CoreCivic, Inc. (CXW) Q1 2016 Earnings Report, Transcript and Summary

Good morning. My name is Tony 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 2016 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.

Thanks Tony. 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 first quarter 2016 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 also 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 our Investors page at our website at www.cca.com. With that, it's my pleasure to turn the call over to Damon Hininger.

Thank you, Cameron and good morning, to everyone joining our call today. Also joining us today is our VP of Brian Hammonds. CCA is the nation’s leading provider of correctional, detention and community correction real estate and services. We provide federal state and local governments flexible and efficient solutions to address specific needs unique to their correctional systems. We see common theme facing correctional system that include overcrowding due to population growth or lack of funding for new capacity. The need for significant infrastructure investment resulting from government owned facilities reaching the end of their lifecycle and the need to expand community based reentry services offered to offenders reaching the end of their census and returning to their communities. We believe we’re well positioned to be the ideal partner for government that are actively working to address these issues. CCA’s existing facility portfolio is young and operationally efficient allowing our government partners the opportunity to lower their operating expenses when compared to relatively older and less efficient government owned facilities. Partnering with us allows us the opportunity to help them significant upfront capital expenditures required to develop a new facility. We currently have a number of facilities that have either all or some available capacity to meet a partner’s immediate need but we also have industry leading experience in the development of a filled options should a government partner have a specific need. In a very short period of time we’ve also significantly expanded our capabilities to provide community based corrections and reentry services per recent acquisitions which complement the reentry services provided in our correctional facility. CCA is now the second largest owner and operator of residential reentry service in the United States and we’re strategically pursuing additional investments to further grow in this area as we continue to hear from our partners that this is a area of focus for them. Submission critical nature of our facilities coupled with strong credit quality of our government customers provide a foundation for stable reoccurring cash flows and our dividend payout policy are returning to approximately 80% of our adjusted funds from operations to shareholders provides an interactive yield which as of today is approximately 7%. CCA strategy for cash flow and FFO per share growth is focused on three specific areas. Owning and operating correctional detention service, the traditional model that has driven the majority of CCA’s growth through the years. Real estate only solutions where CCA provides mission critical role state assets leased by government jurisdictions and acquiring residential reentry provider either owned and managed or owned and leased to a third-party operators. I’ll begin my discussion with the later as this is the area in which we had the most recent activity. On April 8, we closed on the $35 million acquisition of CMI or correctional Management Incorporated. A residential reentry provider in Colorado that operates seven facilities totaling 605 beds, as was also the case where the acquisition of Avlon in October 2015 and Texas and Oklahoma, CCA had significant customer overlap with CMI as we already house nearly 3,000 inmates for the Colorado partner correction at three company owned facility. We have worked with the state of Colorado for many years and we are excited to be able to provide the additional capabilities to CMI to complement our existing real estate and service offering. The state of Colorado current utilizes approximately 4,000 residential reentry beds and CMI is one of the state’s leading providers with recent occupancy rates and excessive 90% among seven facilities. The closing of this acquisition brings our total investment in the residential reentry market in the last year to over $200 million. CCA now owns and controls 24 residential facilities in six states representing nearly 5,000 beds which we believe signifies our commitment to provide a highest quality communities corrections and residential reentry services to our government partners by also contributed to our growth and diversifying our cash flows. We continue to pursue additional acquisition opportunities in this market while also competing for new contracts that are existing residential reentry facilities with available bed capacity. I cannot provide specific guidance on the timing, size or potential earnings contribution from future acquisitions or contract win. However, we see typical acquisition targets in this market evaluation between $5 million to $50 million yielding unlevered returns between 8% and 15%. The primary factors influencing evaluations are the overall size and scope of the potential target, whether there is an operating component or are we just acquiring the real estate and leasing the property to a third party provider and contract quality with government partners or quality and length of leased terms in a real estate only opportunity. We continue to identify and pursue acquisition targets in the residential reentry market that would be complementary to CCA’s existing reentry platform and are accretive to our earnings. But it is also important for our investors to know that with this new vigorous behavior on our part in pursuing acquisitions, we will always be disciplined and remain within our parameters on evaluation and with that we have not participated in any auctions for these recently acquired company. Our view on auctions is that they create a strain on resources and a distraction to the management team with our otherwise robust pipeline. Staying with initiatives to deploy capital for growth, we continue to pursue opportunities to construct own and operate facilities to address the capacity needs of our government partners. We are currently in the process of expanding our Red Rock Correctional Center in Arizona to 2024 beds. A 400 bed expansion