CoreCivic, Inc. (CXW) Q3 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the CoreCivic's Third Quarter 2018 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] At this time I would like to turn the conference over to Mr. Cameron Hopewell, Managing Director of Investor Relation. Please go ahead sir.

Thank you Ryan. 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, all remarks, including our answers to your questions, 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 2018 earnings release and in our Securities and Exchange Commission filings, including forms 10-K, 10-Q and 8-K reports. You are also cautioned that any forward-looking statements reflect management's current view only and that the company undertakes no obligation to revise or update such statements in the future. On this call, we will also discuss certain 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 that we have on our Investors page at www.corecivic.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 and thank you to everyone for joining our third quarter 2018 conference call today. We're also joined here in the room by our Vice President, Finance, Bryan Hammonds. CoreCivic is a diversified real-estate investment trust specialized in delivering government real-estate solutions to serve the public good. We are the country's largest private owner of government lease real-estate assets with a 104 facilities totally in over 17 million square feet of real-estate in a 35-year history of delivering a broad range of solutions to help solve tough government challenges in flexible cost-effective ways. Our assets generate a consistent cash flow stream underwritten by investment grade government tenants. We have three complementary business segments each of which is anchored in providing specialized real-estate to government tenants. Our safety segment focuses on corrections and detention facility ownership and management and includes 51 correctional and detention facilities with a design capacity of nearly 73,000 beds. Our community segment is a growing network of residential reentry centers that helps address America's recidivism crisis and includes 26 residential reentry facilities with a design capacity of 5,214 beds. Finally our property segment is a quickly growing portfolio of mission critical government leased properties that as of the end of the third quarter includes 27 properties representing nearly 2.3 million square feet of real-estate. Across all of our segments we have active agreements with over a 125 government agencies that have a variety of core missions. This provides meaningful diversification not only in our real-estate assets but also in our customer base. Each of our business segments leverage core competencies we have developed in delivering real-estate solutions and each has a significant runway for continued growth. As we continue to execute on our strategies for growth in each business segment, we expect a company to benefit from an increasingly diverse stream of growing cash flows on a per share basis. To briefly summarize our third quarter financial performance, total revenue of nearly $463 million increased 4.5% from the prior year quarter. While it is important to highlight that each business segment experienced year-over-year revenue growth; most notable was the growth of our properties and community segments. CoreCivic properties revenue of $15.3 million represented a 50% increase year-over-year and course of a community revenue of $25.1 million was up 31% from the prior-year quarter. Our normalized FFO $0.58 per share during the quarter fell within the range of our guidance and represented a 3.6% increase in first-year results versus the prior year. Our adjusted EBITDA in the third quarter of $99.7 million also fell within the middle range of our guidance for the quarter and represented a 6.8% increase year-over-year. Our third quarter growth was driven by a combination of organic growth in CoreCivic safety due to seven new contract wins with state and federal partners representing approximately 4,500 beds and accretive M&A transactions to expand our community and property portfolios. These positive developments more than overcame a decline in average daily California bay populations increase interest expenses in a rising rate environment; incremental debt from a recent M&A transactions; and incremental salary and benefits expenses. Those personnel expenses were chiefly at our Tallahatchie County Correctional Facility and La Palma Correctional Center where we anticipate new contracts and projected increases in capacity utilization under existing contracts. Dave will describe these in more detail following the conclusion of my remarks. Also included in yesterday's earnings release was our updated full-year 2018 financial guidance. We currently expect to generate normalized FFO per share of 229 to 231. Our updated guidance represents a modest adjustment from our previous guidance of normalized FFO per share of 229 to 233 due primarily to our election to incur higher personnel expenses in the fourth quarter as certain facilities in anticipation of new contract awards and higher utilization of certain existing contracts that we believe could materialize in the near term. Dave will cover in detail the primary drivers of our guidance. However, it is important to note our 2018 guidance does not include the potential impact of new contracts or acquisitions aside from the new contract with Vermont we announced in September. This new contract will have minimal impact this year given the time of the contract award. However, this additional contract brings our total new contract wins