CoreCivic, Inc. (CXW) Q1 2015 Earnings Report, Transcript and Summary

Good morning. My name is Jessica, 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 Corrections Corporation of America’s First Quarter 2015 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Cameron Hopewell, CCA's Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thanks, Jessica. 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 or trends 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 a discussion of non-GAAP measures. A reconciliation of the most comparable GAAP measurements is provided in our corresponding earnings release and included in the supplemental financial data on the Investors page of our website, www.cca.com. With that, it's my pleasure to turn the call over to Damon Hininger.

Thank you, Cameron. Good morning and thank you for joining our call today. Also joining me on today’s call is our Chairman, John Ferguson, and Brian Hammonds, our VP of Finance. I will begin today’s call by providing some highlights of our financial results for the first quarter 2015 before providing an update on key business developments and opportunities. Following my remarks, I will hand the call over to Dave, who will provide a more in-depth review of our first quarter financial performance and will walk through the factors impacting our updated full year 2015 guidance. We started off 2015 with strong financial performance in the first quarter. Revenue of $426 million in the first quarter represented a 5.4% increase from the comparable prior year period. Total net operating income for the first quarter was $125.3 million, an increase of 7.3% over the prior year. And we generated normalized funds from operations of $0.68 per share in the first quarter of 2015, an increase of 9.7%. Both our EPS and FFO results exceeded the high end of our guidance for the first quarter as the result of our continued outperformance in our portfolio of owned and controlled facilities. Revenue generated from owned and controlled properties increased 9.7% and net operating income increased 8.3% year-over-year. Dave will provide additional color on the drivers of our financial performance following my remarks. Also during the first quarter of 2015 our board of directors approved a 6% increase in our quarterly cash dividend to $0.54 per share or $2.16 per share annually. This was the second 6% of a dividend increase in as many years and reflects our continued confidence in the strength of the earnings and cash flows generated by the business. And it is also important to note that our view hasn’t changed in light of the updated guidance we provided last night and the news on California. Next I would like to provide an update on our three facilities currently under development, starting first with our South Texas Family Residential Center. As we highlighted on our last call in February, we opened Phase 1 of the facility in late December of 2014, which provided up to 480 beds, while we diligently worked on the development of the 2400 bed Phase 2. On April 19 we officially opened Phase 2 of the facility with 960 beds coming online in two neighborhoods of 480 beds each. Now while we had some weather related delays that pushed the opening of Phase 2 into the second quarter, we continue to be on track to complete all five 480 bed neighborhoods before the end of the second quarter. We are currently housing over 600 residents at the facility with more than 370 employees, which include resident supervisors, language interpreters, educators, counselors, program facilitators and chaplains. While there is still quite a bit of construction activity taking place on the site, we remain focused on ensuring that we are fully achieving all our operational goals of providing a safe residential setting for individuals entrusted in our care in a facility that is fully compliant with ICE family residential standards. Sticking with updates on our facilities under development, construction continues on our 1500 bed Otay Mesa Detention Center outside of San Diego, California. 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, expiring in December 2015, and calls for the ownership of this facility to revert to the County. We house populations for ICE and the United States Marshals Service at the San Diego Correctional Facility and expect to begin transitioning these populations to the new Otay Mesa Facility beginning in the third quarter of 2015. Now we believe this market to be historically underserved in terms of available bed capacity and thus believe the additional bed capacity will enable us to be a solution for partners seeking space to house populations there. As we approach the completion of facility construction, we expect to incur start-up and transition related expenses in the third and fourth quarters of 2015. Moving next to update you on our Trousdale-Turner Correctional Center here in Tennessee. This is a 2,552-bed facility we are constructing for the State. We remain on-schedule to complete construction of this facility in the fourth quarter of this year, and plan to begin ramping operations in anticipation of accepting [Indiscernible] at the facility beginning in the first quarter of 2016. The state budget, which was enacted during the legislative session this spring included funding authorization to begin activation of the facility in the first quarter of next year. As a result, we expect to begin incurring start-up related expenses in the fourth quarter of 2015. And as a reminder the impact of start-up related expenses at both Trousdale and Otay Mesa is included in our full-year 2015 guidance. These three