CoreCivic, Inc. (CXW) Q3 2015 Earnings Report, Transcript and Summary

Good morning. My name is Ron and I'll be your conference operator. At this time, I'd like to welcome you to Corrections Corporation of America's Third Quarter 2015 Financial Results Conference Call. All lines have been placed on mute to avoid any background noise. After the speaker's remarks, there will be a question and answer session [Operator Instructions]. Thank you. I would now like to turn the call over to Cameron Hopewell, CCA's Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thanks operator. 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 Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our third quarter 2015 earnings release and in our Securities and Exchange Commission filings, including the forms 10-K, 10-Q and 8-K reports. You are also cautioned that any forward-looking statements reflect management's current views only and that the Company undertakes no obligation to revise or update such statements in the future. This call will include a 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 Web site at www.cca.com. With that, it's my pleasure to turn the call over to our President and CEO, Damon Hininger.

Thank you, Cameron and good morning, to everyone and thank you for joining our call today. I really appreciate it. Also joining us for today's call is Brian Hammonds, our VP of Finance. I will briefly touch on some key financial highlights from the third quarter of 2015 before reviewing recent developments across our business portfolio. Following my remarks, Dave will provide an in-depth review of our financial performance and cover the factors impacting our fourth quarter 2015 guidance. As we disclosed in our earnings announcement last evening, we generated revenue of $460 million, representing a 12.6% increase from the prior year period and normalized funds from operations of $0.64 per share, in line with high end of our third quarter guidance we provided in August. Dave will provide a full overview of these and other drivers of our financial performance in the third quarter at the conclusion of my remarks. Moving next to recent facility development projects, as I indicated on our second quarter call in August, we completed construction of our 1,500 bed Otay Mesa Detention Center near the end of the third quarter. However, for several reasons the transfer of offenders from the San Diego Correctional Facility to the new facility was delayed until the third week of October. While the temporary delay created a modest increase in transition related expenses, we know the additional 500 bed capacity at the new Otay Mesa facility will be an attractive long term solution to our government partners, who have historically expressed a need for additional bed capacity in the area. Construction of our 2,500 bed Trousdale Turner Correctional Center in Tennessee continued on schedule, to be completed in time to commence ramping operations and begin accepting offenders from the state of Tennessee in the first quarter of 2016. Bringing this facility online will help to alleviate overcrowding in state operated facilities and provide capacity for anticipated increases in population. The project has remained on budget and we currently expect to invest an additional $5 million to $10 million in the fourth quarter to complete construction of the facility. Upon activation, the facility is expected to ramp up populations to near full utilization within six months. As a reminder, we have just begun incurring startup related expenses for the Trousdale Turner facility in this quarter, negatively impacting our fourth quarter earnings. Activation related expenses will continue to be a headwind in the first half of 2016 as we bring on staff, increase in salary and benefits expenses in advance of the offender populations ramping up at the facility. Next I would like to provide an update on our recently announced acquisitions. In August, we announced the acquisition of a portfolio of four community corrections facilities amounting to 605 beds in the Philadelphia area for approximately $13.8 million. The transaction introduced a strategic alternative to our traditional model of owning and operating residential re-entry facilities by providing a real estate only solution that offer CCA attractive lease agreements with a tenant, in this case Community Education Centers that has multiple long standing contracts with government partners to provide residential re-entry services. And just last week we announced the acquisition of Avalon Correctional Services, adding 11 residential re-entry facilities, representing 3,157 beds with significant geographic and partnership overlap with our operations. Avalon has a 30 year track record of providing exceptional community corrections programming and we believe the resources of CCA will serve to further enhance those operations. Following these transactions, CCA now owns or controls 17 residential re-entry facilities containing nearly 4,400 beds, significantly strengthening our platform for further growth in the residential re-entry market. As government partners around the country seek to expand ways to help or ex-offenders gaining the tools and skills needed to return to their communities and avoid recidivating, we believe the utilization of residential re-entry programming and capacity will continue to expand. Our recent acquisitions help to provide CCA with a larger platform for offering these services in more regions of the Company, an opportunity for organic growth in these regions and a platform to leverage for future acquisitions. Since our acquisition of CAI in 2013, we have continued to develop a robust pipeline of acquisition opportunities in this fragmented market and we believe there will continue to be many attractive targets available that can contribute to our future growth. Our decision to issue $250 million of seven year unsecured notes at 5% in September and obtained a $100 million term loan in October, freed up a substantial amount of capacity on our revolving credit facility, which allowed us to capitalize on these attractive acquisitions as well as provide available capacity for future opportunities. I will move next to discuss developments with our federal partners. First, Congress was again unable to pass any appropriations bills prior to the start of the government's fiscal year 2016 on October 1st, so all departments of federal government will be operating under a continued resolution that currently extends until December 11th. This again has forced our government partners to start the fiscal year operating under prior year funding levels, but funding for our contracts with our three federal partners have been unaffected by this process in prior years and we suspect this year will be similar. As a reminder, during the second quarter of 2015, we provided an initial response to the Federal Bureau of Prisons CAR 16 Procurement, a procurement advertised for up to 10,800 beds, which is for the renewal of existing contracts for a number of facilities operating in Texas. CCA is currently under contract for one of these facilities, our 1,400 bed Eden Detention Center, which has a contract running through April of 2017. We have idle capacity within the geographic locations requested in RFP and therefore believe we are in a unique position to compete for this award. We expect this procurement to be highly competitive and anticipate an announcement to come during the calendar year of 2017 with performance beginning in 2017. Staying with the developments at the Bureau, at the beginning of November, the Bureau of Prisons began releasing an estimated 6,000 offenders, who received sentence reductions qualified them for immediate release. As a reminder, in April 2014, the U.S. Sentencing Commission voted to reduce sentencing guidelines for most federal drug trafficking offenders. In July of 2014, the commission approved a measure to make these sentencing reductions retroactive beginning November 1, 2014 that gave the courts one year to consider the thousands of