CoreCivic, Inc. (CXW) Q4 2014 Earnings Report, Transcript and Summary

Good morning. My name is Erika, and I will be your conference operator. As a reminder, this call is being recorded. At this time, I'd like to welcome you to the Corrections Corporation of America Fourth Quarter 2014 Earnings Conference Call. [Operator Instructions] I would now like to turn the call over call over to Cameron Hopewell, CCA's Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thanks, Erika. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer. During today's call, our remarks will include forward-looking statements pursuant to the Safe Harbor provisions of the Securities and Litigation Reform Act. Actual results may differ as a result of a variety of factors, including those identified in our earnings release and with our various filings with the SEC. 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. This call will include discussion of 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 at www.cca.com. Before I hand the call over to Damon, I would like to remind analysts to limit themselves to one question and one follow up during our question-and-answer session so that others may ask their questions. With that, it's my pleasure to turn the call over to Damon Hininger.

Thank you, Cameron. Good morning, and thank you to our valued shareholders, analyst and other participants who are joining our call today. Also joining us here in the room for our call is our Vice President of Finance, Brian Hammonds. I will begin today by highlighting our result from the fourth quarter and full year 2014 before providing a brief update on key business developments. Following my remarks, I will hand the call over to Dave, who will provide a more in-depth review of our fourth quarter financial performance and our 2015 financial guidance. To begin, we were very pleased with our overall financial performance as we brought 2014 to a close. In the fourth quarter, we generated nearly $80 million in normalized FFO to bring our full year total to $311 million or $2.65 per share, an increase of nearly 5% over the prior year. In addition, fourth quarter adjusted diluted EPS increased 11% year-over-year to $0.49 per share. Quarterly revenues on a year-over-year comparison continue to be negative in the fourth quarter of 2014 as a result of transitioning out of several underperforming managed-only contracts over the course of the year. However, that decision has had minimal impact on our overall earnings and the revenue loss has been partially offset by the strong performance of our owned and managed properties. In fact, fourth quarter revenue from our owned and controlled property segment increased by nearly 4% year-over-year to $368 million, while total facility net operating income increased by over 9%. Now before providing an update on our facilities under development and our federal state and local partnerships, I would like to take a few moments to discuss the recent news regarding our contract with the Federal Bureau of Prisons at our Northeast Ohio Correctional Center. At the end of the fourth quarter, we received the disappointing news that we were unsuccessful in a rebid for the contract with the BOP at our Northeast Ohio Correctional Center, commonly referred to as CAR 15 RFP. The bidding process was highly competitive, and we believe we've submitted a compelling proposal. Unfortunately, the BOP chose to move in a different direction, so our current contract is scheduled to expire effective June 1, 2015. Dave will provide additional details of the forecasted impact on our financial results, which is fully reflected in our 2015 guidance we provided in yesterday's earnings announcement. Within hours of receiving notice of this unsuccessful contract rebid, we mobilized our team to actively market the facility to other government partners and assessed our long-term plans for the facility. Our exceptional team of CCA employees at the Northeast Ohio Correctional Center has had a tremendous operating track record over the 10-year term of the existing contract with the Bureau. Therefore, we know this facility will be very attractive to potential partners who have capacity needs and will be aggressively marketing these available beds to them. Next, I would like to provide an update on our 3 large facility development projects that are currently underway. First, the South Texas Family Residential Center. As a reminder the South Texas Family Residential Center is a 2,400-bed project for Immigration and Customs Enforcement that we announced in the third quarter of 2014 that will provide a safe, humane and appropriate residential care center for families. The facility is being constructed in 2 phases. The first phase, which represents 480 beds began accepting its first residents on December 19, 2014, just 86 days after the project was announced and only 46 days after receiving permits, which is an unprecedented amount of time for a project of this size. Currently, the facility