and CoreCivic safety over approximately the last 18 months up to eight new contracts representing roughly 4800 beds. We continue to see a large number of opportunities to serve government partners and we are actively pursuing attractive acquisition targets all of which can contribute to future growth and diversification. In our business development over the course of 2018 has positioned us well to continue to generate meaningful earnings growth next year which is notable as we haven't been able to forecast fiscal year year-over-year growth since 2015. Of the eight new contracts in CoreCivic safety, six are with state agencies utilized existing capacity representing incremental utilization of approximately 2,500 beds. In the first half of the year, we completed the ramp of the new contract with the state Ohio for 996 beds at our 2016 bed Northeast Ohio Correctional Center and a new contract with Kentucky for the full activation and utilization of our 816 bed Lee Adjustment Center. We also added new contracts with Nevada, Wyoming, South Carolina and more recently Vermont for a total of approximately 700 beds. Each of the four contracts are for out-of-state capacity to assist with overcrowding in each state's corrections system. The remaining two new course of safety contracts were signed over the summer with agencies of the federal government. In June, we're awarded a new contract with United States Marshal Service at our Tallahatchie County Correctional Facility to house 1,350 inmates with the option of housing additional population should capacity be available. Immigration and Customs Enforcement and United States Marshals are each currently housing 600 detainees under this contract. In July, we're awarded a new contract with the federal government to utilize a portion of our 3,060 bed La Palma Correctional in Arizona under which Immigration Customs Enforcement or ICE currently expects to house up to a 1,000 adult detainees up from approximately 900 detainees currently. The facility today houses roughly 1,900 of tenders from the state of California. However, the state has indicated intensity to take advantage of the flexibility that our business model offers an exit facility in early 2019 due to projected population reductions in their system. As you can see, 2018 has been a year of strong demand for CoreCivic safety and we have been successful in winning a high percentage of new contract opportunities in the market. We continue to execute on our diversification strategy, expanding our two other business segments primarily through M&A and development opportunities. CoreCivic community includes 26 reentry facilities with a design capacity of 5,214 beds and provides non-residential correction alternatives to municipal, county and state governments in six states. Community generated 6% of our adjusted EBITDA in the third quarter and grew its top-line 31% year-over-year accomplished through the acquisition of four additional residential reentry facilities representing 514 additional beds and our acquisition of Rocky mountain Defender Management System; a non-residential electronic monitoring and case management services business in January of 2018. While the pace of residential reentry facility acquisitions has slowed due to fewer attractive candidates, we have an attractive pipeline of acquisition targets to continue our measured expansion in this market. This expansion will likely include both residential and non-residential service providers as we aim to offer jurisdictions a portfolio of solutions to combat recidivism and complete the cycle of rehabilitation. CoreCivic properties 50% year-over-year revenue growth was primarily the result of two acquisitions the purchase of the 541,000 square-foot social security administration building in Baltimore, Maryland, in August and the 261,000 square foot Capitol Commerce Center in January. These are the two largest non-correctional properties in our portfolio of government lease assets. Both assets have attractive long-term leases in place with government agencies that will produce predictable long-term cash flows. In late September, we acquired a 217,000 square foot steel frame warehouse in Dayton, Ohio for $7 million that was build a suit for the National Archives and Records Administration and leased through the GSA. While this acquisition is not individually material, it represents a great example of our ability to leverage one of our competitive advantages which is our comprehensive real-estate expertise to close the transaction with higher than average complexity and simultaneously generate above average returns. The Dayton property required certain physical plant modifications to remediate a legacy structural issue which we had the internal expertise to complete quickly and efficiently. After accounting for approximately $1 million of additional day one capital expenditures, this property is expected to generate a cap rate of approximately 15%. While we don't always expect to encounter cap rates that are high for properties leased to the federal government through the GSA, we are seeing accretive good return acquisition targets with cap rates from the high-single digits to the low-double digits with the potential for higher returns depending on the individual properties characteristics and transaction complexity. So far, this year we have invested $305 million in M&A transactions to expand our CoreCivic properties portfolio adding 15 properties and have a robust pipeline of additional near-term accretive acquisition targets in excess of $200 million. We ended the third quarter with a total portfolio of 27 properties representing nearly 2.3 