Q3 2024 CoreCivic Inc Earnings Call
Thank you for standing by. My name is Cath and I will be your conference operator today.
At this time, I would like to welcome everyone to the CoraCivic Inc. 3rd Quarter 2024 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question during this time, simply press star followed by the number 1 on your telephone keypad.
If you would like to withdraw your question, press star 1 again.
Speaker Change: I would now like to turn the call over to Mike Grant, Cora Civics Managing Director of Investor Relations. Please go ahead.
Mike Grant: Thank you, Operator. Good morning, everyone, and welcome to CoreCivics' third quarter 2024 earnings call. Participating on today's call are Damon Hininger, CoreCivics President and Chief Executive Officer, and David Garfinkle, our Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds.
Mike Grant: On this call, we will discuss financial results for the third quarter of 2024, as well as financial guidance for the 2024 year. We will also discuss developments with our government partners and provide you with other general business updates.
Mike Grant: During today's call, our remarks, including our answers to your questions, will include forward-looking statements pursuant to the Safe Harbor Provision
Mike Grant: Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our third quarter 2024 earnings release issued after market yesterday, as well as in our Securities and Exchange Commission filings, including Forms 10-K, 10-Q, and 8-K reports.
Mike Grant: A reconciliation of the most comparable gap measurement is provided in the corresponding earnings release and included in the company's quarterly supplemental financial data report posted on the investor's page of the company's website at CoreCivic.com.
Speaker Change: Thanks, Mike. Good morning, and thanks, everyone, for joining us for CoreCivics' third quarter 2024 earnings call.
Speaker Change: Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will provide greater detail on our financial results and on our updated 2024 financial guidance.
Speaker Change: First, I'll start with a high-level overview of our third quarter financial results.
Speaker Change: In the third quarter, we generated revenue of $491.6 million, a 2% increase compared with the prior year quarter.
Speaker Change: I will provide more color on our performance with our federal, state, and local partner groups later in the call.
Speaker Change: The increase in FFO is driven by higher revenues combined with expense normalization and lower interest expense resulting from our debt reduction.
Speaker Change: And decreased lease revenue in our property segment resulting from our previously disclosed expiration of the lease with the State of California at our California City Correctional Center effective March 31st, 2024.
Speaker Change: Federal partners, primarily Immigration and Customs Enforcement, or ICE, and the United States Marshals Service, comprise slightly over half of CoreCivics total revenue.
Speaker Change: Revenue from ICE, our largest partner, declined 3.4% when comparing the third quarter of 2024 versus the prior year period.
Speaker Change: However, excluding the South Texas Family Residential Center, our revenue with ICE increased 10.9% versus the third quarter of 2023, a rate which is indicative of ICE's continued detention capacity needs and, we believe, satisfaction with our service delivery.
Speaker Change: Excluding South Texas, overall federal revenue for CoreCivic in the third quarter of 2024 increased 7% year-over-year.
Speaker Change: Now I'd like to discuss ICE's usage of detention capacity broadly.
Speaker Change: ISE's actual usage of detention beds dipped from 39,000 at the start of March to roughly 34,000 to 35,000 in April before increasing to roughly 37,000 to 38,000 at the end of the second quarter.
Speaker Change: ICE has not updated this total count since the October 1st start of the new federal fiscal year, so it is not known if or how their usage may have changed since the new fiscal year commenced.
However, ice populations in our facilities increased 5% in October.
Speaker Change: Including the Allen Gamble facility, state revenue in our safety and community segments increased by nearly 8% year-over-year.
Speaker Change: Within our safety portfolio, some of our greatest operational improvements have come in facility-serving state partners.
Speaker Change: For example, we continue to make progress on our financial and operating metrics at our La Palma Correctional Center in Eloy, Arizona, since we pivoted from a federal contract to a contract with the state of Arizona roughly two years ago.
Speaker Change: This growth reflects new major contracts signed in the second half of 2023 with Hines County, Mississippi and Harris County, Texas.
Both populations are housed at our Tallahassee County Correctional Facility located in Tutwiler, Mississippi.
CoreCivics overall occupancy in our safety and community segments for the third quarter of 2024 increased to 75.2% from 72% in the prior year period.
This growth in OxyGEN stems from both higher use of existing contracts, particularly with ICE, and also from the four new contracts signed in the second half of 2023, as well as the new contracts signed in the third quarter of 2024 that I have mentioned.
As we have mentioned in the past, our operating model has significant embedded operating leverage to changes in occupancy, and this was a factor in our margin improvement during the third quarter.
Through the first three quarters of 2024, our ongoing labor attraction and retention efforts continue to generate operational and financial improvement.
This follows a particularly challenged period for staffing during the COVID-19 pandemic.
In 2022 and in 2023, labor market pressures necessitated temporary incentives and related incremental operating expenses, including travel and expense outlays.
Speaker Change: Today, I am proud to report that our staffing has improved to nearly pre-pandemic levels, and that has allowed us to dial back elevated spending on temporary incentives and associated travel expenses.
Importantly, our improved staffing has also positioned us well, operationally, to manage our customers' higher population needs and respond swiftly to opportunities, including those I will discuss shortly.
Labor inflation has now returned to relatively normal levels.
And net operating income for our safety statement increased 25% during the third quarter of 2024 over the third quarter of 2023, reflecting the cost management efforts and occupancy trends I just detailed.