that scheduled for completion in the fourth quarter of 2016, although we expect to begin receiving inmates under the new contract during the third quarter of 2016. CCA was successful bidder for the new 1,000 bed contracts awarded by the state of Arizona in December of 2015 and the Red Rock facility is being expanded to accommodate this new contract along with the existing 1,000 bed contract that the state awarded to CCA in 2012. Upon completion of this $35 million to $38 million expansion CCA will be under contract for a total of 2,000 beds within [oxi] guarantee of 90%. Additionally, we are in the process of ramping up operations at our Trousdale Correctional Center, a 2,552 bed facility in Tennessee which opened in January. The ramp up of inmate population is scheduled to be completed around the end of the second quarter and today we are housing over 1,700 offenders at the facility. While these two contract awards are examples of growth opportunities coming from our traditional model of owning and operating correctional or detention facilities in many situations we are seeing an increased interest in partnering with CCA for real estate assets for which the government entity would lease. Many government owned facilities from the federal level down to local municipalities are reaching the end of their life cycle and are in need of replacement. Additionally, due to budget constraint throughout and following the economic recession even more government facilities have had a significant backlog of deferred maintenance that requires significant capital investment. Not only do these facilities require significant maintenance capital expenditures, but in most cases there are significant operational inefficiency inherent to the design of the facility which results in higher operational cost. We have spoken about aging and inefficient facilities for many years but recently many states have acknowledged this step for the need for additional infrastructure investment. For example, California identified over $1 billion in deferred maintenance required for their facilities in their updated blue print which was issued in January. The legislature in the state of New Mexico introduced the bill in February requesting $200 million for repairs and rehabilitation of state owned prison which ultimately didn't pass. In March the governor of Alabama introduced legislation to approve $800 million of the construction of four new prisons in order to replace 14 outdated facilities. Large infrastructure investments and facility design expertise are required to meet these types of needs for mission critical facilities. CCA provide the compelling and flexible value proposition to government faced in these challenges and no other entity public or private has designed in-built more [indiscernible] facilities over the last decades than CCA whether it's a full service solution or a designed build and least opportunity we are the ideal partner for governments with our expertise and strong balance sheet. Finally, we continue to pursue opportunities to utilize the facilities with the available capacity and our portfolio. Our history has shown there is a competitive advantage to having a certain amount of available beds in order to quickly respond to customer need our current available capacity of just over 9,000 beds is higher than we ideally carry. However, we have seen increased interest in a number of these facilities some of which you have seen is playing out in the somewhat public manner. Several states have expressed their need for additional bed capacity to either elevate overcrowding in their system or replace unacquainted government owned facilities that for safety concerns and budgetary pressures. Our available beds will offer appropriate cost effective solutions should these states choose to pursue the opportunity. These opportunities are real estate only where the states department of corrections would assume operations. Additionally, we continue to have a number of private discussions with potential partners that are looking for additional bed capacity both in state and out of state. But we have yet to enter into contract agreements with these potential customers and no incremental contribution is contemplated in our forward looking financial guidance they represent opportunity to increase our cash flows without requiring meaningful capital investment. Now, before I turn the call over to Dave, I would like to provide a brief update on developments related to the operations at our South Texas family residential center. As you will recall the government and attorney representing a class of minors in ice custody including minors at our facility in South Texas have been engaged in litigation regarding the interpretation of the 1997 settlement agreement. That litigation which concerns the care of [I-cell] minors is now in the ninth circuit of court of appeals. Both parties have completed briefings in this matter and oral arguments are scheduled for June 7, 2016. However, the timing of the court's decisions on this matter is currently unknown. Additionally earlier this year the state of Texas completed the rules obligation process with respect to licensing of family residential centers like our South Texas family residential center. The standards established by the state of Texas are in addition to federal family residential standard that already apply at our facility. We submitted our license application to the state during the first quarter of 2016 and state is responsible for the license -- process conducted in their review. As part of that review process, we hosted a public hearing regarding our facilities operations and mission last week. We have been responsive to all inquiries from the state and stand ready provide additional information as we await completion of the license review process. And like last fall the state has again encountered legal challenges this week to their authority to license family residential centers with the state receiving a 14 day restraining order yesterday which prevents any issuance of the license during that period of time. Finally, we believe successful license to the facilities fully consistent with this mission for this South Texas facility and will enhance the facility ability to address the diverse needs of migrates apprehended at the southern border. Now I would like to turn the call over to David to cover our first quarter financial performance and review the primary drivers of our updated financial guidance for 2016.