million square-foot of real-estate. Our CoreCivic property segment generated over 11% of our adjusted EBITDA during the period. As noted, both of our diversifying business segments have completed positive developments that are showing up in our financial results on both the top and bottom line. We are confident in our ability to build upon this positive momentum as we execute on many new business opportunities these segments have. I'd like to touch on two important ongoing facility development projects before discussing market developments and new business opportunities. First, site work for our new facility development project in Lansing, Kansas, is progressing on schedule. We are awarded the development of this new built a suit facility the first of its kind nationally by the state of Kansas in January of this year. Secured by a 20-year lease agreement, this $160 million project will contribute to the expansion of our CoreCivic properties portfolio and serve as a model for other states. The project will replace Kansas existing 150-year-old correctional facility and has a first quarter 2020 completion date and we are pleased with the progress of our team and our constructive partners. The second ongoing development project is our 1,482 bed Otay Mesa Detention Center in California which kicked off in the third quarter. For many years, the United States Marshal Service and ICE have managed their operations with limited attention capacity in this region and continue to have excess demand for detention capacity. When we initially built the Otay Mesa facility which opened in 2015, its 1,482 bed capacity added an incremental 500 beds two Marshals and ICE's existing capacity as their previous facility. We design Otay Mesa so that it could be officially expanded to nearly 3,000 beds in case our government partners experienced growing or changing needs in the region. The current expansion project is slated to add 512 beds to facility at an estimated cost of approximately $43 million which is more cost efficient than adding capacity through a Greenfield development. The initial development costs for the Otay facility was approximately a 105,000 per bed and our expansion project will allow us to construct the additional 512 beds at a savings of approximately 20% per bed. The project is expected to be completed during the fourth quarter of 2019 so we anticipated incremental revenue and cash flows to benefit our CoreCivic safety statement beginning in 2020. Aside from these known development projects, we also have the capacity and capability to complete for near-term opportunities using our inventory of eight idle correctional and detention facilities representing 9,800 beds which can be quickly activated to meet government partner needs without significant CapEx investments. We continue to see a significant number of near-term market opportunities and I'll review state-level opportunities before discussing develop at the federal level. CoreCivic safety continues to pursue the opportunity to again work with the Department of Corrections and Rehabilitation of Puerto Rico as part of a formal procurement process. Earlier this year, Puerto Rico issued an RFP to move up to 3,200 inmates off to Ireland in order to reduce the annual budget for the Department of Corrections and Rehabilitation. This budget reduction initiative is part of a larger effort by the Governor to address the territory's debt crisis which is impacting essentially all of the Ireland's government agencies and their operations. The RFP called for an initial phase of 1300 inmates to be housed off the island. Upon full implication of the RFP, the Department of Corrections estimates an annual budget savings of approximately $50 million. We have responded to the RFP and believe our response is compelling not just for cost savings for the Commonwealth but also to provide a more humane and robust programmatic environment. We believe in an award to be announced shortly and we believe we are uniquely positioned to meet the Commonwealth's urgent need. With the successful ramp of our 816 bed Lee Adjustment Center and the Commonwealth Kentucky's need for additional capacity to relieve overcrowding, we have the opportunity to market our two remaining idle facilities located in that state. The Marion Adjustment Center and Southeast Kentucky Correctional Facility have a combined capacity of approximately 1500 beds which Kentucky's need for additional capacity far exceeds. We believe meaningful discussions on the potential to use these facilities to alleviate overcrowding will restart when the legislature returns secession in January. In many instances, we are having ongoing discussions with potential government partners that have not led to a formal public procurement process. Currently we are in active discussions with a number of other states that have correctional capacity needs that could materialize over the next 12 months. We estimate these states could in average could utilize a 1,000 to 2,000 beds and the discussions have focused on solutions from our CoreCivic safety segment. We also have existing auto correctional facilities in Colorado, Oklahoma, and Minnesota where we continue to pursue opportunities to lease capacity to address the problems of overcrowding and or aged infrastructure. These three properties being considered represent approximately 4,500 idle beds. Should we successfully enter into a lease agreement, the facility would be moved to the CoreCivic property's portfolio as we would not be providing correctional operations under the contemplated agreements. In CoreCivic properties, we are tracking additional development project