is housing nearly 400 residents and the second phase of the project is on schedule to open its first, what we call, neighborhood of 480 beds by the end of March. At that time, additional neighborhoods of 480 beds are scheduled to be completed every few weeks until Phase 2 represents the full 2,400 beds in late spring. Given this is the largest facility ever developed by the industry for ICE and the short timetable for development, we are very pleased that this project is progressing on schedule to meet our partners' very unique needs. Moving next to the ongoing construction of the Otay Mesa Detention Center outside of San Diego, California. The construction of this 1,500-bed facility is on schedule to be completed in the third quarter of 2015. As a reminder, this is a replacement to our 1,000-bed San Diego Correctional Facility, which is subject to a ground lease with the County of San Diego, which is expiring in December of 2015, and also calls for the ownership of the facility to revert to the County upon expiration. We currently house populations for ICE and the United States Marshals Service at our San Diego Correctional Facility and expect to begin transitioning these populations to our new Otay Mesa Facility by the fourth quarter of 2015. This is a market in which capacity needs have been historically underserved and our government partners will benefit from the additional 500-bed capacity at our new facility. Finally, our other ongoing construction project of the Trousdale-Turner Correctional Center here in Trousdale County, Tennessee. Last quarter, we announced we had officially broken ground on this $140 million 2,500-bed facility, and I'm pleased to say that the facility development is progressing on schedule. We expect to be in a position to begin ramping up operations at the facility in the first quarter of 2016 and are proud to offer solutions to help ease overcrowding here in our home State of Tennessee. These 3 large development projects with a combined total of 6,400 beds clearly demonstrate the unique innovative solutions that we can deliver quickly to our government partners and these will be very meaningful contributors to the growth of our business over the next few years. Next, I would like to touch on additional developments within our facility portfolio. Beginning in early January, our Red Rock facility in Eloy, Arizona began the ramp up of an additional of 500 beds for the State of Arizona. The ramp is expected to be completed in the next few weeks bringing the total occupancy of this facility up to 1,000 beds. We are very proud of our growing partnership with the state and are focused on effectively executing on the ongoing ramp-up schedule. In recognition of the states' growing capacity challenges, the governor's recently released 2016 budget plan requests authorization for additional 3,000 private sector beds. Given our successful activation in the Red Rock facility, we are well positioned to help the state should the governor’s plan be enacted. On our third quarter call, we indicated that we're evaluating opportunities to maximize the value of our remaining non-core properties. We successfully closed on a previously announced sale of our 650-bed Houston Educational Facility in November of 2014 for $4.5 million. Our continued evaluation resulted in the decision to actively pursue the sale of our Queensgate Correctional Facility and Mineral Wells Pre-Parole Transfer Facility. These 2 currently idle facilities account for nearly 3,000 beds in our facility portfolio. However, these are both challenging assets to market to traditional corrections partners given that neither were originally designed as adult and correctional facilities and the age of both facilities. The fair value assessments of these facilities resulted in a recognition of a noncash impairment charge totaling $27.8 million during the fourth quarter, which Dave will explain in more detail during his remarks. I would like to now provide some observations about the current landscape for our state partners. First, at a high level, the Bureau of Justice Statistics or BJS prisoner's report from late last year stated that in 2013, we saw the first increase nationally in state prison population since 2009. The increase was nearly 6,300 inmates over 2012 levels. Notable of this is that 29 states experienced growth in their populations from 2012 to 2013 and that compares to only 19 states seeing growth from 2011 to 2012. Now at a lower level, we continue to see targeted population growth in a number of our state partners. In fact, 8 of our state partners have seen increases over the last 12 months of the combined total of 3,700 offenders. We also have 10 state customers where we provide owned and managed solutions today that are expecting a significant bed shortfall over the next 5 years. CCA continues to look to help our state partners in addressing these challenges as public sector investment in new prison capacity continues to remain at historically low levels