motions for retroactive sentence reductions. The Bureau estimates that approximately 25% of the 6,000 offenders eligible for immediate release are criminal aliens, the only population for which the BOP partners with the private sector and expects the majority of the releases to come from publicly operated facilities, which are largely still overcrowded. Many of the criminal aliens are eligible for immediate release will be transferred to the custody of Immigration and Customs Enforcement for deportation proceedings. For the remaining population being released, many will be transitioning through community corrections facilities which further highlight potential demand for the residential re-entry market. Looking next at the United States Marshals Service, we experienced modestly lower Marshals populations in the third quarter both sequentially and year-over-year. While Marshals populations tend to fluctuate, given their high rate of population churn, we believe overall populations will remain relatively consistent as we move through the remainder of the year and into 2016. I'd also like to provide an update on ICE in our South Texas Family Residential Center. On August 18th, a federal district court judge in California issued a final ruling that ICE and DHS policies with respect to the family detention violate the parameters of a 1997 legal settlement known as Flores Agreement, governing the way DHS handles undocumented minors in its custody. The judge's ruling indicated that ICE and DHS comply by October 23rd, but also provided a number of provisions which would permit families apprehended at the border to be processed at family residential centers like our South Texas Family Residential Center beyond that date. In September, DHS filed a notice of appeal to the judge's ruling and we await the formal appeal process to play out in the district appellate court. While seeking an appeal, DHS has also made adjustments to operations at the facility to comply with all aspects of the court's order. Most notably and impactful to our operations has been to utilize our facility as a short term processing center, reducing the average length of stay for detainees. However, we expect operations at our South Texas Family Residential center to continue throughout that process, as our government partner continues to highlight the need for this facility and praises the high quality services and the open, safe and appropriate environment we provide to our residents at the facility. Our ICE populations, excluding our South Texas facility, continued to track below the levels experienced in a comparable period in 2014. However, they continue to track above the levels leading into 2015 when a budget for the Department of Homeland Security wasn't passed until nearly six months into their fiscal year. It does not appear that funding for the department will be put at risk again this year, but we are closely monitoring congresses, appropriations, negotiations leading up to the expiration of the continued resolution on December 11th. A final comment, while I'm discussing our federal book of business. I want to take a moment to address comments that have been made about our Company and industry during this campaign season. As I look across the corrections, detention landscape, I see a lot of challenges that our partners are going to keep looking to us to help solve. Many states face continued overcrowding conditions. Additionally, nearly 300,000 beds in public prisons are more than 50 years old, creating facilities that are outdated, expensive to maintain and potentially unsafe. Governments are seeking ways to better prepare inmates to return to their communities through residential re-entry centers. In reality, there are meaningful areas of common ground that we share with key political figures and the administration, including support for greater investment in re-entry programming as well as policies and efforts that remove barriers to gainful employment for ex-offenders and help restore rights that lead to successful rejoining society. These are all examples of situations where we can and we do provide solutions to safely and effectively provide bed capacity and an extensive variety of correctional and rehabilitative services to people in ways that prepares them for life after prison and saves taxpayer money. Overcrowding, high recidivism rates and skyrocketing costs are not solved with politics and posturing. They are solved with the hard work that our correctional officers, chaplains, teachers and so many others on our team of more than 14,000 dedicated employees do every day. There's been a real need for these services for more than 30 years and we continue to see a real need going forward. And as you all know, we manage our Company for a long-term performance and stay focused every day on delivering value and quality to our partners, and we believe we'll continue to be rewarded for that. I'll now start off my discussion of state level developments by providing an update on our out of state program with California. As expected, California continued to reduce its utilization of out of state beds throughout the third quarter of 2015. We began the quarter housing nearly 7,500 California inmates, which declined to approximately 6,100 inmates on September 30th. The pace of reductions continued to be slightly ahead of the state's initial indications in May. Importantly in October we announced that we have successfully renewed our contract with California Partner of Corrections and Rehabilitation through June 30, 2019. The contract renewal provides for just over 6,500 beds to be made available to California. CCA has been a long-term partner assisting with California's bed capacity needs through the out of state program and the lease of our 2,500 bed Cal City facility, and we continue to seek opportunities to provide further assistance in the future. Moving now to recent developments in Arizona, on our last call, we discussed an RFP for up to 2,000 beds that was issued by the state during the second quarter of 2015. The RFP calls for the first 1000 beds to come online by September of 2016, with the potential for another 1000 beds once authorized by the state legislature. Proposals were due in September and we have subsequently learned that CCA is the only respondent to the RFP. We are still awaiting the final award to be made, but given the lack of competing responses we feel well positioned to win this new business. Additionally in Arizona we continue to house approximately 500 additional Arizona inmates at our Red Rock facility. These inmates were displaced as a result of a disturbance at another state facility and we have contracted for these inmates under an emergency six month contract. In terms of other known opportunities at the state level, we continue to believe the state of Ohio will soon be issuing an RFP for the purchase of their North Central Correctional Institution in Marion, Ohio which is privately operated by MTC. While the details of the RFP have yet to be released, it is our expectation that the opportunity will strictly be for ownership of the facility and MTC would maintain operations under the current contract. Aside from these publicly known opportunities, there are a considerable number of states that we are actively marketing CCA's capabilities to as we states evaluate their options to tackle challenges within their correctional systems. Looking forward, we expect some continued headwinds through the first half of 2016 predominantly as a result of declining California populations. However, we have clear visibility for growth in the second half of the year due to the ramp of our Trousdale Turner facility expand the capacity at our Otay Mesa facility, opportunities in the state of Arizona and a full year contribution from our recent acquisitions. Our cash flow generation remains robust and our access to capital provides us with a capacity capitalized on additional future growth opportunities. Now I will turn the call over to Dave, to review our financial performance in more detail.

