwest border continue to create challenges, which are expected to increase the governance demand for both residential detention capacity and nonresidential atvs.
Sure new needs arise, we believe we are well positioned to deliver solutions to ice.
Moving now to the results of the third quarter of this year, we generated revenue of $464 2 million, which was a decline of only one 5% compared to the prior year quarter. Despite the non renewal of contracts with United Marshal service at our level of detention center and our <unk>.
West, Tennessee detention facility in 2021, and the non renewal of a contract with Marion County, Indiana at the managed only Marion County jail effective January 31 of this year.
Collectively these three facilities accounted for $19 8 million or four 2% reduction in revenue in the third quarter of this year versus the prior year quarter.
In the third quarter of this year, we generated normalized funds from operations or <unk> of $33 9 million or <unk> 29 per share compared to $58 6 million or 40.
<unk> 48 per share in the third quarter of 2021.
Now the decline was driven by the non renewal of the three contracts that I just mentioned.
The transition of populations at our La Palma Correctional Center pursuant to a new contract with the theater Zona and a challenging labor market.
Dave will provide more detail regarding the financial impact of these items.
But I would add that while we have spent considerable amounts of considerable amount on incentives to recruit and retain our valuable frontline staff and an increase in staffing levels that were unsustainable in the prior year. These investments have positioned us to take advantage of increased demand from our government partners that we will believe occur.
Oxy restrictions imposed by our government partners during the Covid pandemic are relaxed.
As mentioned earlier, we are also poised to enter into new contracts and accept additional residential population from our government partners that we are unable to matters that are unable to manage existing population levels because of because of their staffing challenges.
We believe these these could manifest as early as this quarter.
In April of this year, we can minutes transitioning populations at our La Palma Correctional Center in Arizona for ice populations to Arizona state populations pursuant to a new contract. We were awarded by the Arizona Department of Corrections rehabilitation and reentry late last year.
We expect the transfer process to be completed near the end of this year.
Upon achieving normalized utilization based on the contract we expect to generate approximately $75 million to $85 million in annualized revenue.
However, because of the preparation to receive the Arizona inmates, including a reduction in the average daily population of ice detainees at the facility whose contract expired at the end of the third quarter facility net operating income decreased nearly $12 million during the third quarter of this year compared with the third quarter of 2020.
One.
The Paloma facility currently support submission of the state of Arizona by carrying four approximately 1900 inmates.
We continue to actively collaborate with Arizona Department of corrections rehabilitation and reentry to ensure we successfully complete the transition by the end of this year.
I would like to briefly discuss our updated full year 2022 financial guidance we.
We are now forecasting full year normalized <unk> per share in the range of $1 28 to $1 32.
And adjusted funds from operation or <unk> per share in the range of $1 18 to $1 22.
The increase in our guidance are reflective of our third quarter financial results being in line with our internal forecast.
The expectation of completing the transition at all and also the sooner than estimated in the prior quarter.
And the expectation of increased utilization by federal partners, starting in the fourth quarter.
Dave will provide greater details about our third quarter financial results.
As well as the financial impact.
More significant assumptions included in our updated full year financial guidance following the remainder of my comments.
So finally during the third quarter, we had multiple important milestones that continue to strengthen our balance sheet.
First as I mentioned earlier, we completed the sale of our Mcrae Correctional facility to the state of Georgia for a sales price of $130 million, which generated a $77 $5 million gain on the sale.
During the third quarter. We also so two residential reentry centers in California, and a parcel of undeveloped undeveloped land for an aggregate sale price of $16 3 million.
The cash generated from these asset sales have helped accelerate our capital allocation strategy.
During the third quarter during the quarter, we also repurchased an additional $3 6 million principal amount of our outstanding $4, 65% senior unsecured notes, which are scheduled to mature in may of 2023 and have a remaining balance of only $166 million.
Following the maturity of those notes our next bond maturity isn't until April of 2026, and we have less than $100 million in variable rate debt.
With our debt maturity schedule in a comfortable position significant cash on hand, and resilient positive cash flow generation. We also repaid $33 5 million principal amount of our 825 senior notes.
Reducing the outstanding balance to $641 5 million.
So far this year, we have reduced our outstanding debt balances by nearly $250 million significantly, reducing our future interest expense and improving our long term cost of borrowing.
We remain committed to our targeted total leverage ratio or net debt to adjusted EBITDA range of two five times to 275 times.