I'll now turn to our community segment, which currently comprises of 21 residential reentry facilities serving the Federal Bureau of Prisons, as well as various state and county governments.
Speaker Change: The community segment is engaged primarily in preparing individuals for successful reentry to their communities after a period of incarceration or as an alternative to incarceration.
Additionally, most residential REACH facilities are located in urban environments, closer to employment opportunities, as well as to family.
Speaker Change: In addition to our 21 residential re-entry facilities, our non-residential services, electronic monitoring, and case management services are also included in our community segment.
Speaker Change: As mentioned, Oxy in the community segment improved in the third quarter of 2024 compared with the third quarter of 2023.
Speaker Change: However, net operating income in the segment declined $2.9 million, partly due to the settlement of a legal matter at one of our facilities.
Speaker Change: Similar to our safety segment, our community segment facilities have been able to reduce temporary staffing incentives.
Speaker Change: David will provide further color relating to our strong financial performance and execution on our long-term capital allocation strategy.
Speaker Change: But one item I'd like to highlight is continued progress on our leverage.
Speaker Change: In August of 2020, we established a leverage target of 2.25x to 2.75x calculated as net debt to trailing 12-month adjusted EBITDA.
Speaker Change: While we expect leverage to increase over the next few quarters, we will continue to maintain a strong balance sheet, providing us with flexibility to execute our long-term business strategy while creating shareholder value, thoughtfully returning capital to shareholders.
Speaker Change: While we did not repurchase any shares this quarter, our diluted shares outstanding remained 3% below the year-ago quarter based on 4.9 million shares repurchased over the last 12 months at a total cost of $72 million.
To conclude this business review, we believe the long-term macro environment for our federal, state, and local business remains positive.
Speaker Change: Our current and prospective government partners face complex challenges, including existing prison capacity limitations, aging and expensive-to-maintain facilities, persistent staffing challenges, and populations that are increasing in numbers and evolving in their complexity.
Ongoing direct conversations with our partners highlight their growing needs, as do other available metrics, including jail backlogs and prison population forecasts.
Speaker Change: While uncertainties during an election year may have slowed some procurements, the underlying need for more beds is there, and CoreCivic is ready to help solve problems for federal, state, and local government agencies to help address their various challenges in the near to long term.
Some of these opportunities may require activations of several IDA facilities, and CoreCivic has taken proactive steps to ready facilities for activation.
Many of the public opportunities are on the federal side, particularly with ICE, our largest partner.
Speaker Change: On May 30th, ICE issued a broad RFI seeking information on detention capacity within three areas of responsibility, or AOR, Chicago, Harlingen, Texas, and Salt Lake City.
Speaker Change: Generally, the responding facility should be within a two-hour commute from the listed ICE field office or subfield office, comply with ICE performance-based national detention standards, have approximately 850 to 950 detention beds, plus an infirmary.
Speaker Change: ICE has expressed a preference for a dedicated facility, but will consider a shared facility.
Respondents may propose one or more facilities in each AOR and may also support multiple AORs.
Speaker Change: The RFI is for informational purposes only and does not constitute an RFP or a commitment to issue an RFP.
Speaker Change: In June, CoreCivic responded with multiple facility options, including our idle 1,033-bed Midwest Regional Reception Center in Kansas.
Speaker Change: We believe we are the only provider with available capacity in all three locations.
Speaker Change: In June of 2024, ICE also issued an RFP for up to 600 detention beds in the state of New Jersey, which would expand their capacity in the state. Responses are due next week, November 15th, and we are participating in the process.
Speaker Change: Rounding out our discussion of federal opportunities, ICE issued an additional RFI in August of this year titled ICE West Coast Multi-State RFI to identify possible detention facilities available for single adults in areas covered by the San Francisco, Seattle, Phoenix, and El Paso ICE field offices.
Speaker Change: The RFI seeks approximately 850 to 950 detention beds for each of the four field offices.
Facilities must be able to meet PBNDS
Speaker Change: In sum, this is the greatest level of procurement activity we have seen with ICE in over a decade, demonstrating the continued need for additional detention solutions in various locations throughout the United States.
Speaker Change: Many of our state partners also have growing need for capacity.
Speaker Change: During the third quarter we were awarded a new major contract from the state of Montana and in early August we received from them approximately 120 additional residents.
Speaker Change: at our 1,896-bed Saguaro Crux facility in Eloy, Arizona, where we are already managing 120 residents for the state of Montana.
Speaker Change: With these added residents, the SWARO facility, which also houses populations for Hawaii and Idaho, is near full capacity.
Speaker Change: Last week the state of Montana issued another RFP for an additional 120 beds and up to 360 beds within the continental United States and CoreCivic intends to respond to Montana's request this month.
Speaker Change: In addition to Montana, as I previously mentioned, we remain in discussions with several other existing state partners, as well as new state partners, that could result in the activation of one or more EIDL facilities.
These opportunities could manifest as early as 2025.
Speaker Change: Our readily available bed capacity in key locations positions as well to serve the growing needs of our government partners.
Speaker Change: As Dave will explain in further detail, we are updating our financial guidance for 2024 based on our strong financial performance again in the third quarter.