Thank you, Damon, and good morning everyone. In the third quarter, we generated $0.45 of adjusted EPS compared to our August guidance range of $0.43 to $0.45 and $0.02 ahead of the First Call consensus estimate. Normalized FFO totaled $0.64 per share, at the high end of our August guidance range of $0.62 and $0.64 and AFFO totaled $0.63 per share, $0.02 ahead of the high-end of our August guidance range of $0.60 to $0.61. The most significant factors affecting third quarter results compared with the prior year quarter include the decline in inmate populations from the State of California, which were generally consistent with our projections and the previously announced termination of the contract with the Federal Bureau of Prisons at our Northeast Ohio Correctional Center effective May 31st. The decline in California populations contributed to a reduction in per share results by about $0.08 from the prior year quarter. As expected, the third quarter also reflects operating losses at the managed-only Winn Correctional Center, which we terminated effective September 30, 2015 and start-up expenses to prepare for the transition of inmate populations from the San Diego Correctional Facility to our newly constructed Otay Mesa Detention Center, which was completed last month. The negative financial impact of these events was mitigated by the first full quarter of operations at our South Texas Family Residential Center, where construction was completed during the second quarter of 2015, and the increase from the prior year quarter in average daily populations from the State of Arizona by about 1,000 inmates at our Red Rock facility for a new contract that commenced in 2014, as well as the short-term contract that began in the third quarter of 2015. Operating margins declined from the prior year primarily because of necessary staffing required during the decline in California inmate populations and due to the transitional expenses incurred at the Winn and Otay Mesa facilities. We expect operating margins to improve in the first quarter of 2016 following the completion of the transition of California populations out of the North Fork Correctional Facility during the fourth quarter of 2015 and following start-up expenses we expect to incur in the fourth quarter at our Trousdale Facility. While we are not yet prepared to provide 2016 guidance, which we always issue in connection with our fourth quarter earnings release, we currently expect sequential margins to further improve in Q2 2016 as Trousdale continues to ramp. Our balance sheet remains strong with leverage of 3.1 times and fixed charge coverage of 9.3 times. At September 30th, we had approximately 8 million of construction costs remaining on our Trousdale Turner Correctional Center which is still on track to be completed by year end, with an expected ramp of inmate populations from the State of Tennessee expected to commence in the first quarter of 2016. During the third quarter, we completed a number of financing transactions in order to create more flexibility to take advantage of growth opportunities. As I mentioned last quarter, on July 22nd, we closed on an amendment and extension to our bank credit facility, reducing the interest spread by 25 basis point for LIBOR and base rate loans, extending the maturity date from December 2017 to July 2020, incorporating a net debt concept into our financial covenant and increasingly the accordion feature from 100 million to 350 million. On September 25th, we increased our liquidity by issuing 250 million of seven year unsecured notes at an interest rate of 5% using the proceeds to pay down our revolving credit facility. We were very pleased with the execution of this transaction given the volatility that has existed in the bond markets for several months. At September 30th, we had $78 million of cash on hand and $491 million of availability on our $900 million bank credit facility. Subsequent to quarter end on October 6, we further increased our liquidity by exercising the accordion feature on our credit facility to obtain a $100 million term loan, using the proceeds to again pay down our revolving credit facility. The term loan carries a variable interest rate equal to the rate on our revolving credit facility, following two fiscal quarters during which it is 25 basis points higher than the revolver. I would once again like to extend my appreciation for the support of the banks and our bank group, further demonstrating the strong relationship and support we enjoy with these Blue Chip banks. Pro forma for the term loan, we had nearly 670 million of liquidity from cash on hand and availability on our bank credit facility with no debt maturities until 2020. These financing transactions have positioned us to take advantage of growth opportunities. During the third quarter on August 27th, we completed the acquisition of four residential re-entry facilities located in Pennsylvania for approximately 13.8 million, excluding