We have made meaningful progress in reducing our overall leverage due to the strong cash flows the company generates.
And we expect our leverage to continue to decline over time understanding that recently, our EBITDA has been negatively impacted by the short term transition of contracts at olive comparability in Arizona mathematically increase in leverage through debt levels.
Mathematically increase in leverage through debt levels have declined.
So as the as that.
Transition nears completion, we expect our leverage to naturally decline.
During the third quarter, we continue to execute on our stock repurchase program.
The $225 million stock repurchase authorization approved by our board of directors earlier this year.
Since commencing the program in May of this year, we have repurchased six 6 million shares of our common stock at an aggregate purchase price of $74 5 million or approximately 5% of our total outstanding shares.
There is the remaining share repurchase authorization of $155 million would allow us to repurchase an additional 12% of our outstanding shares based on recent trading price of our equity.
Our capital allocation strategy has enabled us to remain flexible and in future quarters is expected to include a combination of share repurchases.
And debt repayments, taking into consideration factors such as the price of our securities.
<unk> towards achieving our targeted total leverage ratio and potential returns on other opportunities to deploy capital.
We continue to believe our capital allocation strategy has been prudent for positioning the company to generate long term value for a stable capital structure.
And continue to cost effectively meet the needs of our government customers with less reliance on outside sources of capital.
But before I turn it over to Dave Let me acknowledge what is being seen and reported in corporate America on a daily basis and that is the warning signs of a recession for the U S economy and the impact it is having on companies and industries, both near term and going forward.
As we have seen in previous recessions, our industry has been resilient during previous downturns in the economy.
This is in large part because we are an essential government service.
So as the economy slows down and we watch the labor market coming off its unprecedented demand for.
President demand cycle.
We are actively hiring employees for anticipated growth.
And we have plenty of capacity to meet the demand of our partners.
No need to spend capex in this environment of rising interest rates.
To be clear, we won't turn a blind eye toward the current and forecast of macro trends in the economy.
History has shown that our business can be stable and growing during a recession.
I'll now turn the call over to Dave to provide a more detailed look at our financial results in the third quarter discussed in detail our updated full year financial guidance and provide additional financial updates.
Thank you Damon and good morning, everyone in the third quarter of 2022, we reported net income of 52 per share or eight of adjusted earnings per share 29 of normalized <unk> per share and <unk> per share of <unk> 25.
Adjusted or normalized per share amounts exclude a gain on sale of real estate assets of $83 $8 million asset impairments of $3 5 million and expenses associated with debt repayments and refinancing transactions of $8 million.
The gain on sale of real estate assets includes a gain of $77 5 million on the previously disclosed sale of the 1978 bed Mcrae Correctional Center for a gross sales price of $130 million, which was completed on August nine.
The decline in normalized <unk> per share of <unk> 19.
Compared to the prior year quarter included an EBITDA decline of $11 $8 million. So our <unk> <unk> a share due to the earnings disruption at our 3060 bed La Palma Correctional Center, the second largest facility in our portfolio as we continue to transition to populations from the state of Arizona pursuant to a new management contract that commence.
In April for up to 2700 <unk>.
We previously had a contract with ice at this facility and during the prior year quarter and through the beginning of this year, we cared for an average daily population of approximately 1800 ice detainees at the La Palma facility, which declined to zero by the end of September .
Last quarter, we temporarily suspended the intake process for Arizona to ensure our pace of hiring would mean staffing needs to manage the full capacity under the new contract.
After revamping and expanding our hiring efforts, we resumed intake during the third quarter and as of last night cared for 1896 inmates from Arizona and now expect the ramp to be complete by the end of next month.
Our financial results have also been impacted by a challenging labor market and occupancy restrictions implemented during the COVID-19 pandemic that largely remained in place during the third quarter for most federal facilities.
We are experiencing inflation in many expense items like utilities and food. The most impactful increases were wages and other expenses related to labor.
Our investments in wage increases and other expenses related to labor where necessary to help address the press staffing levels, we experienced in 2021 and to prepare for increased occupancy levels. Once occupancy restrictions caused by the pandemic are removed we.
We have begun to see improvement in the labor market in our same store staffing levels increased six 4% from the end of the third quarter of 2021 to the end of the third quarter of 2022.
We have been successful in obtaining per diem increases for many of our government partners that are experiencing the same staffing challenges to cover the incremental salaries that help ensure adequate staffing levels.