Thank you, Damon and good morning everyone. In the first quarter we generated $0.40 of adjusted EPS compared to our February guidance range of $0.37 to $0.39 and $0.02 ahead of the First Call Consensus estimates. Normalized FFO totaled $0.60 per share, exceeding our February guidance range of $0.57 to $0.59 and AFFO totaled $0.61 per share ahead of our February guidance range of $0.56 to $0.58. The adjusted or normalized results exclude $1.1 million of M&A expenses primarily incurred during the first quarter of 2016 and $1 million of asset impairment during the first quarter of 2015. Per share results exceeded expectations largely due to stronger revenue driven by higher than anticipated inmate populations across numerous facilities. Federal revenue was particularly strong in the South West and we began to see increase in federal population in our newly constructed Otay Mesa detention center in California which were higher than our forecast. However, the first quarter was constrained by an operating loss of $0.02 per share at our new trial correctional center which began receiving inmates from the state of Tennessee in January. The operating loss of $0.02 of Trousdale comparing with an operating loss of $0.01 per share included in our guidance for the first quarter and $0.01 more than we expected due to higher start up of expense which are very difficult to predict for a ramp up of a facility of this size. Revenues at this facility during the quarter were in line with our expectations. Although EPS and FFO were a penny above the high end of our guidance AFFO was $0.03 above the high end of our guidance because maintenance capital expenditures on real estate were $1.6 million lower than expected. Maintenance capital expenditures can fluctuate from quarter-to-quarter although they are typically lowest than the first quarter. We have maintained our annual guidance for maintenance CapEx on real estate so we expect to incur higher CapEx levels in future quarters relative to the first quarter. The most significant factors affecting first quarter results compared with the prior year quarter include the aforementioned startup expense at the Trousdale facility the decline in inmate populations from the state of California refinancing short term debt with long term debt in the third quarter 2015 and the previously announced termination of the contract with the federal bureau prison at our North East Ohio correctional center effective May 31, 2015. The decline in California population which were consistent with our projection had the largest impact of these items and contributed to the reduction per share result of about $0.08 from the prior year quarter. The negative financial impact of these events was partially offset by a full quarter operations at our South Texas family residential center which was still ramping up during the first quarter in the prior year increased population resulting from the activation of our new Otay Mesa detention center in the fourth quarter 2015 and the acquisition of Avlon correctional services which was also completed in the fourth quarter 2015. Our balance sheet remains strong with leverage of 3.6 times and fixed charge coverage of 6.2 times. At March 31 we had $55 million of cash on hand and $485 million of availability on our $900 million revolving bank credit facility and no debt maturities until 2020. During the first quarter we put in place and at the market equity distribution program which is the popular vehicle used by REIT and other companies to efficient raise equity capital from time to time. We believe the program commonly known as an ATM program is a perfect tool to match fund proceeds with M&A activities and other capital needs in order to manage our capital allocations strategy. We target a leverage ratio between 3 times and 4 times and have operated within this range or lower over the past decade, although we have modest capital expenditure commitment we continue to pursue M&A activity and have an active pipeline as Damon mentioned in his remarks. As our leverage increases to fund these opportunities the ATM program is available for managing our targeted leverage ratios. For the remainder of 2016 the only substantive capital commitment we have is for the expansion of our 1596 bed Red Rock correctional center pursuant to a new contract that was awarded in late December 2015 from the state of Arizona for an additional 1000 inmate. As we currently have approximately 1000 inmate for the facility pursuant to a pre-existing contract with