transaction related expenses at a cap rate of around 10%. These properties are leased to Community Education Centers under triple net leases that expire in July 2019 and contain multiple five-year extension options. On October 28th, just last week, we closed on the acquisition of Avalon Correctional Services, along with a facility operated by Avalon and entered into an agreement to purchase an additional facility operated by Avalon. The aggregate purchase price of a 157.5 million excluding M&A expenses includes two earn outs aggregating 7.5 million that we currently expect to be achieved. The completed transactions were funded utilizing our revolving credit facility. Avalon and CCA have strong geographic and partner overlap with Avalon operating seven facilities in Texas, three facilities in Oklahoma and one facility in Wyoming and common partners including the Texas Department of Criminal Justice, the Oklahoma Department of Corrections and the Federal Bureau of Prisons. This acquisition is expected to generate approximately 35 million to 40 million of revenues on an annual basis contributing $0.06 to $0.08 in FFO per share. Occupancy of the Avalon portfolio was currently at about 75%, providing the opportunity to further enhance the revenues and profitability. Although the portfolio average per diem is lower than the average per diem in our owned and managed portfolio, margins are very similar. The acquisition of Avalon adds the ownership of 3,157 beds to our residential re-entry portfolio significantly strengthening our ability to further expand the real estate and services needed by our partners, while creating a platform for further organic and external growth in the re-entry market. Moving next to a discussion of our guidance, as indicated in the press release, adjusted EPS for the full year is now a range of $1.88 to $1.90 while Q4 adjusted EPS guidance is a range of $0.39 to $0.41. Full year normalized FFO per share guidance is a range of $2.64 to $2.66 and full-year AFFO per share guidance is $2.58 to $2.60. There are two noteworthy changes from our previous guidance. First, our guidance for the fourth quarter reflects a reduction of $0.02 per share for the interest associated with our new unsecured notes at a fixed interest rate of 5%, net of the pay down of our revolving credit facility at a variable interest rate of about 2%. As we mentioned on last quarter's call even though we were seeking to complete a refinancing transaction we had not included the dilutive impact in our earnings guidance because of the uncertainty of the precise timing, magnitude and interest rate associated with the transaction, all of which would depend on the condition of the debt capital markets. Second, our previous guidance contemplated a quicker transition of U.S. Marshals and ICE populations from the San Diego Correctional Center to our new Otay Mesa Detention Center resulting in a reduction from our previous guidance by $0.02 to $0.03 per share. Although, the transition of inmate populations to the new facility is now complete, we don't expect maximum utilization of the expanded capacity to occur until 2016. This delay also requires the continued use of court space at the old facility, resulting in unanticipated transportation and staffing expenses through most of the fourth quarter. As a reminder, the fourth quarter guidance includes $0.03 in start-up expenses at the Trousdale facility, which has always been in our guidance. With respect to California, we are estimating populations from the state to be between 5,300 and 5,500 by the end of the calendar year from about 5,600 at the end of October. On October 13th, we announced a new contract with the State of California for up to 6,562 beds, expiring June 30, 2019. Our contract provides the state with the flexibility to increase the utilization of our beds in case they have the need. The contract also includes renewal options to extend beyond the expiration on June 30, 2019 by mutual agreement. By including EBITDA guidance in our press release, we have provided you with our estimate of effective income tax rate as well as our estimate of total depreciation and interest expense for both the fourth quarter and full year. Depreciation has not changed meaningfully from our prior guidance and interest expense now reflects our refinancing transactions. We expect G&A expenses to be between 5% and 5.5% 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 the decline in California populations will create a cash flow drag in the short run, looking forward in 2016 we are comfortable with our current dividend level particularly given the strength of our balance sheet and as we have clear visibility on cash flow growth in 2016 coming from Trousdale, Otay Mesa, Avalon and a full year impact of the South Texas Family Residential Center and as we continue to see additional business opportunities into 2016. I'll now turn it back over to the operator for questions.