ongoing development projects will incrementally add approximately 5000 beds to our facility portfolio and represent our available capability I should say, to provide innovative solutions to a diverse set of customer needs. While the South Texas Family Residential Center is expected to contribute to our growth in 2015, all three projects are expected to be meaningful contributors to the growth of our business over the next few years. Next, I will 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 500 beds for the State of Arizona. The ramp up was completed by the end of February bringing the total occupancy at this facility up to 1,000 beds, and resulted in nearly $3 million in additional revenue in the first quarter of 2015. We are proud of our growing partnership with the state and are focused on continuing to deliver high quality service as we assist the state by providing much-needed capacity to alleviate overcrowding in their system. In recognition of the states' continued capacity challenges, the Arizona legislature passed their 2016 budget, which included authorizations for a 1,000 additional contract beds to come online on July 1, 2016. This represents a positive opportunity for CCA given the successful activation of our Red Rock facility. We believe we are well positioned to help the state in providing these additional 1000 beds and we will be actively engaged with the state as they move forward with their procurement. Now I will move to a state update and talk about some budgets and trends that we are seeing within our [respected] state portfolio. Many of our state partners are approaching the end of their legislative season and budget development for the 2016 fiscal year. To date six of our 15 have completed their budget work. Each of the six states which have passed budgets have fully funded our contracts. We continue to see improvements in the fiscal health of state level budgets as state economies have continued to improve. And as a result, we have been successful in receiving price improvements on many of our contracts and believe that actions by states like Tennessee and Arizona to utilize the private sector demand as the challenges they face with growth and overcrowding in their correction systems is a positive indication of the value CCA can deliver. 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 systems. And speaking of Oklahoma, the state continues its budget work, however, we expect final passage this month. Passage of the budget should bring clarity to the Department of Corrections request to procure 1000 additional beds to address overcrowding in their system. Given CCA’s existing capacity in state we feel we are well positioned to be able to meet their needs. In terms of overall growth trends, six of our state partners have seen increases over the last 12 months as a combined total of over 3900 offenders. We also have 10 state customers for we provide on demand solutions and are experiencing a significant bed shortfall over the next five years. Let me now move to California and provide some commentary on recent developments. During the first quarter of 2015, inmate populations in the state system fell below the benchmark occupancy goal of 137.5% of rated capacity, as established by the 3-judge federal court panel for the first time since the court mandate, a notable milestone for the state. CCA has been a strong partner in helping California achieve the court order capacity level through the availability of 9,000 out-of-state beds we provide, as well as the lease for our 2560 bed Cal City correctional centre. The average number of inmates held in the out-of-state program were approximately 8800 in the first quarter of 2015. However, our California inmate populations declined towards the end of the quarter. We have continued to see modest declines in utilization of out-of-state beds in April and May and as of today we are approximately at 8100. The updated 2015 guidance provided in yesterday’s earnings press release reflects our updated expectation that the number of inmates in out-of-state program will continue to decline throughout the remainder of the year. As for the upcoming year’s budget, later this month Governor Brown will come out with the May revise to the budget, which will take into account the state’s latest population trend expectations. When the governor released his initial budget proposal in January, all 9000 of our out-of-state beds and the Cal City lease agreement were once again fully funded in his budget proposal. However, we believe inmate population declines have been more significant than estimates used in the initial budget process, and we expect the May revise will provide us with more clarity on the budget and long term outlook for California population trends. And it is important to note that while we expect a reduction in the program, we believe our contract will continue to be on the next state fiscal year, which would take us into the fiscal year starting in July of 2016 as we have been a successful part of the state’s efforts to address overcrowding and to come in compliance with court mandates. Now to the Federal book of business, but first I will go into the [pops] want to talk a little bit about the budget. The President’s proposed federal budget for 2016, which was released in February includes several notable things. First of which the proposal included moderate increases in the funding levels for both the DOP and overall for the United States Marshals Service. The fiscal year ’16 budget request for ICE provide significant increases to the funding levels for ICE versus the 2015 funding