Notwithstanding that success, we incurred $5 $6 million or <unk> <unk> per share more than temporary incentives than in the prior year quarter to attract and retain facility staff.
We also incurred substantial travel expenses in order to supplement staffing at facilities that were particularly challenged which increased $5 $3 million or <unk> <unk> per share from the prior year quarter.
And as the labor market continues to improve which will take some additional time, we expect to reduce reliance on these temporary incentives and travel expenses.
Lastly contract terminations since the end of the second quarter of last year at our West, Tennessee 11 were in the managed only Marion County jail contributed to an EBITDA reduction of $2 7 million or <unk> <unk> per share from the prior year.
Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, and decreased to 71% in the third quarter of 2022 from 72, 1% in the prior year quarter, although the decline from the prior year was attributable to contract terminations at the West Tennessee facility on September 30.
2021, and 11 worth facility on December 31, 2021, and due to the transition of populations upon.
Occupancy increased from 69, 5% in the second quarter of 2022, largely due to the transition of a polymer or populations increased by 125 residents compared with the second quarter driven by the intake of Arizona populations as well as an overall increase in U S marshals offenders in multiple facilities.
Our overall ice detainee populations remained well below historical levels as the southwest border has effectively remain 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 under our policy known as titled 42.
On April one 2022, the CDC issued a public health determination terminating title 42 with an effective date of May 23 2022.
However on April 25th a federal judge issued a temporary restraining order blocking the termination of title 42, which the judge affirm that may 20th that ruling is under appeal by the administration.
Whenever title 42 is terminated such actions May result in an increase in the number of undocumented people permitted to enter the United States, claiming asylum and could result in an increase in the number of people apprehended entertained by ice.
With depressed occupancy levels, we are in a position to significantly grow earnings whenever the impacts of COVID-19 restrictions subsides.
Turning next to the balance sheet as of September 30, we had $185 million of cash on hand, and additional $233 million of borrowing capacity on our revolving credit facility, which remains undrawn, providing us with total liquidity of $418 million.
During the third quarter of 2022, we purchased $3 $6 million of our four and five 8% senior notes in open market purchases, reducing the outstanding balance of these notes to $166 $5 million.
These notes mature in May 2023, which we currently expect to repay with cash on hand in early 2023.
We also repaid $33 $5 million of our 8.25% senior notes, reducing the outstanding balance of these notes to $641 5 million.
Beyond the four and five 8% senior notes, we have no maturities until the quarter percent senior notes mature in 2026.
Also during the quarter during the third quarter, we purchased three 6 million shares of our common stock for $37 million under our share repurchase program.
Since our board authorized the repurchase program in May we have repurchased over 5% of our outstanding shares or totaled $6 6 million shares at a cost of $74 $5 million and have remaining authorization for over $150 million more of our shares.
Following these purchases leverage measured by net debt to EBITDA was 3.0 times using the trailing 12 months ended September 32022.
Even with these repurchases during the third quarter, we repaid $109 $1 million of debt net of the change in cash.
Going forward, we expect to continue to use our liquidity as well as cash flow from operations to repurchase a combination of our stock and bonds taking into consideration a number of factors, including the amount authorized under our repurchase plan liquidity share price progress toward achieving our targeted leverage of two in a quarter to two three quarters.
<unk> and potential returns on other opportunities to deploy capital.
After the repayment of our term loan B earlier, this year and the Paydown of our previous term loan a we have significantly reduced our exposure to rising interest rates are only variable rate debt outstanding consists of a new smaller term loan obtained in may in connection with our new bank credit facility, which comprises only 7% of our total outstanding debt.
<unk>.
Our balance sheet is in great position, not only to weather, but to opportunistically take advantage of volatility in the capital markets with no need to access the capital markets in the near term.
Moving lastly to a discussion of our 2022 financial guidance for the full year 2022, we expect to generate adjusted EPS of <unk> 47 to 50.
Normalized <unk> per share of $1 28 to $1 32, and <unk> per share of $1 18 to $1 22.
Our per share results were in line with our internal forecast for the third quarter, but we are now expecting to complete the transition at our La Palma Correctional Center sooner than estimated last quarter.
We're also expecting higher federal populations and slightly lower interest expense than previously estimated.
These favorable updates are partially offset by a continuation of higher levels of incentives, including travel expenses to help address a difficult labor market.
Our guidance contemplates the continuation of an inflationary environment, including particularly for food utilities and interest rates and as mentioned, we also expect demand for our space and services to increase in the fourth quarter, particularly at the federal level as occupancy restrictions are expected to be relaxed beginning in the fourth quarter, even though we do not expect.