Speaker Change: Now I will turn the call over to Dave who will provide a detailed look at our third quarter financial results, our capital market activities, and assumptions included in our newly updated financial guides. Over to you, Dave.
Unknown Speaker, Unknown Speaker,
Speaker Change: Special items in the current year quarter include 3.1 million dollars of asset impairments and a 1.2 million dollar gain on the sale of an idle residential reentry center.
Speaker Change: Normalized FFO per share was $0.43 during the third quarter of 2024, compared with $0.35 in the prior year quarter, an increase of 23%.
Speaker Change: Adjusted EBITDA was $83.3 million, compared with $75.2 million in the prior year quarter, an increase of $8.1 million, or 11%.
Speaker Change: The increase in adjusted EBITDA resulted from higher occupancy, contributing to an increase in revenue of $7.9 million, and a $6.5 million reduction in operating expenses, resulting from the continued normalization of our expense structure, particularly in the labor market.
Speaker Change: These factors, along with a decrease in interest expense and shares outstanding, also contributed to the increase in adjusted EPS and normalized FFO per share.
Speaker Change: These per share increases were net of a reduction in facility net operating income of $7.2 million or $0.05 per share, resulting from the previously disclosed lease termination with the State of California effective March 31, 2024, and our California City Correctional Center reported in our property segment.
Speaker Change: Even though the previously disclosed termination of the contract with ICE at the South Texas Family Residential Center occurred in the middle of the third quarter of 2024, net operating income at this facility was comparable to the prior year quarter due to the accelerated recognition of deferred revenue originally established from upfront payments from ICE at the inception of the contract amortized over the term of the contract, which was contemplated in our prior guidance.
Speaker Change: The outperformance at this facility was also due to the rapid ramp down in detainee populations in July, resulting in a substantial reduction of most operating expenses, though we continue to generate full-fixed contractual revenue through the termination date on August 9th.
Speaker Change: The substantial reduction of operating expenses resulting from the rapid ramp-down in detainee populations was not contemplated in our guidance, which contributed to a positive variance relative to our guidance of three cents per share.
Speaker Change: Federal revenue in our safety and community segments decreased $1.5 million from the third quarter of 2023 to the third quarter of 2024, including a reduction in management revenue at the South Texas facility of $16.5 million.
Speaker Change: So excluding this facility, federal revenue in our safety and community segments increased $15 million, or 7.1%, a healthy increase across the remainder of the portfolio.
Speaker Change: State revenue in the community and safety segments increased $5.6 million, or 2.9%, from the third quarter of 2023 to the third quarter of 2024, which included revenue from new contracts with the states of Wyoming and Montana, awarded in the fourth quarter of 2023 and third quarter of 2024.
Speaker Change: The increase in state revenue is net of a reduction of $8.6 million resulting from the transition of our Allen Gamble Correctional Center in Oklahoma from a facility we previously operated in our safety segment to a facility we now lease to the state of Oklahoma in our property segment effective October 1st, 2023.
Speaker Change: Local revenue in our safety and community segments increased $3.4 million, or 39%, from the 3rd quarter of 2023 to the 3rd quarter of 2024, primarily resulting from new contracts with Hines County, Mississippi, awarded in the 3rd quarter of 2023, and Harris County, Texas, awarded in the 4th quarter of 2023.
Speaker Change: at our California City facility, which resulted in a revenue reduction of $8 million from the third quarter of 2023 to the third quarter of 2024, partially offset by the previously mentioned conversion of the Allen Gamble Correctional Center to a leased property.
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Speaker Change: During the third quarter, we were able to continue reducing certain operating expenses such as registry nursing, temporary wage incentives, and travel, all related to labor market pressures that have been steadily easing over the past several quarters.
Speaker Change: These three expense categories declined by $9.7 million from the third quarter of 2023.
Speaker Change: We also generated a higher margin at the South Texas Family Residential Center, as previously mentioned, as we generated a similar level of net operating income compared with the prior year quarter, but generated revenue for only half the current year quarter.
Speaker Change: Turning next to the balance sheet, during the third quarter, we repaid $75.6 million of debt, net of the change in cash. Our leverage, measured by net debt to adjusted EBITDA, was 2.2 times using the trailing 12 months ended September 30, 2024.
Speaker Change: As of September 30th, we had $108 million of cash on hand and an additional $257 million of borrowing capacity on a revolving credit facility, providing us with total liquidity of $365 million.
Speaker Change: Our Board of Directors has authorized up to $350 million of repurchases of our common stock under a share repurchase program, including an increase to the authorization in May by $125 million.
Since our share repurchase program was announced in May 2022,
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Speaker Change: Our guidance assumes federal populations to remain within a stable range for the remainder of 2024. If national detention populations increase and are sustained at higher levels, there could be upside to our guidance.
Speaker Change: This facility contributed 11 cents of normalized earnings per share in the third quarter.
Speaker Change: We expect the operating margin for our safety and community segments combined to be roughly in line with Q3 excluding the South Texas facility.
Speaker Change: Even aside from the unique factors I previously mentioned, positively impacting this facility in the third quarter of 2024.
Our guidance does not include any additional share repurchases.
Speaker Change: Although our leverage at September 30th was just below our targeted range of two and a quarter to two and three quarters times, leverage will mathematically increase beginning in the fourth quarter as a result of the termination of the contract at the South Texas facility.