levels. Our contracts with our federal partners would be fully funded under the president’s proposal. And Congress has begun work on completing their fiscal year 2016 appropriation bills, and we believe that the proposed funding of our federal contracts are positive developments. Moving into a discussion of system pops for our Federal partners, some of the weakness in federal populations we experienced in the fourth quarter of 2014 carried over into the first quarter of 2015 as we expected and discussed in our call back in February. Starting first with ICE, throughout the majority of the first quarter ICE was operating under a short-term continued resolution, which provided funding for approximately 34,000 detention beds at fiscal year 2014 levels. Even though ICE continued to be tasked with assisting the unprecedented humanitarian crisis by providing residential care centers for families. In fact, Congress did not pass a fiscal year 2015 funding bill for the Department of Homeland Security until the beginning of March of 2015. Uncertainty surrounding the DHS ICE funding for full-year budget and seasonal fluctuations may have contributed to ICE populations remaining low below levels you typically have seen in the past year during the first quarter of 2015 and into the second quarter. Since the fiscal year 2015 funding Bill was passed, our ICE populations have stabilized and have trended slightly higher. And as a reminder, our new South Texas facility, which is our largest contract with ICE has a fixed monthly payment. So that serves as a good hedge on population volatility within our portfolio. As for the United States Marshals Service and the Federal Bureau of Prisons, we believe there are a couple of dynamics impacting current population trends. While we have spoken previously about Federal budget challenges having an impact on staffing levels, hiring and activities for both Federal law enforcement agencies and US attorney’s offices resulting in clients and marshal and BOP populations in 2014, we have also seen marshal population stabilize and begin to trend higher in recent months. The increase in US Marshal populations maybe a result of the gradual increases in staffing levels and the cases being processed by US attorney offices around the country. And while overall BOP populations continued to decline in the first quarter of 2015, and increase in US Marshal population resulting from an increase in number of Federal court cases being processed could eventually reverse this trend during 2015. At the same time our estimates indicate that the Federal Bureau of Prisons is operating at a nearly 128% of rating capacity in their own facilities as of the close of the first quarter of 2015. It is important to note that as the rate of overcrowding in the BOPs own facilities decline, the average cost to house an offender in a BOP operated facility per day continues to increase, which only improves CCA’s value proposition to the BOP. One final update on the BOP. The bureau currently has a procurement advertised for 10,800 beds known as the criminal alien requirement or CAR 16. This procurement is for renewal of contracts for facilities operating in Texas. Now CCA only has 1550 beds up for rebid in this procurement and the proposed facilities have to be in a certain geographical location. Three states included in the procurement as [Indiscernible] of performance are Oklahoma, Mississippi, and Arizona. CCA has facilities currently operating in these states that are housing Californian inmates that we think could be very attractive to the BOP. Moving on, we continue to pursue various opportunities at our Federal, state and local levels to provide solutions through our available bed capacity at idled or underutilized facilities. Additionally we believe there are ample opportunities across the country to allocate capital for growth opportunities, whether through providing a real estate solution, acquiring existing government owned facilities, or the development of new facilities to either provide additional capacity or replace ageing inefficient facilities for existing or new government partners. With over 200,000 beds currently in service at facilities more than 75 years old or older, many states are experiencing also growth in overcrowding, we believe we are well-positioned to bring to bear a full value proposition to partner with government agencies to finance, construct and operate facilities. An additional avenue for allocating capital for growth is through the acquisition of residential re-entry facilities to expand our footprint in this market. Since our acquisition of CAI in late 2013, we have expended a significant amount of time and effort to build a pipeline of acquisition targets. We believe this to be an attractive market as residential re-entry services are a natural extension to the intensive re-entry program already offered across our existing correctional facilities. Expanding our re-entry capabilities and footprint will serve to benefit our government partners that are looking to expand utilization of residential re-entry program as they work with a familiar partner that already has extensive experience in providing re-entry programming. We continue to evaluate acquisition opportunities in this market and will be disciplined in our approach. So with that I would like to say that I sincerely appreciative of all the CCA management team, the wardens out in the field, and the entire CCA family of correctional professionals here in Nashville and nationwide for all the important work they do every day for us. So with that I will now turn over the call to Dave.