Titled 42 to be reversed this year.
Our 2022 forecast reflects a decrease in EBITDA at La Palma of approximately $20 million from pre pandemic levels and an even larger decrease from 2021.
Although we expect the facility transition to be complete near the end of next month, we do not expect the expense structure completely normalized by the end of the year.
<unk> expense structure normalizes, we are confident EBITDA at La Palma will return to pre pandemic levels, providing meaningful growth to our 2023 financial results compared with 2022.
Our forecast contemplates the exploration on November 30 of our contract with the Federal Bureau of prisons at the Mcrae facility. Our full year 2022 forecast includes EBITDA of $7 6 million for this facility that will partially offset the growth in EBITDA in 2023 from the palm of facility.
The 2022 full year EBITDA guidance in our press release enables you to calculate our annual effective income tax rate of 25% to 26% and provide you with our estimate of total depreciation and interest expense.
We expect G&A expenses for the fourth quarter to be comparable to the prior three quarters.
During 2022, we expect to incur $63 5 million to $66 million of maintenance capital expenditures in line with 2021 and unchanged from our previous guidance.
We also expect to incur 19 million to $20 million for facility renovations, including $4 million to $5 million at La Palma for the new Arizona contract almost all of which has been spent through the third quarter.
We remain focused on managing our leverage target.
We remain focused on managing to our leverage target and are not forecasting any share repurchases in the fourth quarter, but we will remain flexible and opportunistic.
I will now turn the call back to the operator, Amy to open up the lines for questions.
Thank you and as a reminder to ask a question you will need to press star one on your telephone.
Please standby, while we compile the Q&A roster.
Your first question comes from the line of Joe Gomes with Noble capital. Your line is open.
Good morning, Damien David Thanks for taking the questions.
Hey, good morning, Joe.
The first one was kind of a multipart question here, but.
You talk about your hiring in advance of some population increases you think youre going to occur.
Wondering what kind of gives you the confidence.
In that population increases will incur.
Also.
Mention David some staffing shortages.
Other people other.
Government agencies that I was wondering if you might be able to give us a little more color on that.
Do you think.
Of course, if it can take advantage of that.
Absolutely. Thank you so much Joe for those questions.
So.
For the first part of your question. Your first question I should say give you a little more color there so.
As I have noted that I, probably the Best example, I gave you with what I gave a little bit of color on relative to ice in my prepared remarks.
So we had assumed and now we're starting to see play out a little bit a couple of things happened, we advise one and they are into a new fiscal year. So they've got now kind of a full funding, but a full funded budget relative to get their capacity nationwide at 34000. So as you know at a previous year. They are funded at that level.
A lot of money was diverted out of that.
<unk> for other expenses related to Covid. So we think that probably impacted their total contractual contracted a mountain nationwide and again at the end of the year.
End of the fiscal year they were at about 26000.
That'd be that'd be number one that new fiscal year kind of fully funded budget and can get maybe get back to more historical level at 34000. The second thing somewhat related is.
We are starting to see steps, it's not completely universal yet it depends on kind of conditions on the ground in certain locations, but we are starting to see a little bit or pulling back of restrictions.
That will put in place around COVID-19 because of social distancing social distancing requirements within our facilities and we are starting to see that then.
<unk> had some caps in certain locations for is that being relaxed a little bit. So as I mentioned in my prepared remarks with the start of the new fiscal year on October one.
Quarter to date increase of population is about 26%.
No more increase again won't materially impact this year, but also it will have some impact going into next year for sure.
So I think the answer to the first part of your question I'll Tag team with Dave here in a minute to add anything additional on that but the second question.
We've gotten a couple of calls in fact, I got a call directly from one one commissioner Afirma Department corrections here in the United States about a year ago, saying that they are having a difficult time.
Staffing the facility within their state and are really rule part where they couldn't find the labor and actually you asked if we can help them with the staffing front. So we talked about maybe different solutions, we could do with them in that state, but more recently and again, it's kind of the same issue.
Several states here in the United States that maybe at facilities either rural locations or even facilities that maybe are somewhat near metropolitan areas.
Really difficult challenges to staff the facilities and.
Unlike us where we are a nationwide employer there are somewhat limited on on where they can pull labor from that either jurisdiction are from that perspective, the respective states. So we've got a few states that have knocked on our door, saying were looking to close maybe units maybe looking at closing entire facility just because they can't staff those facilities because of the.