Speaker Change: Our balance sheet and cash flows remain strong, with no near-term debt maturities and readily available bed capacity, positioning us well to take advantage of opportunities in the marketplace.
Speaker Change: to range from $177.8 million to $185.8 million, or $1.58 to $1.65 per share for 2024, up from our previous guidance of $162.4 million to $172.4 million, or $1.45 to $1.54 per share.
Speaker Change: We expect our normalized effective tax rate to be approximately 30% for the fourth quarter and approximately 27.5% for the year, which is unchanged from our previous guidance.
Speaker Change: We are forecasting G&A expenses in 2024 to be between $146 million and $148 million.
Speaker Change: We plan to spend $62 to $66 million on maintenance capital expenditures during 2024 unchanged from our previous guidance, and $8 million to $10 million for other capital investments also unchanged from our previous guidance.
Speaker Change: I will now turn the call back to Damon for comments on the election.
Damon: Thank you so much, Dave, and I want to just do a little bit of observations and comments on the elections that just happened a couple of days ago.
Speaker Change: We have seen, you know, during that period of time, significant events during that history.
Speaker Change: where elections have, you know, kind of changed the course on policy and sentiment on certain issues. And it feels like.
Speaker Change: with this election this year. We're heading into an era that we really haven't seen maybe only once or twice in a company's history where the value proposition of the private sector for both our state partners and our federal partners are gonna be not only strong today, but even stronger as we go into the next couple of years. So I wanna start with that.
Speaker Change: Two of our, were a consequence to us, Montana and Vermont. Both those customers are
Speaker Change: working with us today for out-of-state solutions and also with Montana, we also have got an in-state facility.
Speaker Change: and I'm going to be talking a little bit about the state of Montana. Montana is growing steadily as it goes with those two states. As we talked about earlier, Montana continues to be a growing partner with us with the most recent procurement. That's number one on the state side. Number two is I wanted to highlight something that was going on in California this election cycle.
Speaker Change: We've had a long-standing policy not to get involved to lobby or engage on a sentencing reform. And that's in every single state, regardless if we do business or not.
Speaker Change: So, I provide this commentary just making sure everybody knows that we do not engage or lobby on anything around criminal justice reform that touches sentencing policy. That's number one. Number two is California has been a partner in the past, especially at the local level and also out of state, but in giving some views on this, we don't think it's necessarily any indication that California is going to engage us on any solutions going forward. So, those are two important caveats.
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Speaker Change: What this bill does is that it reverses some things that went into effect back in 2014 under Prop 47, which allowed the rollback of certain sentencing of certain offenses within the state of California.
Speaker Change: Notably, Prop 36 will eliminate the $950 threshold for a third theft, meaning someone caught stealing three times can be charged with a felony regardless of the value of the merchandise stolen. It also is going to increase jail time for organized retail theft.
Speaker Change: So I just highlight to say that that was in California, it had the highest vote total of anything on the ballot with referendums.
Speaker Change: The populations that we've seen at jails in the last couple of years, we've noted that those are increasing. Prison population forecasts are notably increasing over the next five years, but also physical pain issues, staffing issues.
Speaker Change: Switch it over to the federal side. So everybody obviously well, is well, it's well known, I should say, that the White House
Speaker Change: with the Senate races around the country. The House is still unknown at the moment unless something's happened here in the last few minutes, but I think most people think that the Republicans are also going to keep to the House. So that's obviously just a general observation about the races itself and, you know, control of the House, the Senate, and also the White House.
Speaker Change: But more importantly, how it impacts our federal partners, and let me just touch on that, and I first want to talk about ICE.
Speaker Change: So, obviously, during the summer leading up to the election, there was a lot of discussion and policy debate and really a lot of energy for both candidates running for White House but also Senate races around immigration and border security and immigration reform.
Speaker Change: We think that the outcome of this election is probably going to be notable for ICE for a couple different reasons. One is that we do think that there is going to be increased need for detention capacity.
Speaker Change: As you all know, as long-time investors and supporters of the company, there has been some discussion from the spring going into the summer about additional detention capacity. And there was a couple of bills that noted that capacity going up to 50,000.
Speaker Change: that may take that number with the support from, again, House Republicans, Senate Republicans, and the White House, taking that number to a much higher level. Don't know exactly what that number is, but that's just, you know, things that we're hearing and seeing a little bit reported in the press.
Speaker Change: So how we're approaching that is that we have about 18,000 vacant beds in our system. And that includes our beds that we had available in Dilley, Texas.
Speaker Change: So we are taking proactive steps and working on a plan to activate and make available every single bed that we've got in the enterprise. And again, that's about 18,000 beds.
Speaker Change: Along with that, and you all have been supportive of this step, but for the last two years we've been taking
Speaker Change: Steps to making sure that we've got the scale and ability to staff capacity, especially for ICE Making sure that we've got people in the pipeline that we can get them through the background screening process and ultimately through Academy So we've been working on that for about 24 months. And so we're getting ourselves
Speaker Change: Make sure calibrated accordingly that we can staff up to potentially meet the demand for this capacity that could be used by ICE.
Speaker Change: And it wouldn't surprise us that we start seeing some signs either reported in the press or actually from ICE directly where they're doing additional RFIs or some type of advertisements indicating for increased capacity. So we'll clearly get some signs here I think in the coming days and weeks.