Thank you, Damon, and good morning, everyone. In the first quarter, we generated $0.49 of adjusted EPS compared to our February guidance range of $0.44 to $0.45, and $0.04 ahead of the First Call consensus estimate. Normalized FFO totaled $0.68 per share, ahead of our February guidance range of $0.62 to $0.63 and AFFO also totaled $0.68 per share compared to our February guidance range of $0.61 to $0.62. Adjusted EPS, normalized FFO, and AFFO exclude a non-cash impairment charge of $1 million for the write-off of goodwill associated with our decision to exit the managed-only contract at the Winn Correctional Center. Compared with the first quarter of the prior year, these first quarter results represent increases in adjusted EPS, normalized FFO per share and AFFO per share of 11%, 10% and 17%, respectively. These increases were attained through the continued ramp of new contracts with the state of Arizona at our Red Rock facility and ICE at our South Texas Family Residential Center, as well as from exiting certain unprofitable contracts as we discussed last quarter and in this quarter’s earnings release. We expect the new contracts with Arizona at our Red Rock facility, where occupancy increased from about 500 inmates at year-end 2014 to nearly 1000 inmates by the end of Q1 2015, and with ICE at our South Texas Family Residential Center to contribute to further growth in 2015. As a reminder, revenue at the South Texas facility is largely based on the number of beds brought online rather than the number of residents at the facility. As Damon mentioned, we currently have 960 beds in service and expect to have the full 2400 bed facility online near the end of this quarter. On a percentage basis AFFO per share increased from the prior year quarter more than EPS and FFO per share due to a decrease in maintenance capital expenditures as we had accelerated some expenditures in the first quarter of 2014. Maintenance capital expenditures can fluctuate from quarter to quarter and were a little lower than we forecasted in Q1 2015. We have maintained our annual guidance in this area however, so we expect to incur higher levels in future quarters relative to the first quarter. Our balance sheet remains very strong with leverage at 3.1x, fixed charge coverage increasing to 9.2x and solid liquidity. At March 31, we had $74 million of cash on hand and $319 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 March 31, we had remaining construction cost of about $75 million on these two projects. Moving next to a discussion of our guidance. As indicated in the press release, adjusted EPS guidance for the full year is now a range of $1.89 to $1.97, while Q2 2015 EPS guidance is a range of $0.49 to $0.51. Full year normalized FFO per share guidance is a range of $2.62 to $2.70, and full year AFFO per share guidance is $2.57 to $2.64. The most meaningful change to the guidance we provided last quarter is a reduction in the number of inmates we project housing in our facilities from the state of California. At the end of April 2015, the state was approximately 2200 inmates below the 137.5% occupancy cap imposed by the Federal Court. We believe it is reasonable to assume that California could return 2000 to 2500 additional inmates from CCA by the end of calendar 2015. We will work with our partner to meet their objectives while attempting to minimize the impact on our financial results. The span of our earnings guidance reflects a range of assumptions about the pace, location and number of inmates we house for the state as well as by the efficiency of removal. Note that while we expect a reduction in the out of state program we believe our contract will continue to be on the next state fiscal year. Cross walking Q1 to Q2 and the rest of the year at a high level, as we mentioned last quarter approximately 75% of our unemployment taxes are incurred during the first quarter, resulting in a $0.02 increase in EPS from Q1 to Q2. Our guidance for the remainder of the year reflects the previously announced termination of the BOP contract at our north-east Ohio correctional center effective May 31 and the decrease in California population. The financial impact of the population declines at Northeast Ohio and from California is partially offset by the continued ramp of the South Texas Family Residential Center and the termination of the contract at the managed only Winn Correctional Center later this year. We experienced a net operating loss at Winn in the first quarter on revenues of $4.5 million as for many years we have been unable to achieve an increase in the per diem, which is now approximately $10 below our average managed only per diems. Our guidance also reflects an increase in populations from ICE and the US Marshals at certain facilities from levels at the beginning of the year based on increases we have recently experienced. Finally, our guidance includes $0.03 per share in start-up costs in Q4 in preparation for the commencement of the new contract at the Trousdale facility, which is expected to contribute to earnings and cash flow growth in 2016. Our guidance does not include any new contracts, acquisitions or the termination of any material contracts beyond the BOP contract at Northeast Ohio and the contract at the Winn Correctional Center. As a reminder 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. Because of a slight weather delay in bringing beds online, we did not recognize any such depreciation during the first quarter as we had contemplated at the time of last quarter’s earnings call. We are now currently projecting depreciation on the lease for the second quarter and full year 2015 of approximately $9 million and $30 million respectively. The interest expense component also begins in Q2 and is expected to be about $2 million in the second quarter and $8 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 facility’s operations and therefore cash available to service our debt and pay dividends to our shareholders. We have again included 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 imply that the expense is non-cash, when this expense is really a component of the rental payments made to the lessor. By including EBITDA guidance in our press release, we have provided you with our estimate of the effective income tax rate as well as our estimate of total depreciation and interest expense for both the second quarter and full year. You can see that we are projecting an increase in our effective income tax rate for the remainder of 2015 compared with the first quarter what is otherwise relatively consistent with the guidance we provided in February. The increase from Q1 is attributable to a higher portion of taxable income coming from our taxable REIT subsidiary, combined with the phase out of the unprofitable contract at the Winn Correctional Center, a managed only facility in the TRS. G&A expense is expected to be around 5.5% to 6% of total revenue. Finally, we review with our board each quarter our dividend levels and our dividend policy as part of the quarterly dividend declaration process. Although our AFFO payout ratio increases modestly with our new guidance, looking forward and into 2016 we are very comfortable with our current dividend level, particularly at our conservative leverage ratio and as we have clear visibility on cash flow growth in 2016 coming from Trousdale, Otay Mesa and a full year impact of the South Texas Family Residential Center, and as we continue to see additional business opportunities later this year and into 2016. I will now turn it back over to Damon.