The labor market. So we do feel like we've got a couple of states that are kind of circling right now where we could potentially provide capacity in our system because of those those challenges so anything you'd add I guess, both those Dave nothing to add.
Okay.
Confirmation.
We've seen as Damon said 25, 26% increase in populate in ice populations. So far this month, one month does not a trend make but thats certainly a good sign and kind of it makes logical sense given the turn of the fiscal year.
The federal government. So October one was the beginning of benefits by year, so refreshing that budget.
It helps as well as the strong demand that continues on the southwest border only thing I would add to the to the populations, particularly state populations I would say, where there could be opportunities to take additional populations because of.
States, having challenges with their staffing levels as our ability to provide those incentives. They were expensive I mentioned $5 $6 million of incentives that we pay to our employees.
Higher Q3, 'twenty two over Q3 dollars 21.
Partners really don't have that flexibility to go to the legislature to get more funds, we can be more nimble and more flexible and can provide those temporary incentives to staff up.
To levels.
Table us to take on those populations.
Okay. Thanks for that.
Talking about those incentives so looking through that.
No.
Supplemental information, they're looking solely at the safety segment <unk> expense as a percent of revenues for the quarter were 89%.
From.
The high <unk> call it $77, 7% to 8% in Q1 and Q2 is that <unk>.
Mostly a reflection of some of these incentives you've talked about and some of this hiring in advance that drove up.
<unk> safety segment expenses as a percent of revenues.
Yes, it's exactly that.
Bob.
We said last year were unsustainably low staffing level, it's doing everything we can decrease staffing levels. So I'd say the prior year quarter was probably lower than it could have been lower than that.
We only would have been.
There were some reasons for that we are still.
<unk> deep and Covid and some of the programs and services had been suspended temporarily.
Now reinstated for the most part this year so that contributed to it and then of course, the biggest impact on our margins overall as the decline in occupancy and Thats not necessarily true from last year's quarter to this year's quarter, but as you bring on those staffing levels get back to normalized levels. You do have this dip in margins until the occupancy.
Return.
Okay.
Yes.
The alternatives retention that you spoke about David.
Obviously electronic monitoring.
<unk> has been a big driver this year.
For some of your competitors out there you are.
Key competitor out there I guess I should say.
What are you kind of you guys doing to try and garner some more of that business, what kind of investment do you need to make in that segment.
Two hopefully hopefully capture more business there.
Yes.
Great question, a couple of answers there one of which is.
<unk>.
We have a great relationship with ice as you know, it's our actually our longest.
Long as partner.
<unk>, we've had almost a 40% year relationships. So we know that barely really well they know us really well we know what their needs are and we've been able to adjust.
Our solutions kind of nationwide opinion on changing needs. They have globally based on challenges on southwest border, but also from a policy perspective. So we've been actively talking to them for a couple of years also we participated in the most recent procurement that led to the.
Contract that Geo has to date and they're well aware of our capabilities not only just because of our relationship with they have over 40 years, but also we have demonstrated operational a record with our community segment that we've been doing for years now or residential reentry, but also community programs like home confinement case management electronic <unk>.
Monitoring and whatnot. So we've got a whole suite of services that we.
We can provide but also track record when we've had great outcomes of great performance, but anything you would add to that David nothing that at this time.
And so the opportunity we see.
Growing opportunities, obviously grown for our main competitor.
And its attractive business. So we are focused in on.
Okay, Great and then maybe we could just talk a little bit on the.
Stock buyback.
Maybe you can kind of give us in the third quarter kind of the cadence there.
What are you buying throughout the quarter or is it more front end loaded and then you took advantage of.
The bond market.
Pay down some of the repurchased some of it there.
And why no forecast in the fourth quarter for additional stock buybacks.
Yes, Joe it's Dave I'll take I'll take that one I'd say, our pace was probably heavier earlier in the quarter as we knew we had $830 million of sale proceeds coming from Macrae.
That kind of impacted the timing of share repurchases early in the quarter.
With respect to Q4 as I mentioned in my script, we're not forecasting any repurchases in Q4, saying that that doesn't mean, we won't be opportunistic and if we see opportunities disruption in the price.
Something like that we could execute on it our repurchase programs not really formulaic, but it is colored by our leverage and we.
We closed the quarter using the trailing 12 months at three point O times, we're mindful of our target.