Thank you [Operator Instructions]. And your first question will come from the line of Tobey Sommer from SunTrust. Please go ahead.

Wanted to ask about California, how important will it be to get the forecast from the state as we look out into 2016 and try to see what their thoughts are about their inmate population forecast? Thanks.

Tobey, this is Damon. Thanks for your question. I think it's always been the case with California that we're looking as we think about the future when they released, either their budget proposals or population forecasts. So, as I think about 2016, I think the most notable milestone we've got in front of us is when Governor Brown releases his initial budget proposal in January, that should indicate how they think about not only the contract amount for 2017 fiscal year but also may give some indication on population. So I see that as a next big milestone and after that the budget typically gets revised in May as you know and then they may provide another five year forecast for population. So January will be the milestone and then later in spring as they go through the budget negotiations.

And could you walk me through how Trousdale next year is expected to contribute to EBITDA as it ramps up, when should it be at pretty solid full contribution as opposed to maybe being a near-term drag as it ramps?

Tobey, this is Dave, I'll handle that one. As we mentioned, we expect to ramp to begin in January first quarter and extend through the second quarter of 2016. It will probably start generating profits as soon as it hits around the 75%, 80% occupancy, but I'd expect the run rate to really be in place by the third quarter of 2016.

And my last question, I'll get back in the queue is, Damon, you talked about how some of the news flow has been a little bit negative in some instances. But if I ask you about how your customer relationships are with the folks with whom you're -- and for whom you're providing services, how would you characterize the tenure of those relationships today?

Great question Tobey and I would say very-very strong at the federal, state and local level. We've had great partnerships with the federal partners for many years as you know and relationships with the state level are very strong too. So hearing this stuff kind of talk about globally, the things that matter most to me is our employees, our shareholders, our communities we operate in, but also our partners. And our partners have been great to work with and have lot of confidence on operations and we don't take that for granted. We know we've got to operate our facilities at a very high quality and provide great value to our partners. So we're focused on doing that, I think we do a good job at it.

Your next question will come from Kevin McVeigh with Macquarie. Please go ahead.