Arizona we are expanding the design capacity of the facility to 2024 beds and an estimated total cost of $35 million to $38 million including additional space for inmate reentry programming and support services. We have invested $8.8 million in this expansion through the end of the first quarter. Construction is expected to be completed late in the fourth quarter of 2016 although we expect to begin receiving inmate under the new contract during the third quarter of 2016. Moving next to a further discussion of our guidance, as indicated in the press release adjusted EPS guidance for the full year is in range of $1.81 to $1.87 up from $1.76 to $1.84 from our February guidance while Q2 adjusted EPS guidance is in range of $0.44 to $0.46. Full year normalized FFO per share guidance is in range of $2.60 to $2.66 up from $2.54 to $2.62 from our February guidance and full year AFFO per share guidance is $2.53 to $2.59 up from $2.47 to $2.55 from our February guidance. Our increase in guidance reflects the Q1 be carried through to the full year and the accretive impact from the acquisition of correctional management completed at the beginning of the second quarter of 2016. Our full year guidance reflects the operating loss I mentioned at the Trousdale facility during the first quarter of $0.02 per share turning profitable near the end of the second quarter of 2016 and achieving our targeted return during the second half of the year. Our guidance also includes startup expenses incurred during the second half of penny to two penny per share for the ramp of the new contract in our Red Rock facility. Therefore, as I mentioned last quarter our earnings are still back end loaded. We are projecting continued stable inmate population from the state of California averaging a little under 5,000 inmates for the reminder of the year. This projection is consistent with the states draft budget and updated report of inmate population projection released by the state in January. Average daily inmate populations from California were 5100 during the first quarter of 2016 which as I mentioned was consistent with our forecast and the last draft budget release by California. As a reminder we have a contract with the state of California for up to 6562 inmate expiring June 30, 2019 should they have the need for additional inmate over that time period. The contract also includes renewal options to extend beyond the expiration by mutual agreement. Our guidance doesn't include any substantial new contract awards or contract losses. Our guidance also doesn't include any impacts from regulations proposed by the department of labor to increase the total compensation required to exempt employees from qualifying for overtime because the final regulations as well as the effective dates are unknown. While the proposed regulations would result in an increase in the number of employees eligible for overtime pay our strategy is to address the new rules will be dependent on the final regulation. Finally, as we announced last month on April 8 we close on the acquisition of 100% of the stock of CMI along with the real estate use and the operation of CMI business for a total purchase price of $35 million funded with our revolving credit facility. CMI a privately held community corrections company that operate seven community corrections facilities including six owned and one lease with approximately 600 beds in Colorado specializes in community correction services drug and alcohol treatment services, and residential reentry services. Our guidance includes $0.02 of FFO per share for our period of ownership in 2016. The acquisition of CMI brings our reentry portfolio to 24 facilities with a design capacity 4970 beds located in the state, although we continue to pursue a number of attractive investment opportunities particularly in the reentry space our guidance doesn't include any new M&A activity beyond CMI. The magnitude and timing of our M&A activities is difficult to predict and therefore we will update our guidance on a quarterly basis if and when we successfully complete the transaction. Once again we have provided EBITDA guidance in our press release which enables you to calculate our estimated effective income tax rate of approximately 5% and provides you with an estimate of total depreciation and interest expense for both the second quarter and full year. We expect G&A expenses to be around 5.5% of total revenue. I will now turn the call back to Damon for closing comments before opening the lines for questions.