Thank you, Dave. That now ends our prepared remarks. We now like to take it over to the operator and open it up for Q&A.

[Operator Instructions] And at this time, we'll go to Kevin McVeigh with Macquarie.

Great, thanks. Hey, and very helpful comments. Hey, I wonder if you could just drilling down a little bit more on California. It sounds like kind of the in-state is pretty safe, the volatility could be on the out-of-state, is there any way to think about kind of a range of kind of best worst case scenario to the extent the state has continued success in terms of reductions? And then, just along those same lines Damon, if I heard you right, in the CAR 16, you have about 1,800 beds or so, 1,500 rather, and the total opportunity is 10,008, who has got those other beds and just any thoughts on puts and takes across the guidance as it is currently laid out from a California and CAR 16?

Absolutely. Thank you Kevin. It is Damon. So let me – a couple of questions you had there, first with California and then with the BOP. So let me tackle those in that order. So California that key question that we will have and really everybody I think has in California, in the legislature, in the Department of Corrections is the population projection, so let me back up a minute and give you at least what we know and then some of the kind of key milestones and things that we will be looking towards here in the coming weeks and months. So if you go back about 16 months, at the time right before the Prop 47 was passed, those observers within the state and probably the most notable one was LAO, which is Legislative Analyst's Office, they were expecting Prop 47 to have an impact of a couple of thousand inmates within their correction system. And you understand that and you understand the current number they are at 5000. So it was notably higher than what they are projecting going into the vote on Prop 47. The other thing as I mentioned earlier, and we had mentioned also in February the Governor’s budget in January fully funded the 9000 beds. So going into their vote, [Indiscernible] couple of thousand bed reduction in the Department of Corrections system, but the governor still felt strongly about fully funding [the NSA] program. So it obviously has been higher, the impact on Prop 47 has been higher than anybody expected within the state. So the key question going forward is what would be the impact going forward, and our projection that will be released by the State. We don’t know the timing of that, but obviously that will be a key thing that we will be looking at to think about the business going forward. But one thing I do also want to note, again it is not necessarily an indication of a trim, but facts I think are important in this discussion, and so if you go back to November to present and look at their system and the trend down in their system, they have gone down by about 5000 inmates that I mentioned earlier. But population is something that we look at on a weekly basis. It looks like the most significant reduction happened during the month of January this year. So they went down about 2000 in that month. So in the last six months that was the largest increase in one month. Most recently, in April they went down by about 500 inmates. So 2000 was the biggest. April they went down by 500. That is the smallest decrease in five months since Prop 47 has been enacted, and then actually in this past week, again we look at this every week, this past week they went down by 35 inmates. So the question I know the state will be kind of grappling with is that one, what is truly the long-term impact of Prop 47, and now it looks like they are going to decline on the impact of Prop 47, have they reached a new bottom and what is their projection going forward. So it gives you at least a little bit of color and obviously it points out a couple of key facts as we think about the state and the impact on population in the last six months. But Kevin, to your question we don’t know what the projection is. Again that will be a key milestone or key report that we will be looking for the state. And as I think about other kind of key things that we need to keep an eye on in the coming weeks and months, in addition to the POP projection is also the May revise which I have already highlighted, which we think will be here in the next week or two. That budget revise may have a POP projection, but we don’t know the fact. So it could be also embedded in that report that will become public. Another thing is that we continue to look very closely at the actual population. So they are pretty good within California releasing populations within their system. So that also will be a key thing that we look at in the coming days and weeks, and see – the trend that we are seeing where it is lowering – the rate of decline is slowing down, is that the case going forward. And then the last thing I would note is kind of a key milestone, as I mentioned earlier, we believe our contract will go into the following fiscal year, which should be July of 2016. So as you all know, our current contract expires June of ’16. So that would require a renegotiation of the contract. So obviously would be another key milestone for investors to look for. So that gives you a little more color hopefully on California. Again I can’t give you an answer on the POP projection, but that is something that we will be keeping a close eye on. Moving to your question on BOP and CAR 16 so you are exactly right, 10,800 beds as I mentioned earlier. Those facilities have to be in a certain geographical location. Again we think our facilities in Oklahoma, Mississippi and Arizona which are housing California beds could be very, very attractive to the bureau, and you got the number right. You heard me correctly, so 1500 is the amount that we have got for rebid. The majority of the rebid is for beds in Geo’s facility. I think they have got just over half like about 55%, 60%. MTC has about 2000 beds and again we have about 1500 beds. The majority, GEO, MTC second, with the second largest quantity, and then we have got the smallest quantity of quantity with our Eden facility.

Got it. Damon, just the MTC, I missed that? How much of MTC?

Geo has got over half of the beds up for rebid, MTC has about 2000 beds up for rebid, and we have got the smallest quantity of the total amount, which is our Eden facility of about 1500 beds.

Got it. And then just, if you said this, I apologize. In terms of the guidance, where you are projecting kind of where should California sit in that in terms of number of beds embedded in the full-year guidance now, if you can give that?

So we’re projecting from where we are now, which was again down to 8100 from say 8700 – down to 8100 at the end of April. We’re projecting 2000 to 2500 additional inmates, pretty much pro rata between now and December 31st, calendar year ’15.

Got it. So, there is an outside chance that if those current trends kind of continue that maybe upset there. Okay, awesome. Thank you.

Thank you Kevin.

And our next question comes from Brian Rutenbur from Sterne Agee.

Yes, thank you very much. So, trying to understand the California impact a little bit further, 2,200 beds on an annualized basis would be about $50 million, is that the right ballpark?

Well, I wouldn’t want to quantify I mean the guidance reflects the range that is going to be dependent on that 2000 to 2500, but it is also going to be dependent on where they are coming from and the pace at which they take them out between now and the end of the year. So all I can really want to tell you is that it is all – that range we have [8% range] embedded in that guidance.

Okay. Can you tell us how much -- I didn't hear the revenue guidance. Was there anything that you gave us in terms of revenue for the year?

No we haven’t historically provided the consolidated revenue guidance.

Okay. I was just trying to do a back of the envelope, what it would – then would this impact be on an annualized basis, if we took the 2,200 or 2,100, you pick the middle of your range. And at the end of the year if in fact they take out those beds, what would be the annual impact in terms of AFFO or earnings?