Speaker Change: Also, with that, as you all know, we've got great capability of getting additional detention capacity that's temporary.
Speaker Change: We're the ones, obviously with Dilley, we got the facility up and running within about 120 days. So we have the competency and expertise where above and beyond the 18,000, if we did need to do additional capacity, we're getting ourselves prepared to do that. Again, I think it will be clear if there is additional need there from ICE in the coming days and weeks. And two final things on ICE.
Speaker Change: We've got the capability and the leadership in place to scale up and provide additional capacity if there's transportation needed, primarily on ground transportation, but also we've got the competency to also do air transportation too as needed.
Speaker Change: And then finally, obviously we'll be watching closely too about how the Alternative Detention Program may change with the new administration.
Speaker Change: In fact, interestingly, and probably not a coincidence, ICE actually came out with an RFI yesterday in advance of the procurement for the re-bid of the alternative detention contract, which I think expires end of next year.
Speaker Change: We think this is a very clear sign with this RFI where they want to engage more vendors to provide unique and innovative solutions for this program. We also think, again, probably knowing that the program is going to change a little bit relative to outcomes and its mission, again, wanting to engage more vendors to understand kind of what the realm of the puzzle is on the program, and then also appreciating that the program potentially is going to expand, so I think also wanted to have the opportunity to have the scale to increase the program.
Speaker Change: If that's where policy and ICE leads the program going forward. So that RFI, like I said, came out yesterday. It's also advertising that there's going to be a
Speaker Change: Industry Day coming up in early I think December and again it's going to opportunity for multiple vendors to engage ICE about the program going forward and think about creative and innovative solutions to not only get better outcomes but also scale up the program as necessary.
Speaker Change: to provide solutions to their critical needs in a very efficient, innovative way, but also providing safe and humane solutions. And again, we've done that in over 40 years, but also with Democrats and Republicans in charge of both the administration and Congress.
obviously also a long-time federal partner of ours.
Speaker Change: They are influenced, obviously, by the prosecutorial activity and behavior for the U.S. Attorneys around the country. So, obviously, in the coming days, there will be a new U.S. Attorney General.
Speaker Change: And then with that, the Attorney General along with his administration will be put in place.
U.S. Attorneys in the 90-plus court districts around the country.
Speaker Change: So history indicates that that obviously takes a little time, and then that for that direction on prosecutions, it takes a little time once the people get in place, and they kind of implement that policy. But just to give you a kind of historical perspective on numbers, at the end of the administration for President Obama,
Speaker Change: Marginal service population nationwide is 47,000, so that was at the end of President Obama's term. That went as high as 66,000 under President Trump. So it gives you a little sense of, again, it takes some time, but it gives you a little bit of a sense of kind of the impact on numbers if history is going to be an indication of the path going forward.
Finally, on the
Speaker Change: Finally, just to wrap up with the Federal Bureau of Prisons, you know, we don't do any work, as you know, with them on the safety side, so secure prisons. We do do some work with them in the community section, halfway houses and home confinement and other solutions.
Speaker Change: On the community side, we think that's going to be more of the same, if not increasing.
Speaker Change: President Trump did pass the First Step Act, which had some provisions to kind of supercharge the use of community solutions within that bill. So we think that's gonna be the case where that'll be an area of interest with the administration.
Speaker Change: On the BOP side, on the secure side, the population's gone down dramatically, so we don't see any near-term...
Speaker Change: kind of impact relative views of the private sector, but you know being someone that's been in this profession for 32 years and growing up in Leavenworth, Kansas, I have unique experience on the federal Bureau of Prisons in their mission.
Speaker Change: And I do know that they're suffering with, you know, very old kind of challenged facilities from a CAPEX perspective, but also from a staffing perspective. So we're happy to engage in and provide kind of feedback on that as appropriate as some of the leadership changes happen there, potentially down the road. So.
Speaker Change: With that, let me stop, just want to provide again a little more commentary before we go to Q&A. And operator, I'll turn it back over to you to start the queue.
Speaker Change: Thank you. At this time I would like to remind everyone in order to ask a question please press star 1 on your telephone keypad.
Speaker Change: We will just pause for a moment to compile the Q&A roll.
Dan Hingoran Unknown Attendee, Damon Hininger, David Gutierrez
Speaker Change: And your first question comes from the line of Jason Weaver with Jones Trading. Your line is open.
Jason Weaver: Hey, good morning guys. Thanks for taking my question. Damon, you've touched on in several of the last conference calls about the sort of the gearing that you have with regard to occupancy. I was wondering, can you comment on how you would expect the margin profile to change if we were to ramp safety segment occupancy up into the low 80s, mid 80s and beyond there?
Speaker Change: You're right. As the occupancy increases, our financial model has a bit of operating leverage to it. So we had always indicated that if we got back to a pre-pandemic occupancy,
Unknown Attendee in the low 80s.
that we'd be around a 25% margin.
and occupancy in the low 80s.
Jason Weaver: If I can convince you where to go in the mid to upper 80s, you know, I haven't run the math on that, but I would guess you'd add a couple hundred basis points to that margin.
Got it, got it, that's actually helpful.