Thanks so much David. So before, I turn the call over to the operator for the Q&A session I would like to reiterate that we believe we have ample avenues for growth through the impact from recently completely acquisitions targeting additional acquisitions of residential reentry facilities ramping up new contracts and Tennessee and Arizona utilizing available capacity and competing for new development projects. We believe our strong balance sheet and operating performance will maintain our access to capital allowing us to fund the accretive growth opportunity as we have discussed. We expect our earnings will trend positively throughout the year as evidenced by our updated 2016 guidance. Additionally, we remain committed to our dividend payout policy and will increase future dividends as your earnings and cash flow increase. Finally, last week was a national recognition of the work that reentry professionals do both in public and private facilities and this week actually it's correctional employees week here in the United States. And with that I just want to say how much I appreciate the CCA management team administrators and wardens and our entire CCA team here national and nationwide. I am internally grateful of the significant work you do for our company. Thank you again for calling today's conference and let me know let me now turn the call over to our operator for the question and answer session.

Okay. Thank you. [Operator Instructions] We will take our first question from Tobey Sommer with SunTrust. Please go ahead your line is open.

Thanks. I am curious about the real estate transaction opportunities that you are looking at and those investment what could those mean to your historically targeted returns in EBITDA margins and I know you don't have a lot of them kind of under your belt yet, but how do you think about that over the longer term? Thanks.

Tobey good morning this is Damon and thanks for your question. And answer is they really will depend on the location and the jurisdiction relative to the return and I think the same discipline we are showing on what I say on a managed solution. So we have got a jurisdiction that has a very specific need in a locale where there maybe not a necessarily obvious user if for whatever reason they have vacated the premise then we would think about maybe a higher return in with that maybe lease term that are loner in length and maybe add a little more rate relative to lease rate that provide a lot more return to us because of higher risk profile. So really it's determined by the jurisdiction. But having all things equal if it's real estate only solution versus the own and operative solutions that we do already the risk obviously is going to be a little lower with the real estate only just because we don't have the operational risk and a legal risk and somebody other kind of areas of the expense that we would have the volatility that we typically express within our own managed statement. And so with that we may require maybe a little lower return.

And I would add EBITDA margins there would go up because you don't have the level of operating expenses we have in the core business. Q - Tobey Sommer Okay. Thank you this is helpful and how would you characterize the evolution of your conversations because going from sort of introducing the concept and what in what you may be able to offer customers in is there a difference in the cadence of those conversations when I think about local state and maybe even federal conversations you are having? Thanks.

Yes, Tobey this is Damon again. I would say yes, I would say the cadence is picked up I would say primarily at the local level where you have got a lot of jurisdictions for the reasons we talked in the past. Maybe the deferred maintenance has got a significant unfunded pension liability where they clearly have a need and also they see an opportunity where not only they get this capacity but maybe consolidate their system because they maybe built a facility or two or three over the last 30 to 50 years. So I would say the interest in the solutions that we will put in front of them I would say that interest is growing and we are getting more interest from more jurisdiction also, so I would say we have got say about a handful of jurisdiction that are very intrigue by what we brought to the table and we are hopeful we can give one of these cross fish line sometimes soon.

Thanks. In I want to ask one more question about California I will get back in the queue. You are looking for I guess pretty stable volumes from California for the balance of the year how should we think about the states the capacity that they have got coming online and what if anything it means or the kind of business that you are doing with them which maybe a little bit apple and oranges. Thank you.

Yes, Tobey so couple of answers there the first part is yes, for the rest of the year we feel like we are at the position we are kind of stabilized our populations on the out of date program. So they have said California and they have indicated such in their proposed budget January which we expect it may revise coming out here next couple of weeks that they need about 4700 to 5000 beds out of state for the coming fiscal year. So all indications again we have reached I think a good level of kind of stability within our system based on their feedback but also what they proposing to fund next fiscal year. And as we look out in that couple of years based on their projections they continue to say that they are going to really need I would say program long term I say long term being next three to five years because they are already showing forecasted increase in their population within the state even though they do have some capacity as you noted coming online in today date so we feel like we reached a good point with them on [indiscernible] program I have got your clarity for the foreseeable future and what the needs are and also city which is the solution in state continues to be a kind of viable solution for them both short term and long term.

And further the classification of inmates that they need are the types of inmate that we house for them so that's favorable to CCA as well.

Coming online or not sort of equivalent bed?

Correct. They are the lower level.