I really don’t want to provide that to you Brian.

Okay. Then the exposure, I'm trying to understand is, there is an additional -- is it 8,000 beds you have or additional 6,000 on top of the 2,000 to 2500 that you have out of state?

Our contract is for about 8900, and so we are projecting – so you are down about 600 to date, and then on top of that it will be 2000 to 2500 additional that we are forecasting between now and the end of the year. Obviously we haven’t put out 2016 guidance, which is really why it is hard for me to tell you what the impact would be in 2016, not to mention the fact that we don’t really have very good visibility on what that impacts in terms of any additional population reductions would be in 2016.

Brian I would add to that that we as I mentioned earlier, we believe we will having a contract pass next fiscal year, and so that will be obviously a conversation we will have with the Department on the location and the ultimate amounts. We know that is a notable – that will be a notable event for the investment community because that should give clarity on locations and the populations going into 2017 fiscal year. The other thing I would say is that we have a great relationship with California and as in the last couple of years they have been very flexible, as much as they can be on the impact and on the location. So your earlier question to Dave about kind of impact, one thing that we will be working on in the coming days and weeks is to try to meet their – what they need to accomplish in their system in order to bring it down the population, but also try to minimize the impact as much is possible within our system. And they have expressed as they have had in the past a desire to be flexible and try to minimize the impact to the company.

Okay, thank you very much.

Brian I want to say one other data point. California is expected to bring on about 2400 infill dorm beds in early 2016. So we wouldn’t be surprised if the May revise includes some additional reductions into 2016, but it is just very difficult to predict what that is going to be.

Okay, great. Thank you very much.

And we will now move to Tobey Sommer from SunTrust Robinson Humphrey.

Thanks. One question on California that I think has been asked, but I missed it. If the beds come down in terms of the demand, is there an expectation that you might have for which facility they would be drawn from? Thanks.

Yes, this is – Tobey, thanks for your question. This is Damon, and I wouldn’t want to point out a specific facility, but as I expressed earlier the state has been and has expressed going forward a lot of desire to be flexible whether that is on the timing and on the impact, and so it would be our desire to minimize the impact obviously, but also to see if we do have line of sight on another opportunity, as expressed earlier like Oklahoma where they have got desire to do [1,000] beds to see if we can kind of link those two events together but as of right now it is too early to tell exactly the location and the timing of specific facility.

Okay, but I guess the point is you might be able to play a role in that decision?

Absolutely. Yes, absolutely. In California again they have and this is going several years, they have expressed a lot of desire, basically we have had some ups and downs in populations in years past. And so they have always come to the table saying, we know this will also have an impact with you. We want to help you minimize that. It is clearly something that they have got to achieve but we will have a role in that and have a dialogue. So it will be a two-way conversation.

After the beds, the small number of beds that California has coming online shortly -- come online, are there any more beds in California under development or accessible to the states?

There are not. There is not. So yes, other than the ones that Dave just highlighted there is not, and again the key question in the coming days and weeks will be the POP projection going forward. The one thing that we look at very closely is not only the state populations, but also what is going on in the county level, and so we are seeing – we are seeing some volatility in the county level too. We don’t see anybody building capacity at the county level but we are also starting to see a little bit of a shift on certain offenders that maybe are serving their full sentence versus maybe US pats are only serving 20% to 50% of their sentence. But that will be a key question on continuing to look at capacity, which again we don’t see anybody developing it, but also what happens and what kind of shifts in behavior do you see at the local level.

Okay. California has achieved successful results in its – kind of its goals in recent years with innovative measures, I guess, is one way to describe it. To what extent do you think other customers that are having inmate population increases right now and experiencing that are maybe increasingly willing to engage in innovative things such as California or perhaps things – new measures to mitigate that population growth?

It is a good question, and I would say California is very extraordinary as you know because they went up to 200% capacity within their system. They had the Federal Courts come in and also mandate them to take their system down to 137.5%. So I would say some of the efforts that they have taken and some of the results they have been able to achieve as a result of the pressure and the direction they have gotten from these Federal Courts, which we have seen in the past some states have these type of situations where they are severely overcrowded and they are forced to make some very, very tough decisions with respect to the system. But I would say in my – all my time in the industry California clearly was the worst off of any system were crowded and with that had these extraordinary measures. But to answer your question, we don’t see these type of steps that California has taken, we don’t see these happening in other states, no. Some states have done some adjustments and tweaks and have made some provision changes related to sentencing and sentencing guidelines, but nothing to the extent that we see in California. The other thing I would point to is that virtually every state in the country does a five-year population projection, and they update it on a regular basis and it is really important to update that as they go into the budget season so legislators can think clearly on what they need to appropriate for dollars for the permanent corrections in the coming fiscal year. And that is something that we look at on a regular, regular basis, and so if you heard me kind of talk about the numbers telling the rate of growth over the last couple of years, they are projections that we see going forward and those projections are always taken into account any tweaks or changes that are made with parole standards, sensing guidelines and looking at the numbers. Just not reading the newspapers, but looking at the numbers and the projections that we are seeing around the country. Again we don’t see anything as notable as what is going on in California.