and our research indicates that more than 200,000 public sector prison beds operating today are in facilities that are more than 75 years old. Let me now go to California in a comment on our recent developments. First of which is that the state has made meaningful progress towards reaching the benchmark of occupancy at 137.5% of rated capacity, which they have to hit by February of next year. And this was established by the 3-judge panel within the federal court. CCA has been a very strong partner in helping California achieve the court order capacity level through the 9,000 beds we provide out-of-state, as well as our Cal City lease, each of which are performing extremely well. Our California populations have averaged nearly 8,900 over the last quarter of 2014 and this was slightly above levels experienced in the first 3 quarters of 2014. As for the upcoming years, State of California budget, Governor Brown released his initial budget proposal last month for fiscal year 2016 and all of our 9,000 out-of-state beds and our Cal City lease agreement were once again fully funded in his budget proposal. We believe we have continued to strengthen our partnership with the State of California as we have become a fundamental part of their overcrowding solution for the state over the nearly 9-year partnership. As for the remainder of state budgets, we are in early stages of the legislative season for many of our state partners and their budget development for 2016. And we will provide a better overview and more in-depth overview, I should say, of funding levels during our May call. But at a high level, we have seen state economies continue to improve, but revenue growth has been slower than in recent post-recessionary periods. However, we are encouraged by the actions taken more recently by Arizona and Tennessee, utilizing the private sector for capacity solutions to manage the issues caused by their growing inmate populations. Other states, like Oklahoma and Ohio, are experiencing similar growth in overcrowding, and we believe CCA could deliver significant value to these and other states that are working through similar issues in their correction system. When looking at population trends of our federal partners, we continue to see softness progress through the end of 2014 and a couple of updates on this. First, beginning with ICE. ICE began its fiscal year 2015 operating under a short term continued resolution, which provided funding for approximately 34,000 tension beds, which was at fiscal year 2014 levels. Even though ICE continued to be tasked with assisting with that unprecedented humanitarian crisis by providing residential care for families. Prior to its December 11, 2014, expiration, Congress extended the continued resolution for ICE through February 27, 2015. We believe that seasonal fluctuations may have contributed to ICE's population remaining below the 34,000 level during the fourth quarter of 2014, and thus far, in the first quarter of 2015. And the uncertainty surrounding the budget for the remainder of this fiscal year could be also playing a meaningful part and also playing a role in impacting their populations. And while Congress is still in the process of trying to pass a full year funding bill for ICE, we believe that such a bill will allow ICE to fund 34,000 adult detention beds and an appropriate level of family residential beds through the end of the fiscal year of September of 2015. This expectation is consistent with the proposed funding for ICE and the President's fiscal year 2016 federal budget proposal that was issued last week. As for the United States Marshals Service and the Federal Bureau of Prisons, we continue to think there could be several factors affecting their populations. First, we have seen a sequestration had lasting effects on staffing levels, hiring and activities for both federal law enforcement agencies and the U.S. Attorneys offices, which impacted both Marshals and BOP populations in 2014. Now we have observed in the last half of 2014 increase in staffing levels at these agencies. Additionally, the fourth quarter typically leads to a softness in populations due to the impact of the holiday season. However, with the full year 2015 budget approved in December and the holiday season behind us and also, like I say, the notable increase in staffing towards the end of 2014, we believe the United States Marshals Service populations will begin to stabilize. Finally, our review the President's 2016 budget proposal for United States Marshals Service and Bureau of Prisons would fully fund our contracts for the next fiscal year. So with that, I would like to reiterate that we are very pleased with our performance in the fourth quarter and the full year of 2014. I'm extremely grateful and appreciative of the CCA management team, our wardens and the entire CCA family of Corrections professionals here in Nashville and nationwide for all the work they do everyday for CCA. Now I'd like to turn the call over to Dave.