Speaker Change: And then, you know, I appreciate your comments on the Marshall service and just knowing a little bit of the details around that. Would you say that if the USMS no longer has to use those third-party contracting entities, does that remove any type of bottleneck for them that makes them more likely to use private providers such as yourself?
Got it. I appreciate that color.
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Speaker Change: With a shift in demand like this, I would expect that, but that's helpful. Thank you for the caller. You're welcome.
Speaker Change: Your next question comes from the line of M. Marine with SACS. Your line is open.
M. Marine: Thank you. So I have a couple of questions following up on some of the remarks you made in your prepared comments.
So there's an RFI out.
M. Marine: You're thinking that there will be an RFP in early 2025. Is there a standard timeline that we should think about? Because it seems like there's a lot of activity now in other RFIs and RFPs.
So, is there a standard?
Hello.
Speaker Change: If you wanted to give us a broader stroke, you know, answer, then I would say for both, but I was specifically thinking about for detention capacity.
Thank you for that.
Speaker Change: Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez, Unknown Attendee, Damon Hininger,
as much information they can at their fingertips.
M. Marine: as they go into coming days, weeks, and months for detention needs and where the capability are with the private sector. But again, I think I wouldn't be surprised if we wake up tomorrow or in the coming days and weeks.
You know, again, don't know how.
That would be impacted by a new administration coming in.
M. Marine: and they're getting direction from leadership, they can move very, very quickly. And again, I think the RFIs, they've got out already, obviously, they've gotten a lot of great market information from us and others, where again, today's point that allows them maybe be a little more efficient, you know, into this year going into next year.
Speaker Change: Okay, that's helpful. And then just to follow up on something else you said, you talked a little bit about, you know, how you've been preparing for, you know, increased occupancies with your staffing levels, you're comfortable with where staffing levels are, but then obviously, to take on new awards, there would be some startup costs.
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Speaker Change: Yeah, that's a great, great question. So yeah, we've been working. And as you know, we went from about 5000 in population in May of 23 to where we are today, which is about 10 10,000. So
Speaker Change: If we need to scale that even further, what's some investments we need to make on kind of the processing, again, making sure it's very efficient for background screenings, training, and whatnot.
Speaker Change: So, we basically have got the playbook ready to scale up. We've got the pipelines kind of populated, so we know where we can pull from the various labor markets around the country to get people. But you're right, once we hit go, then obviously we'll start incurring expense.
Speaker Change: Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez, Unknown Attendee, Damon Hininger,
Speaker Change: But we do have capacity in existing facilities where we already have contracts where we could take on, you know, I don't know, 1,500 to 2,000 additional people that are at facilities already staffed. It's just a longer process when you're activating a new facility or entering in a new contract.
Okay, got it. Thank you. You're welcome. Thank you, Em.
Speaker Change: Your next question comes from the line of Brian Violino with Wedbush. Your line is open.
Brian Violino: Great, good morning. Thanks for taking my questions. I just wanted to get a bit more detail about, I know you mentioned, you know, if ICE were to have needs above and beyond the current idle beds of both you and your competitors today.
Brian Violino: and more of a hypothetical, but, you know, would there be a need for additional permanent construction? I know you mentioned temporary housing. Just curious your thoughts about, you know, that if, you know, new construction would be an option and the cost of temporary centers versus permanent facilities. Thanks.
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez, Damon Hininger,
providing help with residents, adult residents, I should say.
Brian Violino: So, I think if we get in discussion with ICE, I think they're going to pretty clearly be able to say, you know, this solution in this part of the country, we think it's a long-term solution, and so you need to think about investments relative to not only just the mission and the staffing and the programs and whatnot, but also the physical plant.
Brian Violino: But there also may be some discussions where they say, you know, we think this mission is maybe more short term in length.
Brian Violino: And so, the good news for us is that we can do both and have done both. I mean, we've got vacant capacity, again, we've talked about the 18,000 earlier today.
Brian Violino: But if there are certain parts of the kind of the mission for IC or near term where they, you know, clearly kind of say, you know, it's probably a temporary solution.
Brian Violino: Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez, Unknown Attendee, Damon Hininger,
Brian Violino: But we do have the capability to execute into lease agreements. That's what Damon's talking about when we mentioned third parties. So that's not permanent capital necessarily that we would have to deploy. But those are things we'll be thinking about in the coming weeks and months.
Great. Thank you. And one more.
Speaker Change: on the new ATD RFI that you mentioned came out yesterday.
Speaker Change: I believe there was another RFI that had been out for a while. I guess anything notably different compared, you know, between those two RFIs?
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
and other notable differences between those.
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Speaker Change: You know, I'd say I didn't do a kind of reconcile between the two since it's kind of late breaking news, but I'd say with RFI that came out yesterday, again, I think it's a clear sign.
Speaker Change: By doing RFI and also doing an industry day, you know, that's usually the case where they, again, want to think about the scale, so maybe getting more people in the program and doing that with multiple vendors. So we took that as a very encouraging sign, and it's, to be honest with you, pretty consistent of what we've heard from ICE here recently, where they're thinking about engaging multiple partners, again, with likely changes to the program, the size of it, and looking maybe for a different mission and outcomes.
Speaker Change: Great, and just one more effect that is there any major change in the way you're approaching this ATD renewal versus prior years in terms of the strategy to win some of that?
Got it. Thank you very much.
Thank you, Brian.