Great, thanks. I wonder -- could you give us sense of the MTC contract in Ohio, how -- any sense without getting too specific, how large that could potentially be? And then how long they're locked into that and at some point I'd imagine you take that over from a managed perspective. Is that the best way to think about it?

Kevin, this is Damon. Thanks for your question.

Hi Damon Sure.

Good morning.

Good morning.

I think that facility is about the same size of Lake Erie, which is about 2,000 beds. I'm trying to recall, I don't know of top of my head how long MTC has been in the contract, but I want to say it's more than 5, maybe less than 10 years left in it. But as we understand it, the procurement will come out and we're looking purely at a transaction of selling to real estate by taking it off the Ohio State balance sheet and having a private sector own it and then MTC continue to operate it. Now down the road when MTC's contract comes close to expiration and they do an RFP and that could be an opportunity for the operations side, but I see first it's -- purely it's a real estate transaction and then ultimately potentially could be an operations opportunity.

And are there any other opportunities like that in the pike size Damon, without getting again too specific from a state perspective?

I don't see anything near term at the state level, but we are seeing some stuff starting to percolate at the local level. So could be an opportunity for us to either build or purchase or expand or renovate a local jail facility either operated by a city or a county government. So we are starting to see some meaningful interest at the local level, but don't see anything right now at the state level.

And then just thinking a little more, kind of longer-term with obviously the acquisitions residential re-entry, how do we balance that against California versus kind of managed-only beds? Is it just more diversification amongst the revenue stream, that try to take some of the noise in California out or just you know more along the lines of just more focus on owned and manage as opposed to manage only?

Yes, so a couple of answers there. Let me first talk about own and manage or manage only. So we do still the manage only opportunity or manage only operations today and what I try to express to the investment community is that, if we get nice increases in the per diem that can keep in line with the increases we're seeing on the expense side and produced a -- we think a repo margin, then we will be very motivated to keep those contracts on a long-term. Having said that, if we have some that are starting to get upside down like the one we had and we'll take the appropriate steps either to not try to renew the contract or procurement or express interest in state to take -- back out their operation or give to another private provider. To your first part of your question, a couple of answers there, one of which is diversification is a kind of key part of our strategy as we think about these acquisition opportunities. The second thing in the re-entry market, the timing just is really, really good. It's very fragmented as I said in my script. And this kind of national dialog about kind of smart on crime, looking at kind of resources that can be invested to help individuals be more successful once they get released from facilities. There is a lot of motivation at the state and the federal level to put more resources to these facilities. And so, that's also part of the strategy. The Avalon acquisition we think is very well timed because of now it's kind of national dialog about resources being deployed for these types of facilities, but also we see the market to Avalon is in Oklahoma, Texas and Wyoming being great markets. In fact Texas, which is the majority of the facilities that we're acquiring from Avalon, this is a market that's grown by 50% over the last 10 years in half way houses and community corrections beds. And so, having this portfolio where we could leverage these facilities and expand them to meet the increased needs in Texas and Oklahoma, Wyoming, the time is just really, really good. And again the numbers were there, they're making more resources available to expand the use of these beds in those locations.

And then my last question and I'll get back in the queue. In terms of ICE, are we seeing share of wallet continue to shift more towards the private operators or just any thoughts on how that's been trending?

I didn't hear the first part of your question there, Kevin.

On ICE facilities Damon, are we seen the share of wallet continue to trend more towards the private operators as opposed to counties or what have your or is that kind of been running at the same level?

I'd say -- this is Dave, I'd say.

Hi Dave.

I would say it's probably primarily because of some standards that local jails can't meet in terms of conditions of detention. So we're seeing a little bit of consolidation out jails into the private sector than we've seen in the past.

[Operator Instructions] Our next question will come from the line of Michael Curtis with Cannacord Genuity. Please go ahead.

Just going back to the Ohio RFP, curious about the structure there since you guys would potentially own the facility and they would manage it. Just given that MTC has kind of had some struggles recently, does that pose any risk kind of to -- I don't know if it's operations or just upticks at all?

This is Damon, appreciate your question Michael. I don't think so. MTC is got a great track record in Ohio. They operated our Lake Erie facility for about 13 years before we were successful on that transaction and taken over operation. And so I don't see any change there. I think if that was -- went down the path and you're try to kind of determine what kind of worst case scenario is if there was a need to change operators, of course we got that expertise and we could do that at the appropriate time. But as I sit here today and think about the reputation and operations MTC has got in Ohio, I think this contract will come to term and again the state will take appropriate steps to either renew the contract or maybe do an RFP to let other operators to perform that service.