Thank you, Damon, and good morning, everyone. In the fourth quarter, we generated $0.49 of adjusted EPS at the high end of our November guidance range of $0.46 to $0.49, and $0.02 ahead of the consensus estimate. FFO totaled $0.67 per share, ahead of our November guidance range of $0.64 to $0.66 and AFFO totaled $0.65 per share compared to our November guidance range of $0.62 to $0.65. Compared with the fourth quarter of the prior year, these fourth quarter results represent increases in diluted EPS, FFO per share and AFFO per share of 11%, 8% and 10%, respectively. These increases were achieved through a combination of entering into new contracts, most notably with ICE and the states of Arizona and California, as well as from exiting certain unprofitable contracts. The unprofitable were marginally profitable contracts that terminated in 2014 occurred mostly at managed-only facilities and resulted in a decrease in revenue of $23.7 million from Q4 2013 to Q4 2014, but actually contributed to an increase in facility NOI of $1.5 million because they incurred net operating losses in Q4 2013. We expect the new contracts with Arizona at our Red Rock facility, which became effective January 1, 2014, and with ICE at our South Texas Family Residential Center, which became effective in October 2014 to contribute to further growth in 2015 as populations under these new contracts continue to ramp. Note that consistent with the NAREIT definition, FFO and AFFO, as well as our calculation of adjusted EPS in the fourth quarter 2014, exclude noncash impairment charges associated with our Queensgate and Mineral Wells facilities. We have previously discussed the challenges and limited number of traditional corrections partners for these 2 non-core assets, both of which have been acquired in connection with M&A transactions in the '90s. There are no additional assets in our portfolio that fit this profile. Because we no longer expect to market these non-core assets for correctional purposes, they will be removed from our bed count and occupancy percentages as of January 1, 2015. Our balance sheet remains very strong with leverage of 3.1x, fixed charge coverage at 9x and solid liquidity. At December 31, we had about $75 million of cash on hand and $360 million of availability on our bank credit facility and no debt maturities until December 2017. The construction of our new Trousdale-Turner Correctional Center and Otay Mesa Detention Center, both continue on track for completion later this year. As of December 31, we had remaining construction cost of about $115 million on these 2 projects. Moving next to a discussion of our guidance. As indicated in the press release, EPS guidance for the full year is a range of $1.94 to $2.02, while Q1 2015 EPS guidance is a range of $0.44 to $0.45. Full year FFO per share guidance is a range of $2.67 to $2.75, and full year AFFO per share guidance is $2.62 to $2.69. There are several puts and takes when cross walking EPS for Q4 to Q1, but the 2 largest drivers are higher unemployment taxes and 2 fewer days in Q1. As a reminder, approximately 75% of our unemployment taxes are incurred during the first quarter, resulting in a $0.03 decline from Q4 to Q1. The 2 fewer calendar days in Q1 versus Q4 is important to consider when forecasting our results because we are paid by the day. The 2 fewer days in Q1 compared with Q4 accounts for a reduction of an additional $0.02. Our full year 2015 guidance includes the receipt of 500 additional inmates from the State of Arizona at our Red Rock facility in the first quarter and the continued ramp of the contract at the South Texas Family Residential Center through the second quarter. I mentioned last quarter that we had experienced some softness in our federal inmate populations. Our forecast contemplates continued softness for the first quarter due to overall lower populations in the Federal correctional and detention systems with a gradual increase in federal population throughout the year. Damon highlighted some of the reasons for these reductions. Our guidance also include startup costs in Q4 in preparation for the commencement of the new contract at the Trousdale facility, as well as expenses to transition detainees to our new Otay Mesa Detention Center in Q3. These costs amount to about $0.04 per share. Our guidance does not include any new contracts, acquisitions or the termination of any contracts beyond the BOP contract at Northeast Ohio effective May 31, 2015. We generated $40 million of revenue from the BOP at Northeast Ohio in 2014 and our 2015 guidance reflects a reduction of about $0.08 in EPS for the termination of this contract. I have a few final notes for modeling purposes. Because of some very specific accounting rules, the lease agreement with a third party lessor at our South Texas Family Residential Center is treated similar to capital lease accounting. This results in a portion of the rental payments to the lessor being classified as depreciation and interest expense for GAAP accounting purposes instead of rent expense. The depreciation amount for the first quarter and full year 2015 amounts to approximately $2 million and $32 million, respectively. The interest expense component begins in the second quarter and amounts to about $9 million for the full year. We will be deducting such amounts in our calculation of adjusted EBITDA because we believe this presentation is more reflective of the cash flows associated with the facilities operations, and therefore, cash available to service our debt and pay dividends to our shareholders. We have inserted in our press release the calculation of adjusted EBITDA so that you can see these adjustments reflected in our guidance. Likewise, for FFO and AFFO calculations, we will not be adding back to net income this depreciation. Again, adding back the depreciation would apply that the expense is noncash when this expense is really a component of the rental payments made to the lessor. With the insertion of EBITDA guidance into our press release, we have provided you with our estimate of the effective income tax rate, as well as our estimate of depreciation and interest expense for both the first quarter and full year. You can see that we are projecting an increase in our effective income tax rate compared with 2014. This is attributable to a projection of higher taxable income in our taxable REIT subsidiary, partially resulting from the elimination of unprofitable managed-only contracts. G&A expense is expected to be 5.5% to 6% of total revenue. Finally, dividend levels and our dividend policy are reviewed by our board every quarter as part of the quarterly dividend declaration process. The next board meeting is scheduled for February 20. A press release is expected to be issued shortly after that meeting announcing the amount of the next quarterly dividend that would be paid in April. I will now turn it back over to Damon.