Speaker Change: Your next question comes from the line of Joe Gomez with Noble Capital Markets. Your line is open.
Good morning.
Morning, Joe. Morning, Joe.
Speaker Change: So I wanted to start out looking at the community segment and I know Damon you mentioned
Speaker Change: There was a I think you said 2.9 million legal settlement in there
But if I'm looking at the supplement
The Revenue Per Compensated Mandate has fallen.
Speaker Change: sequentially here and then also while looking at the expenses, operating expenses
have increased pretty significantly.
Speaker Change: And Joseph, if you could give us a little more color as to what is driving both of those, it would be appreciated.
Speaker Change: I'll take a stab at that, Joe. So the operating expense increase was certainly related to the legal matter. The per diem, slight reduction in per diem was really mixed.
Okay, thanks for that. And talk about South Texas.
Speaker Change: Is that something that you can extend if you think there's the possibility that South Texas is back, you know in place so to speak as a potential ice facility Or you know any additional detail there would be great
Yeah, thanks for that question. So yeah, we've been
Really, since the
Speaker Change: Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez, Unknown Attendee, Damon Hininger,
Speaker Change: with us, or relocate, I should say, to other locations, but it would surprise us that them still residing in a local area, that we can quickly kind of get them
Unknown Attendee, David Gutierrez, Damon Hininger, David Gutierrez, Damon Hininger,
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Okay.
Perfect, thank you for that.
Speaker Change: Back to the yesterday's RFI release, obviously, you know, very early days in there and we'll see what happens in the virtual day that they're talking about. But outside of you and your main competitor, you know,
Speaker Change: Is that a very narrow group of, you think, potential competitors for this, or is it a big group?
involved in this.
Speaker Change: Yeah, that's a that's a great question. And I think I think the short answer is is that I think the size of this program today But also potential size going forward I think would you know
Speaker Change: Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez, Unknown Attendee, Damon Hininger, Damon Hininger,
the size and scale like us.
Speaker Change: That maybe would be a good partner for us for whatever reason. Maybe that's just a small component of the case management services or maybe the technology.
Speaker Change: So I think that's part of the reason also they're doing RFI is that maybe they've had a few people knocking on the door, a few people knocking on ICE's door saying, I've got this capability and it could be a piece of the overall program.
Speaker Change: I just need a dance partner to do it. So I think that's part of the intent, too. So we're looking forward again to participate. Like I said earlier, we've made, and you know this too, Joe, I mean, we've made a lot of investments and have done a lot of work to get ourselves prepared for this. But anything you'd add to that, Dave? Yeah, I think it still depends on the scope of services. The RFI yesterday,
Speaker Change: was a bit informative, but again, you don't know what a new administration may want to do to the scope of services and how they look at
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez, Damon Hininger,
Speaker Change: Okay, great. Thanks for that and I'll get back in queue. Thank you
Thank you very much, Joe.
Speaker Change: Your next question comes from the line of Greg Gibas with Northland Security. Your line is open.
Speaker Change: Hey, good morning, Damon and Dave. A lot of good color in those prepared remarks. You know, I know you addressed a few on this, but one of the follow up, I guess, on that ISAP or APD program, you know,
Speaker Change: If you anticipate, you know, ice ramping populations significantly there as relates to the total opportunity across the US, you know,
Speaker Change: Yeah, it's a great question. I think the first part of your question, I think, yeah, it's probably all of the above. So everything you kind of laid out there, I think, on your list, I think it's probably all, again, all of the above is probably what ICE is thinking about. And then I think, yeah, I think that the last part is, is just, yeah, just...
Speaker Change: Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez, Unknown Attendee, Damon Hininger,
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Speaker Change: Oh boy, Dave, I'll try to take a stab at that. So I think we've probably got around 1,500 beds today. I think it's 1,500, anywhere from 1,300 to 2,000. It changes on a daily basis depending on ebbs and flows of populations under existing contracts.
Speaker Change: Then we probably got another 800 or so that could be accommodated in facilities not currently housing ICE detainees. And then as I mentioned, around 13,000 in idle facilities.
Those would have to be complete.
Activations.
Speaker Change: And so the margins on those, as I mentioned earlier, on the idle facility, when you're activating those, you're obviously at a negative margin during the startup period. I would imagine margins would be slightly higher than our portfolio average in the safety segment, which for the third quarter was 25.2%.
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Speaker Change: Already utilized facilities, as I mentioned, those are higher because you've already got your fixed costs largely in place, and you're just incurring your variable expenses. So our Supplemental Disclosure Report, which we posted on the website, breaks out our fixed and variable costs as well as the per diem. I would imagine that per diem in the supplemental is an average for the whole portfolio. I would expect that that would be slightly higher for an ICE
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Got it. That's helpful. Thank you.
Very happy to come.
Speaker Change: Your next question comes from the line of Kirk Ziedke with Imperial Capital. Your line is open.
Speaker Change: Hello, Damon, David, Mike. Appreciate the call. Good morning. Morning, Kirk.
On the marshals...
Speaker Change: I think I got this right. You said the current population is 47,000, but it was 66,000 in the first Trump administration. Are those the right numbers?