Thank you very much.

Thanks Tobey.

Thank you and [Operator Instructions] meanwhile we will move to Michael Curtis with Canaccord Genuity. Please go ahead. Your line is open.

Hey guys good morning and thanks for taking my questions here also nice quarter I guess just first off you mentioned in your prepared remarks little bit about some of your ideal facilities and pursuing some contracts with those headline actually I think this morning about a meeting with the Oklahoma corrections board to potentially replace some of their housing with actually the facility that was vacated by I believe out of state California bed so I was wondering if you could just provide little bit more color on that what’s happening there? Thanks.

Michael thank you this is Damon I appreciate your question. Oklahoma has one of those states that you seen in the headline this spring where they are considering potential lease of facilities by the private sector CCA and with that petition they could close on the order and facilities so nothing to report today but they already said that they have expressed interest on our potential solution that we provide to them in state.

Okay, great, thanks. And then I guess my only other question here and this is a bit more speculated but so what’s going in Alabama with the $800 million budget I guess it's kind of seen lot of a approvals at this point is there any space for the private sector to play in that? Thanks.

Absolutely and we think that in Alabama and some of the other states I mentioned as they think about opportunities to close and consolidate their system it could be the solution where the private sector provide whole solution or it could be a public private partnership or maybe part of it publicly funded in some of its privately operated or privately funded I should say. So we think yes, Alabama like other states that are considering these types of solution and it could be a kind of all the above type of approach providing that solution.

Great, thanks again. That's all from me and nice quarter.

Thanks Michael.

Thank you. Next we will move to Kevin McVeigh with Macquarie. Please go ahead your line is open.

Okay let me congratulations well. Around the dividend growth payment should we think about that in terms of consistent with the rate of growth EBITDA or is only way to just try to frame with what that potential opportunity is?

Yes, what we have said Kevin last couple of years we [indiscernible] AFFO so as we think about kind of what that looks like now but also as we look at forecast over the next day and six to 12 months, and play part as you think about the dividend and what adjustments we want to make quarter-for-quarter.

Got it and then nice to see your federal partners kind of stepping up a little bit any thoughts on that piece over the balance of the year and then just as each respective quality seems like they are getting there kind of respected nominees and placed, anything to think about Damon in terms of that over the next couple 3, 6 months?

Yes, on the federal side I will just say we don't see any kind of immediate meaningful new opportunities and I think it for obvious reasons we have got a national election going on right now. We have got two of our three federal partners at this level have vacancies so they are led with interim directors and so I think as we go for the end of this year early next year probably not going to see a lot of activity just because we will have a new president inaugurated in January and he or she then will go out about the business and go ahead and start filling some of the position. So I think as we think about our partners it will be status quo for the rest of 2016.

Got it and then just one last one on pricing and attrition as it has been in terms of pricing discussion some of your partners and anything to call out around turn over?

So on the pricing side I would say incrementally becoming little better and better and I look at the last kind of 36 months of the nice kind of modest trend of improved pricing. We are still got a lot of legislature in session around the country, but our state folks as they kind of continue kind of keep yea in ground and need legislature do feel that funding is improving overall there is the couple thoughts so oil and gas to impact some revenues for some states overall feel like state revenues are improving and in term with that has quite a little bit of relief for us on a pricing and also gaining our annual escalators. So it is improved again it's not dramatic year-over-year but it is still continues on a trend of improved models year-over-year.

And turn over. I would say we have seen pockets where staffing compensation levels have been challenging would not characterize that as across the board. So if you look at certain markets we have certain challenges we are here to make adjustments and look at that closer and make just make adjustments so but we will continue to monitor that as the overall economy continues to improve. And make adjustments accordingly going forward as well.

Okay. Awesome. Thanks guys.

Thanks Kevin.

Thank you and [Operator Instructions] next we will move to Andrew Berg with Post Advisory Group. Please go ahead. Your line is open.

Hey guys I may have missed this can you just go back over how much the start up cost were impacted you in the quarter and what the anticipated impact would be 2Q I think you guys have talked previously about most impact being first half of the year.