Thank you, Dave. So let me bring to a close our comments and make these final points. 2014 was a year in which the foundation was built for the meaningful future growth of CCA, whether it was the development of an unprecedented solution to a humanitarian crisis facing ICE, the 2,400-bed South Texas Family Residential Center; a 2,500-bed build to suit adult security facility solution for the State of Tennessee; adding incremental beds in San Diego, an underserved market; expanding partnerships with existing partners such as in Arizona or reemphasizing our commitment to creating the best inmate reentry programming value in corrections. We have established a clear path to growth, which will begin to ramp up throughout 2015, coupled with the dividend yielding well over 5%, propelling us to a nice growth trajectory in 2016 and beyond. As for the business outlook, population increases are projected for many states and overcrowding situations are continued challenge at the state and federal levels, which indicate a need currently and in the future for solutions we provide. We were encouraged by the economic outlook for state and federal budgets, while being keenly aware that public sector investments in new government-owned capacity to deal with overcrowding and aging infrastructure are extremely limited, and believe there are meaningful opportunities for CCA to expand its presence in the U.S. marketplace. That concludes our prepared remarks. Thank you again for calling in today's conference. And let me now turn the call back over to the operator for Q&A.

[Operator Instructions] We'll go first to the site of Brian Ruttenbur with CRT Capital.

Just have a question around the guidance that you gave. In terms of facility level margins, it appears that with the DNA and the interest changes because of North Texas that the facility level margins are going to go up dramatically year-over-year. Is that what we should be looking at?

Yes, that's a great question, Brian. It's something we're thinking about, because if you just continue to report the GAAP expense, the depreciation interest component as depreciation interest instead of rent, you're exactly correct, that would result in outside margins that are probably not realistic. So one of the things we're thinking about doing is just adjusting the operating expenses, if you look at it on a per mandate statistics to include the depreciation and interest, that's really what we consider rent expense. So something we're considering as we publish our per mandate statistic in 2015. We'll certainly be clear as to how we're presenting that, but you're right looking at it that way.

Okay. And then the second question was about new bid activity. Is there going to be increased activity? Is it first, second quarter? What are you seeing from the last quarter to this quarter? Are you seeing any increases, decreases? I'm just trying to get a trendline where things are going.

Yes, Brian, this is Damon. I would say that you're probably going to see over this quarter and kind of early second quarter, but it say kind of state is treading water just so that they get a good sense of what their budgets are going to look like going into the new fiscal year, which as you know, is July 1. But as I mentioned in our prepared remarks, we are encouraged seeing some budget pulls like in Arizona, where they're looking to use more and more of the private sector in future fiscal years. So I think the activity you'll see maybe a little activity during the first half of the year. But I think we'll get it into the middle of the year and states get a clearer sense what the budgets look like and you can see that picking up.