Turning and applying the same kind of scrutiny to the federal side, do you see actions and changes either in sentencing or other areas to curtail population growth?

There has been some tweaks and we have talked about here in the last, I guess, probably 24 months, and that has an impact on the BOP populations. Their populations have been coming down. The conventional wisdom within the industry is that it is a little more of kind of wait and see. So no one really I think want to come out and say, definitely here is what we think the projection is going to be for the next five years with the BOP. I think this year you probably will still see some declines, but as I mentioned earlier, the feeder into the bureau of prisons is the United States Marshals Service and the Marshals Service has declined somewhat here in the last 12 to 18 months, but as I indicated in my comments we are starting to see really on the front end of that pipeline where you have got more dollar fee appropriated and people being hired in both the law enforcement community at the Federal level, but also US attorney’s offices and like I said we are now seeing nationally, but also in our system marshal population starting to rise. Marshals Service has these individuals for a short period of time anywhere from 60 days to 6 months, and they ultimately pass over to the BOP. So a little bit of a wait and see in 2015, but we think that if the Marshal population start to increase than that could have a like impact on the bureau of prisons.

Okay. My last question is, could you give us any color on your view of the implications of budget activity at the federal level and state level that you're anticipating I guess for the state's fiscal year coming up? Thanks.

Over all, and thank you, an overall view on the state level is positive. It has really been on a nice trend here in the last three years. So as revenues have increased we’re seeing now the Department of corrections get a little bit of breathing room to where they could not only do some investment. Their facilities at many states that have imposed multi-year merit increased freezes. So we’re starting to see a little bit of breathing room for the Department of Correction to achieve around the country where they can do a little bit stuff in their system, but also we are seeing a little bit of modest improvement on pricing. So, nothing in the foreseeable future that we think is going to reverse that trend. Now you have got – not every state is in the same financial health, but overall we see kind of a general modest trend upward on state budgets. On the Federal level, as I mentioned earlier, the proposed budgets from the President and at least what we are hearing out of the committees in both the house and Senate indicate that our contracts will be fully funded, and it is most notable with ICE there is going to be a meaningful increase just because of the investment ICE has made on family detention for both facilities that we have and Geo has and then marshals service will be adjusted if they are seeing the trend as I mentioned earlier on populations, and they can increase far beyond what [Indiscernible]. So nothing more to add to that, but overall I would say it has been modest improvement on the state side and fully funded on the Federal side.

Thank you very much.

Thank you for your questions.

And we will now go to Kevin McVeigh with Macquarie.

Hi, so, just one follow-up, Damon. In terms of pricing, any impact in terms of what that could be at the top line, is it 25 bps, 50 basis points, just as pricing starts to affirm a little bit?

Historically we have been 2% to 3%, typically it is pretty much on par with DPI. I would say just for the near term it is probably just a tad below that because again I think States are still being somewhat cautious and careful on their expenditures, but I would say, yes, you probably normally – the normal level of kind of 2% to 3%, we could be heading that way here in maybe say, 12 to 24 months.

And what would that translate to in terms of revenue?

Probably wouldn’t give you a number on that. We could maybe follow up with you online on that, but – and put a number to it, but I couldn’t gives you one right now.

Okay and then just with California factored in at a very high level, how are we thinking about capacity nationwide in terms of potential beds, because I know one of the things we've talked about in the past is some of that, ultimately the capacity gets absorbed. That should help the pricing a little bit more. Just any thoughts on available capacity and how that should absorb and does California change that discussion at all?

I would say to that question it probably would have to do a little bit of a wait and see, get into [Indiscernible] half of this year. As I mentioned earlier, we have Arizona get an authorization for another 1000 beds, Oklahoma if their budget is finalized they should get an authorization for another 1000 beds, and we have also seen some POP improvements in our system in places like Colorado, and so that is positive dynamic for the company and for the industry if a fair amount of this bed is absorbed with these new opportunities and with the reduction in California. It could be the case where we were a year ago, which we think capacity drying up and there is opportunity for pricing improvement, but I think we will have a little more clarity on that as we get into the late summer, early fall. The other thing I would note and I did mention this in my remarks, but it is just important to reinforce that even states that are growing, like Arizona, Oklahoma, Tennessee, Colorado, there is no prison capacity being built at the public sector level, at the state side or at the Federal side. So really the capacity of note that is out there is in the private sector because we just don’t see even through this budget cycle, which we’re not completely through yet, not everybody has passed their budget, but they are in a period everybody is going to be appropriating dollars for new prison capacity.

Helpful. Thanks Damon. Take care.

Thank you.

I will now go to Rob LaQuaglia with Wells Fargo Securities.