Yes, I will cover that. This is David. We had two stance of startup cost Trousdale. It's hard and then we have got penny to two pennies of start-up cost for the Red Rock facility we don't have a definite ramp schedule yet. I negotiated with Arizona we are still working through that with them, but we have estimated a penny to two pennies of start-up there. Come back to Trousdale it's more difficult to estimate what start-up is at because it does turn profitable so at what point do you say it's start-up ends and your operational we are not projecting the targeted returns on that facility by the modeled we did those pricing for that facility until the second half of the year but certainly the short answer to your question is $0.02 in Q1 for Trousdale a penny to two pennies in Q3, Q4 for Red Rock and then Trousdale will not be optimized I guess the way I would characterize that until the second half of the year.

Okay. So first quarter $0.03 it's like $20.5 million on the dollar basis versus EPS business.

Just $0.02 for Trousdale because the Red Rock hasn't started yet.

Okay. Got it. And then, I know that it's a little bit speculative obviously you start rolling a bit more into your election season any thoughts about or any concerns about what we may start hearing in terms of changes in the industry notwithstanding the fact I think you guys make a pretty compelling case for why the industry should continue to be there we know that [indiscernible] have comments maybe to the contrary and I guess more importantly any thoughts of what you guys maybe proactively trying to counteract some of the Red Rock, Washington?

Yes, this is Damon and let me answer that question. I appreciate the question itself. I think about the in terms of issue and this question that we have got in the past I think it's really important to kind of look back over the last 30 years, we have had tremendous success at the state and federal level with either state level governors being a democrat or being a republican or president being democrat or republican we have been able to have really good operations perform very, very well and provide great value to our partners regardless of who is in White House or how is in the governmental residence and irrespective state. And that's our focus just to make sure that we continue to have great job everyday have high quality operations and then provide great value back to the tax payers in that respect to jurisdiction. And at the end of the day again we are 30 years again regardless of who we elected in office once again in office and they do appreciate the value and the track record and format we have had great success on renewing our contracts and that's the other point to is that over the last six- seven years again with changes and leadership both at state and federal level we have had renewal rates on our contracts north of 90%. So there is a lot of fun on cable TV that have a lot of views on the election season that we find ourselves in I think that best thing to kind of look at is to think about this business in our industry as look at our last 30 years I think it's a very good indicator on how we have been successful regardless of changes in leadership at the state or federal level.

One additional point just to be clear under long standing policy, we don't lobby for any legislation that would determine the basis or duration of an individual in parturition or detention.

Yes, and I think you guys have been pretty clear in past and I agree I think that the service provider is needed it's given the physical plan of the lot of the federal facilities it makes perfect sense. But I just was -- anything you do law being another one as to maybe trying to offset some of the potential Red Rock comes out I think the need for the business is clearly there. It's more than Red Rock that David was addressing?

Yes, I will say that we have done very effective but to your point is we are constantly on a daily basis educating stakeholders at the local state and federal level and that includes me going to DC or meet with folks within respected state to really truly help them understand exactly what we do, the value we provide and the quality of our operation. That's the concept regardless of there is election going on or not that's something in our DNA that we can do everyday just to make sure because there is a lot of turnover. I mean, we are all focused on the national election but I think in the last four five years I have seen over a 1000 new legislatures within respective state capitals around the country. And so that's just the constant process where you making sure that when someone is new to office and we have got an operation within respective district or state that they are aware of who we are what we do, quality of operation and with that making sure before they have a view or comment or have an opinion -- understand exactly what we do but also talk to our partners. Our partners are director of the corrections the people that we work with day in and day out if we are not doing a good job in their eyes we wouldn't be renewing contracts 90% and they would also have serious concerns about moving forward with [indiscernible] so that's a constant process and that just happens during election season.

Got you. Okay thank you.

Thank you. I appreciate your question.

Thank you and it appears we have no further questions at this time.

Alright well thank you very much we really appreciate your participating in our call today and we look forward to reporting our progress in the August earnings call. Thanks again. Have a great day.

Thank you. This does conclude today's conference call. You may disconnect and have a great day.