<unk> in the quarters to two and three corners times and we'll be disciplined the challenge here in the short term as Damon mentioned previously in his script. We've got this short term.
Earnings declined because of La Palma.
And now we see occupancy going up so if we continue to see those trends improving particularly with occupancy levels we could.
Gear that program back up and accelerated repurchases, but until we see really evidence of that.
<unk> leveraged going down.
I'd be a little bit more conservative now the challenge we have also got a trailing 12 months.
The past four quarters. So our debt does continue to go down, but the leverages impacted more by the declines in EBIT. So as we get through that cycle of four quarters.
See that naturally increasing and therefore leverage naturally decreasing.
And would then be able to ramp that share repurchase program back up maybe.
Maybe a little color on the bonds too.
Yes, so bonds, yes, thanks very much so.
With constraints on leverage and still plenty of liquidity.
Ed.
All very volatile bond market, we thought it made sense to utilize our cash to pay off not just the four and five 8% bonds. Those bonds mature in may of next year as I mentioned, we expect to pay them off early 2023 anyway. So if we can get them at par or below par.
Why not just take them out now avoid the interest expense that we would incur between now and when we redeem those notes the same kind of thought process on the quarters. Yeah. That's that's more market driven though I would say.
It's a higher rate.
It is an expensive tranche of debt 675 million at eight a quarter. So while we had plenty of liquidity.
And again that governor on leverage we think it just makes total sense to save on interest expense and chip away at that maturity because it is a chunky maturity is not until 2026, but nonetheless, it's all a bit of a chunky maturity. So something we'll monitor going forward I don't know if we'll continue to buyback the pace, we did in the second quarter, but it's a good.
Use of our cash while we're constrained on the leverage side.
Great. Thanks, Thanks for the color on that I'll step aside and let someone else ask a couple of questions.
Thanks, so much.
Thank you one moment for our next question.
And our next question comes from the line of Marin with Zacks. Your line is open.
Thank you.
So.
Question.
Different topic.
So.
Now.
Ending divestitures.
Some smaller facilities contracts.
We're coming up or you had.
I did one of the facilities.
How far in advance do you start conversations to renewal contract.
Yes, Great question. This is Damon.
It really depends on the customer and the circumstances around that around the contract. So.
The case was mccray.
I mean, we kind of saw the kind of signs of potential of them.
And utilization of private sector, almost a decade ago and so we really got in a room and looked at all of our contracts that would have.
I looked at kind of exploration dates for those respective contracts and determined the best course of action of those facilities. Once those contracts did expire and nothing changed during that period of time for the E&P perspective that they are going to change course or potentially renew one or multiple of those contracts. So so in the case of macrae. It was probably a couple of years ago that we started actively.
Thinking through what's the alternative for Mccray.
Kind of obvious point, but we thought the most likely scenario would be somehow a solution for the state of Georgia, and so started putting on on paper. Some various proposals to the state of Georgia and open ended up with a really really good transaction for us and a great solution for a state of the state of Georgia. So again it depends on the circumstance if we've got.
Another contract coming up.
And the customers clearly, saying hey, we want to renew this contract may be expanded or change the scope of services to programs that again that maybe a year or two hours start thinking through kind of what that all looks like in certain negotiation process for that for that contract, but anything you'd add to that Dave.
None of that in the last year when the executive order was issued when we had our 11 worth contract.
And contact us marshals out West, Tennessee, those conversations began immediately.
Probably wouldn't have.
Probably would've been.
Except for the executive order would have been a routine extension of those contracts with a lot of advanced discussion, but because of the executive order I think those conversations began a little bit earlier in earnest for both.
Parties for US we wanted to try to ensure we can retain the contracts and Ed on the U S. Marshal side trying to figure out what capacity was available if they couldn't use our facilities. So those are probably a little bit unusual because of the executive order.
Thanks.
We've also seen you come up with.
Loosen.
One facility, where you sort of created a corporate model.
Population is that's not what have you.
You might be able to replicate at other venues.
Thank you.
Thanks sure I follow your question there with the soda you're referring to.
So you.
You were able to.
Forgive me I'll have to go back.
Find exactly what facility I'm, referring pool, but you were able to take in one population.
To pick up some of the idle.
Beth.
How does that facility and I'll look for it and come back in queue.
I don't know.
Yes, yes, yes.
Yes, it's our Montana facility up in Shelby, Montana is our crossroads facilities. So yes that was a.