So that's more of a local issue there, in terms of MTC. And then on -- so moving to California, I appreciate all the color on the year end numbers and then when the next kind of pivot points are, is there kind of floor to where these things can go, especially considering the renewals that you recently did? Is there a floor kind of how low the prisoners can go?

I think the indication that the state did in the summer of this year was 5,000 was a number that they were looking towards as they go into the following fiscal year, which would be July 1st of next year. And so that's the last public statement from the State of California. So I think we'll get additional clarity as we go into January with the new budget proposal.

And then on the, the BOP with the -- obviously the 6,000 prisoners are being released, and that's pretty well understood at this point. I've read a couple of things on the potential of this to reach out to more offenders and for the potential more releases. I'm kind of wondering what the makeup of the prisoner releases would be. Would it be kind of similar to what we've seen in the 6,000 where a third is kind of more of a immigrant population or would it be different at all?

It's hard to say Michael. There're some things being talked about, but it'd be really hard to say what the number would be and with that what percentage would be, determine aliens, so that'd be pure speculation on my part. The Bureau to their credit, they sit down with us at CCAG or MTC twice a year to give to us a overview of the next 12 months to 18 months from a budget perspective talk generally about some operational issues that are mutual interest and also population forecast. And they have and as you know, they haven't projected a forecast past 2016. So I think they're grapping a little bit of, one, what is being proposed or suggested relative to what the base looks like going forward and also is there going to be increase or decrease at that point. So 2016, I think with the 6,000 inmates that are being released could be a period of time to where that they see what their forecast looks like, the dust is kind of settled with these releases and then they can get a better sense of what the trends look like, especial in the front end with prosecutions from U.S. Attorney's offices around the country, and also additional assets that are being deployed, not only the Attorneys but also with the judicial program. So, as a long way of saying, we don't really have any clarity, just the Bureau I don't think has a lot of clarity right now past 2016. But it could be the case, once we get into next year, and you get a sense of what all these trends look like then you could get some little more clarity either short-term or long-term on their population forecasts.

Your next question will come from Andrew Berg with Post Advisory Group. Please go ahead.

A couple questions, first, with respect to the Arizona opportunity, you said you're the only respondent to that. If you were to win that, do you have the capacity right now to take that on or is that going to result in new spend to build capacity?

Yes, good question. And the answer is, both. We do have some capacity today at our Red Rock facility which actually we're holding some inmates in there today because of the displaced populations from the Kingman Facility. But we would have to be some expansion there too, to get to the full 1,000. But just a reminder, that facility is about 1,500 benches or 1,500 beds, we'd have to do about a 400 bed expansion to go up to total of 2,000 beds at that facility.

And you have no other cost to have those beds?

I don't think we've said. Yes, it's probably about $15 million, $20 million.

And then with respect to your capitalization, if we take everything into account for what you've done subsequent to quarter end, is the way to think about this that your secured debt went up by a 258 million, the 158 million you would have drawn for Avalon, plus the 100 million of the term loan?

That's right.

And accordingly your revolver availability, I think you said at the end of the quarter was 490 million that would go up by a net 58 -- the 158 million drawn less the 100 million you generated?

That's correct, you got it.

Okay. Just wanted to make sure I got that right. And then lastly with respect to the headwinds you saw, I think and you've talked about both the coming up in the fourth quarter, the current quarter and what you saw in the third quarter from ramping up facilities, can you put a dollar amount on that?

I'm sorry, for dollar amount of what?

The expense headwind you guys experienced from ramp up either with San Diego, I mean, I think you said you are already starting to have some expense related to Trousdale?

Yes, that was about for the Otay Mesa transition, it was about $2 million of unanticipated in Q3, it's a similar number in Q4. So it's a $0.02 to $0.03, so pretty similar number in both Q3 and Q4. Trousdale is a $0.03 which is somewhere around 3 million plus of start-up cost in Q4.

And there are no further questions at this time. Please continue.

All right, well, thank you so much for calling in today. I appreciate the opportunity to give you an update on CCA and the forecast for the rest of the year. We look forward to giving you an update in 2016, in our February earnings call. Thank you again for participating.

Ladies and gentlemen, this does conclude the conference call for today. Thank for your participation, you may now disconnect your lines.