Brian, one more point on that. There was no depreciation or interest in Q4. So when you're looking at the per mandate statistics for the fourth quarter of '14, that would have no impact. So that discussion is really only applicable to 2015.

And we'll go next to the site of Kevin McVeigh with Macquarie.

Damon, it sounds like in terms of state trends, Arizona and Tennessee are being more kind of aggressive is not the term, but kind of using you folks quicker than Oklahoma or Ohio. In terms of Oklahoma, Ohio, is that something you expect to play out in '15 as you get more visibility on the budgets? Or is it the political climate or am I just kind of over thinking the comments here?

I think it's the first part. As I mentioned earlier, states are right in the thick of their budget season, and it's really not unlike what happened in Tennessee and Arizona before they move forward on Trousdale here in Tennessee or Arizona, they wanted to, at that respective time, this goes back a year or 2 years ago, just to give you clarity of make sure they have funding for new incremental beds by the private sector for the new fiscal year. So it's not unlike and kind of pass cycles and states where we've got these new contracts. So I think as I said earlier, as you get a little later in the season, states get a better feel of their budgets, and you got these Department of Corrections that are either growing and/or overcrowded, then I'll get a little more comfort and confidence, go ahead and move forward on a new contract or expanded contract.

Got it, got it. That's helpful. And then in terms of just M&A in the sector, obviously there was a fairly large transaction in one of your competitors. As you think about putting capital to work, how does your profitability scale up on counties versus your core business? And just any thoughts as that plays out, does that help the pricing consolidation move forward here?

Well, I'd say, generally, and it's always been the case for the history of the company and for the industry that if you got increased utilization, both from public and private, and you see occupancy go up, and especially in the private sector, the next would have a meaningful impact on pricing. So I think that could continue to play out. So if you see beds being absorbed by the private sector not in a dramatic fashion, but it would have, I'd say, a modest impact on our pricing ability around the country.

We'll go next to Tobey Sommer with SunTrust.

This is Frank in for Tobey. Can you talk a little bit about some of the proposed prison reforms and what impact they might have on kind of federal spending levels and what impact that might have on the business?

Absolutely. This is Damon. So a couple of answers there. One of which is as you see, I think, with any new Congress either new bills introduced or maybe bills from previous sessions reintroduced, and we think generally, as I think about those various bills, they're really are consistent now that has been done historically, but also, we provide a lot of solutions at those bills we're trying to achieve. So, for example, there are several bills I'm trying to figure out ways to reduce cost within the prison system, reduce overcrowding, utilize more programs within facilities to help reduce recidivism. And so that's right in our wheelhouse. So you see these -- both at the federal level and at the state level, they could have, depending on the proposal and what exactly they're trying to achieve with those various bills and have an impact on population, but with the end goal of being more successful at programs within facilities and also are trying to reduce cost with correction system. Again, that's right in our wheelhouse and those are solutions we can provide, both at the state level and the federal level.

Okay, great. And can you talk a little bit about the hiring environment out there right now? How -- what are the initiatives you are to kind of get good people and keep them in?

It is, just generally, I'd say as I look across the country, we are still in a pretty good environment with the labor and workforce and being able to attract and retain employees. We do have spots just like probably other companies and other industries, where we do have some challenges most notably, I'd say kind of in the southern and kind of mid-southern part of the country. We've got the activity in oil and gas fields. I'd say that's changed here in the last 6 or 3, 6 months because of the issues with the energy prices. But we do have some spots where we've had to maybe take it up a notch or 2 and be more aggressive just to make sure that we're recruiting and retaining workforce. But generally, we're in a pretty good environment and we have continued to enjoy historically low turnover levels in the company as a whole and part of that, obviously, is being competitive on the salary and wages and benefits, but also we're doubling our efforts on engagement and making sure our sites are not only safe and secure to operate in, but it's a good place to work and have a career. So spend a lot of time on the, what I'd say, kind of non-compensation efforts to improve turnover and retention. But overall, it's a pretty good environment, though we need to keep a close eye on it.