A win win win yes, we worked it out with Montana, where they had an increased need for capacity and more kind of environment that we have at our facility, where we've got more program versus being backed up in local jails and the local deals and we're happy to take the American service that were.
Likely not be able to continue to stay at our facility because of the direct contract. So that is it was a great solution again for all parties Martin service, Montana and core civic and so that's definitely a play in the playbook that we're always considering in those situations.
Okay, Great and then last question.
We haven't really been talking a lot about COVID-19 because COVID-19 Gino.
The vaccine booster, but.
Is that something Thats quota.
On your radar screen in terms of <unk>.
<unk> within the facility.
Absolutely, yes, we are monitoring very closely is still in.
Our team here within Brentwood, Tennessee, or monitoring kind of federal state and local public health authorities guidance and direction and so we're taking that into account accordingly.
Implemented into our operational plan as well as appropriate along with kind of feedback from our government partners and then again kind of an obvious point, but.
All jurisdictions are a little different relative to kind of the.
Virus levels.
People that are impacted by the virus and so we're monitoring that closely locally so again cant say, it's completely completely in the rearview mirror, but I think we all agree that the risk has diminished obviously the vaccine helped dramatically significantly both the public and.
Public sector, and private sector, and our employees and our residents. So we're grateful for that too.
Okay.
Thank you for your questions.
Thank you one moment for our next question.
Okay.
And our next question comes from the line of Kirk Ludtke with Imperial capital. Your line is open.
Hello, everyone. Thank.
Thank you for the.
Presentation and the question.
Couple of topics like our topic.
Firstly.
<unk> next week I was curious I think I think people probably.
Would view Republican control of either the house or the Senate as a positive but is there something is are there any state level elections that that might impact the outlook.
Yeah, a lot of a good great question is the name and a lot of state local elections that we're watching closely.
Depending on the outcome of those various state elections.
Could have.
Some impact on potentially solutions that we can provide net respective states I guess I'd say this way, though the states, where we operate today either in state or maybe provide a solution for an <unk> population.
I feel very good with saying that we just have had a 40 year track record where regardless of who's in.
Because the governor or <unk>.
Chip within the legislature as long as we continue to do a good job from a quality perspective, it would be cost effective and show good outcomes in our programs.
We've had great success, regardless, if they are changed leadership or political affiliation within those states to continue to have really strong contracts and also great relationships with respect to make.
Anything you'd add to that Dave.
Added to our toolbox to so you've seen a number of facilities that are owned and operated two facilities, where we just provide the real estate. So for political reasons are.
Whatever the case may be a governor prefers to employee state employees to operate a facility.
Very comfortable turning over the operations to the state government to operate where we're just become the landlord.
Lease the facility to the partner so either solution works for us.
Economics can bury it came it can be better it can be worse, depending on the particular economics of an individual contract, but it is a new tool in the toolbox that we've utilized the past few years.
The politics of got in the way of the ownership and operations of a facility.
Got it.
That's very helpful. Thank you.
With respect to look Palma.
Eloy I apologize if I missed this but how.
How many ice detainees were at La Palma at the end of the ice contract.
Okay.
Yes.
Keep me honest here, Dave I think at the beginning of the year right. After we got the contract. We were probably 2000 1800 about 1800 in the facility and then obviously that will kind of ramp down we worked out a ramp plan with ice.
Overlay that with the ramp land at Arizona wanted to achieve.
And going into the facility so kind of overlay those two ramp plans together and then I think they were could play out solely by mid September Thank guys was.
Hopefully it answered quite anything you'd add to that.
Yes. They are up mid September so I think thats, what youre asking if they were completely by the end of the quarter.
Got it okay, I'm just I'm looking at the occupancy level at Eloy It looks like you have.
Technically for 800 detainees there, but is there any is there an occupancy cap at Ely.
There was.
They're in all over the country with <unk>. So there was an oxy cap and that will probably kept us where we had a lease probably 500 beds, if not more probably 767 hundred beds that were vacant.
And more than you wanted to know if we gave you a little more color on how thats a pack the total capacity.
Most if not all of our highest abilities have male and female and then also have different levels of custody. So if you think about.
Maybe six or seven different variation of population facility and then you've got to overlay that with restrictions then you've got a lot of capacity that was not able to be utilized during during COVID-19.
Adds also a little bit to the total amount. So it's a different way if that facility was just all male one Cathy level, then you're probably going to have a little higher utilization during <unk> with it since we had multiple.