Hi, guys, thanks for taking my question. I guess this one would be for Dave. Could you just talk about any timing on unsecured debt, where it'll likely be 2015 or 2016 event, and then any detail you could give on potential pricing will be great. Thanks.

Yes, so as I mentioned we have about 320 million of liquidity available at the end of the quarter. A substantial portion of our debt is at variable rate. So as we look forward and as we move into a higher interest rate environment, it makes some sense to turn out a portion of our short-term debt into long-term debt. As far as pricing goes, I would speculate, but I will just throw a number out, anywhere from 5 to 5.25, maybe 5.5, depending on where markets are at the time we go to market. So it also somewhat depends on what we see in the pipeline for growth opportunities to deploy capital. We see some coming imminently. You could see us going shorter – you could see a transaction coming shorter than later, but – so a lot of variables, but we are certainly keeping an eye on the markets, and it is something we are looking at as far as where we are on the – given the balance on the credit facility.

Great, thanks.

And we will now go to Barry Klein with Macquarie.

Hi, guys, thanks for taking my question. On the tax rate, if I'm doing my math right, it was only at 2% or 3% for the quarter, is that the new run rate or is this just a sort of blip and really you get back to the run rate you've talked about in the past?

As I had indicated in my comments, we had a low rate in Q1 driven by a couple of things. Actually Q1 is normally lower than the other quarters because of some seasonality and unemployment taxes, which reduces the taxable income at the taxable REIT subsidiary, primarily in our managed only segment. Q1 was also further driven down by some operating losses at our Winn Correctional Center. So as we phase out of that you will see the effective income tax rate rising.

Okay, got you. And then a couple of the procurements, the BOP you mentioned at 10,100 beds. I just had two questions, one is on the timing and then two, does having to bid in the California beds with inmates in the prisons, does that have any impact on the bids, is that viewed favorably or unfavorably by the BOP for the procurement or no?

Good question, and the answer is no. In fact it maybe just a tiny net positive if you have got an existing facility that has got staff with a lot of tenure and lot of experience. And the answer is no as it relates to BOP. And as I mentioned earlier it is important to note that California has again been very, very flexible within the past and as you may remember, we are holding California inmates at Red Rock, which now hold Arizona, and we were very clear on our expectation that we were going to be aggressive for the opportunity in Arizona with the State, and in California that expressed a lot of interest and flexibility to help us work down, and ramp down the population there in advance of the Arizona population coming in. So probably mutual maybe a tad net positive again [Indiscernible] it has got existing staff with a lot of experience and tenure.

Okay. And the timing, did you say anything on timing?

Excuse me. So the timing, the proposals are due here within the next 30 days, and this procurement like others, it has a shelf life of a year. So an award we expect will probably be within the next 12 months.

Okay, and then with regard to Red Rock, the additional 1,000 beds, is this – I'm sorry, with Arizona, the additional 1,000 beds by July 1, 2016 that has been authorized, can Red Rock handle all of the 1,000 beds, I know there is only 500 or 600 beds remaining or as is or could they do – could you guys do something with Red Rock to make some modifications or is it something that you might split up with the existing California beds and work with them…

Yes, we think that the facility would be perfect for 1000 beds, but we would have to do some physical plan modifications.

As you mentioned, there is 500 available today.

That is correct.

Right. So you would put on another unit or something like that, I would assume, right, is that how --?

Right, correct. Exactly.

Okay, got you. And the July 1, 2016, that's when inmates go in or that's when you get an answer or what is the – I guess what is the – a little bit more clarity on the timing there?

A good question. July 1, 2016 is when you would have to start taking inmates. So it will be a very short period of time. So again we think we are well positioned for this opportunity.

All right. Is there a timeline on when we could get more information on whether you guys win or whether they move forward?

We think the procurement could be out here very quickly, maybe at the end of this quarter or maybe right at the beginning of July as the new fiscal starts, and my suspicion is even though I haven’t seen a procurement yet, is that once it is out that will give not only some clarity on time of the award, but that could probably happen pretty quickly, probably sometime maybe in the third quarter, if they really want to get the beds online by July 1 of next year.

Okay. And then lastly, sorry, I am asking all these timing questions, on Oklahoma, the 1,000 bed RFP, I know they've talked about this in the past and they've pushed it off, but is there any update on your views on timing if they move forward with that RFP?

Yes, as I mentioned earlier, the state of Oklahoma has not finished their budget yet. We think it is going to be finalized this week. The department has requested funding and authorization in the budget for an additional 1000 beds. So, once the budget signs and I think it will be pretty apparent on kind of the timing on not only the procurement, but also when they would want to award the beds in state.

Okay. So, again probably soon after the budget is passed then they'll probably start the work on that I would assume, is that what you are saying?

That is correct.

Okay, great. Thanks again for the time.

Thank you.

And that is all the time we have for questions today. At this time, I will turn the conference back over to you, Damon, for any additional or closing remarks.