[Operator Instructions] We'll go next to Brian Hoffman from Avondale Partners.

You talked about the U.S. Marshal trends for 2015 and how you expect that to stabilize after the first quarter. Can you talk about trends that you are seeing or expecting for the BOP?

Yes, it's a ripple effect, as you know. So the Marshal is the first stop of the federal prisoner and then if they're convicted and ultimately sentenced for their crime, then they would be handed over to the BOP. So we think that Marshal populations will stabilize for the reasons I said earlier and then now we'll have an impact on the BOP, but that will be later, we think this year going into next year. Now the Bureau of Prisons, as you know, it's got a few, not necessarily reforms, but the sensor commission made some changes relative to certain inmates that would be eligible for early release. So we think that will kind of work its way through the system through 2015. But to the first part of your question as it relates to the populations Bureau, seeing the Marshal stabilize and should have a ripple effect for the Bureau of Prisons later this year, going into '16.

Got it. And then you mentioned that Otay Mesa and Trousdale negatively impacted the quarter by $0.04 due to startup expenses. Do you expect that to continue over the next several quarters before those facilities open?

Let me clarify that, Brian. I'm sorry, I was talking about the 2015 numbers. So the 2015 guidance includes startup expenses in Q4 2015 in anticipation of commencement of that contract in early '16, and then the transition of the inmate population from San Diego to the Otay Mesa Detention Center in Q3 2015. So you've got a $0.04 drag in 2015.

Got it. And then last question for me. Can you give any sort of guidance or help us think about how to think about revenue contribution from the South Texas contract because the $21 million that you got in the fourth quarter, clearly you only had 480 inmates or residence for a portion of the quarter. So just any color in terms of how that -- how we can expect that revenue to ramp as that contract ramps over the next several quarters?

Sure. For obvious reasons, we don't disclose per diem rates or provide contract specific economics. But I can say that the NOI will reflect risk-adjusted returns based on our pricing of the agreement with ICE. That contract contemplated the short-term duration of the contract, the unprecedented accelerated commencement and ramp schedule that ICE requested, as well as some uncertainty in the cost structure, including external versus internal staffing, TNE or combinations for that stuff at the facility in a competitive market rate for salary as Damon was just discussing in that area. We're charged with staffing a 2,400-bed facility over a very short period of time. So all that was considered in our pricing and negotiations with ICE. The facility and services are being provided unique. They're highly customized to meet the unique needs of the residents placed in our care there. And then finally, I'd say the rental rate with the third-party lessor reflects the capital investment that they had to make to install the facility infrastructure, including core houses, some dining facilities, educational facilities, recreational areas and all that on an unprecedented acceleration time frame. So that's really the reason behind a very high per diem at that facility. It's not actually a per diem, it's a fixed monthly payment. It was graduated during the ramp period, but becomes fixed beginning in February. But if you translate it or just do the math on a per inmate basis, it's a high per diem, along with very high cost as I was just discussing, a very high cost associated with the facility. So the margins are actually lower in the fourth quarter, a little bit lower than the average facility in our owned and managed portfolio. But we've never provided consolidated revenue guidance, but recognizing that revenues are only half of the equations for NOI and the difficulty in modeling the financial impact of the facility, we've inserted to the press release the calculation of EBITDA and adjusted EBITDA to help you with that.

This does conclude the Q&A portion of today's conference call. At this time, I would like to turn it back over to Mr. Damon Hininger for closing remarks. Please go ahead.

Erika, thank you. And thank you for your time and participation today. More importantly, thank you for your investment in CCA. Your management team is focused on executing on another good quarter as we begin 2015, and we look forward to reporting on our progress during the course of the year. Have a great day. Thanks again for calling in.

We'd like to thank everybody for their participation on today's conference call. Please feel free to disconnect at any time.