Both both genders and multiple levels of security than it does impact a little bit the capacity that is unable to be used during COVID-19.
Okay.
Got it okay. Thank.
Thank you.
With respect to the.
Sorry, one moment our next question.
Sorry about that sorry.
Thank you Scott.
Okay.
Our next question comes from the line of Brian <unk>.
And thanks for taking my question.
Good morning.
Good morning, just a quick two parter on the expenses I guess just in general <unk> been ramping up expenses on the staffing side for a few quarters now could you just frame for us.
In terms of your expectations for occupancy level go where you are in that ramp up and then sort of secondarily.
On the sort of bonus and incentive payments.
Should we think about those if we were to go into a more recessionary environment and just the general sort of expense line.
Going into next year and beyond how should that be trending with bonuses and then also ramp up staffing just trying to get a better ideas where that could go.
Yes. Thanks for the question Bryan I'll tag team with payment on this one I would say.
Sounded like probably most companies we would welcome a little bit of a recession, obviously don't want it to be a deep recession, but a recession could.
On unemployment better employers market and so we would be able to reduce the amount of incentives that we pay our staff.
We already see things like registry nursing the rates are coming down our need for hiring registry nursing has come down throughout this year, we're still paying some.
But I would say as the economy, if the economy continues to decline and particularly in the labor market. The labor market loosens up a bit that would be a positive for us because we would be able to reduce our expenses on the occupancy trajectory.
We're doing our 2000 and we're preparing our 2023 budgets right now.
Ready to put out guidance, we'll do that in February as we normally do.
But it would seem like Occupancies would trend upward from here, particularly when we get to the La Palma transition.
This population is depending on if and when titled 42 gets reversed that could be a positive for occupancy levels and then of course, the relaxation of the occupancy restrictions as we've already begun to see some.
With what all.
Toward higher occupancy levels.
But the magnitude is just hard to hard to gauge at this point.
I would say, we would have to get back probably to that 80% to 82% occupancy level before we see our margin percentages returned to pre pandemic levels, but we have run that exercise.
To see that despite the fact that we've got higher wages. Today, we also have higher per Dms today. Unfortunately, we're not getting the total revenue.
Those higher per diem is because the volumes are still down but once we see those occupancy levels get to pre pandemic levels in the 80% to 82% level.
<unk> confident that margins would be at the same pre pandemic percentages, yes, that's perfect. The only thing I would add to <unk>.
<unk> comments.
As you're kind of going back to kind of the general mood of the <unk>.
Katami and likely falling into recession.
I mean, we have as I said in my remarks last six months, we've made great progress on lowering vacancy rate, but I'd say to really it's really accelerated in the last 90 days.
So pretty much the quarter.
And.
And I think if we go into next year. It <unk> says and still see a little bit of a tailwind from a labor market factors and then we can taper down those incentives as appropriate and I think you would also find industry. Our HR team has shared with us at our pipeline for 2022. So this year have exceeded the levels. So these are people that are apply for jobs for <unk>.
Civic throughout the company.
Our pipeline for this year 10 months into the year have exceeded the levels that we had in 2020 and also 2021. So we're pretty close back to 2019 levels on pipeline people apply for her employment with the company and again.
Turning to credit for our HR team and the incentives that we've put in place along with our operations team, but also I think we are starting to see a little bit of a tailwind too with the economy softening.
Maybe labor softening and also with that.
Great. Thanks, and one more quick one if I could.
Your competitor recently won a legal case related to AB 32 in California.
Any comment on how that could impact your current operations and how you might think about operating in California going forward.
Yeah, Great question and the short answer is is that obviously, we're watching it very very closely we do have that one facility in California that is the node type Mesa with ice and Marshal service I'll say that would that case, possibly impacted that the viability that contract going forward. So again, we Washington watch that closely.
Relative to kind of behavior going for kind of business opportunities of things, where maybe do differently based on the result of that case I'd say no again that was the only really kind of notable contract that we were.
Thinking about that potentially could be impacted by that case, but anything you'd add to that David.
Okay.
<unk> sensor and it was only 67% occupancy during the third quarter.
It's nice to get AB 32 favorable ruling there, where we'll be able to renew the contract expires December 2004. So at this point it seems like that should be a renewal without any issues at this point.
Great. Thank you.
Thank you. Thank you.
Showing no further questions at this time.
This concludes today's conference call. Thank you for participating you may now disconnect.
The conference will begin shortly to raise your hand during Q&A you can dial one one.
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