Speaker Change: Actually, what I was doing is giving more historical, so, and I'll tell you what the population is today, but historically, trying to give a sense of how to change from a Democratic to a Republican administration. So, at the end of President Obama's term, second term, it was at 47, almost 48,000. So that was the national population for federal prisoners for the United States Marshal Service.
Speaker Change: Just actually almost 66,000. So two historical numbers and then obviously the current number is the last one.
Speaker Change: You didn't mention the Bureau of Prisons. I know that was not a big part of your business before the executive order. I'm wondering is is that just something you're going to stay away from?
Speaker Change: You know, we enjoy today a really good relationship with the Bureau of Prisons. We work with them on the community side.
Speaker Change: And if there is a need on the safety side, I'll be very happy to have that conversation at the right moment.
Speaker Change: Got it. I appreciate it. Thank you. And then, and then lastly, you know, there is a lot, it's likely that deportations will ramp. And so does that change the nature of your business if, if the mix of detainees is more weighted toward
Speaker Change: people that have been seized on the interior and in the process of being deported rather than people who are cross have been seized crossing the border
Does that change anything?
Speaker Change: Yeah, that's a great, great question. And the short answer is it could, you know, buy a facility. But you know, the good news is, is we've been doing it for 40 years. So we've seen
Speaker Change: That change even at facilities where maybe it's a more longer-term population at facility, but maybe changes in policy and behavior make it more short-term.
Speaker Change: The good news about our facilities, I mean, we designed them and purpose-built them to be very flexible based on the changes of mission for ICE. Again, some of the facilities maybe that are vacant today that have not worked with ICE, we may have to do a little bit of investment.
especially if there is, you know,
Speaker Change: coming into the facility on a regular basis, and that needs to go up to 200 or 300. So we may have to make some tweaks there with the physical plant.
Speaker Change: But again, we've been doing that for many years in a lot of other locations, so it's pretty easy to do. But anything you have to add, David? Yeah, we have both today. So we have facilities where it's a very transient population, very short length of stay.
Speaker Change: In fact, we had one earlier this year convert from one that was more of a longer-term stay to a processing center, so we can manage either, but as Damon said, not sure whether that will change under a new administration or not.
Speaker Change: Got it. Well, it just it seems like the length of stay would be longer if you're for someone that is being deported.
Speaker Change: Possibly, yeah, possibly. Not to get in the weeds, but to determine...
Speaker Change: It depends on their legal case, where they are in the immigration process, and then ultimately the country of origin. Because, you know, logistically, sometimes they go longer in certain countries to deport them back versus others. But yeah, those are all variables that can happen, and again, we're well-suited to kind of work through those issues.
Got it. Does, and then lastly, does...
An administration that's more focused on deportation, does it make
The Monitoring [inaudible]
component of the ATD contract.
More important or less important or it's hard to say.
and...
Speaker Change: So, it could be the case where they say, okay, let's look at all the tools at our disposal and, you know, prioritize and triage this appropriately. And both those tools, detention and alternative detention, could be very effective. So, I think those will be questions that will be answered here in the coming days and weeks. But at the moment, we think they're probably looking at more tools, not less, to kind of help them work through this.
Okay, I appreciate it. Thank you. Yes, sir.
Speaker Change: And your next question comes from the line of Ben Briggs with Stonex Financial. Your line is open.
Ben Briggs: Good morning, guys. Thanks for taking the call, and thank you for taking the question.
Ben Briggs: A lot of mine got answered here, but I've got a couple of quick ones for you.
Ben Briggs: So there are two RFIs, I think they have five AORs associated with them, and then there's one RFP in New Jersey.
Speaker Change: Okay, got it, got it. That makes sense. Okay, thank you. And then Montana has one RFP out, right? Yeah, that was just issued last week, I think it was.
Speaker Change: Yep, and then there's the electronic monitoring RFI out from ICE in addition to all that.
Speaker Change: Great. Okay. Great. Second thing for me is just kind of a housekeeping thing. I don't think there are, but are there any facilities with remaining COVID population restrictions or those have, those have all, those have all rolled off, correct? Those are all rolled off. Yes, sir.
Speaker Change: At least in our portfolio, yeah, at least in our portfolio.
Yep, yep
Speaker Change: And then finally, just kind of referring to the guidance here. I know you increased guidance a little bit, but it does imply a little bit of a slip in guidance in the fourth quarter. That's not all attributable to South Texas, is it? Or can you give a little bit of a fourth quarter 23 to fourth quarter 24 bridge?
Speaker Change: Unknown Speaker Even a bridge. Yeah. So, I mean, our guidance last quarter contemplated the termination of the South Texas
Speaker Change: Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez, Unknown Attendee, Damon Hininger,
necessarily a big change from last guidance in Q4.
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Unknown Attendee, David Garfinkle, Damon Hininger, David Gutierrez
Speaker Change: Yep. Okay. Okay. Yeah. I wasn't including the Cal State. Okay. Well, this has been very helpful. Thank you again for taking the call.
Sure, thank you.
Speaker Change: Thank you. I will now turn the call back over to Damon Hininger for closing remarks.
Speaker Change: Thank you so much. Thank you so much for participating in our call today. Grateful for all the questions and the commentary. And I just want to say to our shareholder, thank you so much for your continued support and advice and counsel to us. So we're grateful for that and never want to take it for granted. Enjoy the rest of your day, everyone. Thank you so much.
Speaker Change: Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.