opportunities similar to the Lansing, Kansas, build a suit development of more than a half a dozen other states that are publicly exploring private sector solutions to replace their aging prison infrastructure. The runway for opportunities of this kind, looking only as the replacement of out-of-date criminal justice infrastructure is substantial. In total, we estimate that $15 billion to $20 billion of required investments are desperately needed to make these facilities safer for staff and inmates alike more efficient and to provide the kind of reentry program space we know can help people better prepare to rejoin their communities. Private sector solutions in collaboration with government similar to what we just accomplished in Kansas are the key to solving these national infrastructure challenges. Turning to the federal level, CoreCivic safety recent contracts wins with the United States Marshal Service and ICE at Tallahatchie and La Palma clearly indicate both agencies increased capacity requirements which are projected to grow. United States Marshals average daily prisoner populations have grown substantially from 52,000 at the beginning of this year to approximate 58,000 as of September 30th. Multiple CoreCivic facilities with Marshal Contracts already in place have experienced an increase in Marshal Populations and we have the capacity available to accommodate additional growth. For example; our new 1,350 bed contract with the Marshalls at Tallahatchie was nearly fully utilized between the Marshal's and ICE by the end of the third quarter. Should the agency have additional capacity needs, we have multiple facilities that could be activated to accommodate this growth if our existing capacity is insufficient. ICE is also gradually increased its utilization of our detention capacity through the first three quarter of 2018 with a 1,000 bed contracts a La Palma facility in July. We saw apprehension rates increased meaningfully in September resulting in rising capacity needs. Should ICE continue to have increased needs for detention space, we have the ability to provide incremental capacity of facilities already operating under contracts with the agency and can also activate idle facilities across our portfolio. Finally, we are waiting an announcement from the Federal Bureau of Prisons on CAR XIX procurement that was issued in 2017 and is intended to provide an additional 9,540 beds from the private sector to alleviate overcrowded conditions and DOP operate facilities and to increase utilization of the bureau's most cost-effective beds. We believe in an award announcement for this opportunity will come in the first half of the federal fiscal year. As a reminder, today we only have two contracts with DOP for correctional facility capacity representing 5% of our total revenue. As you can see, we have experienced very positive developments across all three business segments through new contract awards, increased utilization and accretive M&A transactions. Coupled with the fact that the utilization of existing contracts have been mostly stable, these positive developments show that we have the right strategies to grow the business and serve our partners and we have put the company on trajectory of cash flow growth over the next year. At this time, I like to turn the call over to our CFO, Dave Garfinkle, to provide an overview of our third quarter results and updated full-year 2018 financial guidance. David?

Thank you Damon and good morning everyone. In the third quarter we generated a normalized FFO of $0.58 per share compared to our guidance range of $0.57 to $0.59 and AFFO total $0.54 per share compared to our guidance range of $0.55 to $0.57. Adjusted EBITDA of $99.7 million came in at the midpoint of our guidance for the third quarter. Although FFO per share was in line with our guidance, our third quarter results were negatively impacted by higher salary expenses than forecasted due to retention of staff at our Tallahatchie facility in Mississippi and at our La Palma facility in Arizona. We retained higher staffing levels to ensure a smooth transition for two proposals, Vermont and Puerto Rico, that could potentially utilize approximately 1,700 beds in the aggregate that became available due to declines in California populations of these facilities or to be ready for opportunities to utilize the available capacity under existing contracts. While this decision created some inefficiencies and negatively impacted operating margins during the quarter, retention of experienced staff is important to ensuring an expedited, efficient and high-quality transition when we are able to secure new opportunities for existing capacity. We have successfully secured new contracts in the past when we have retained staff like this to position us for growth prospects. On September 19th, we announced we did win the contract award from Vermont to care for up to 350 inmates at our Tallahatchie facility. We were also able to accept U.S. Marshals prisoners quickly at our Tallahatchie facility following a new contract award in June and ICE detainees quickly at our La Palma facility following a new contract award in July where we retained staff despite reductions in California populations. We remain optimistic about the additional contract award from the government of Puerto Rico as well as increasing opportunities to utilize the available capacity due to increasing demand on the southwest border. In addition, while the new contract with ICE at La Palma is no doubt beneficial for the long-term financial performance of the facility, it did have a transitory impact on revenue in the third quarter at our central Arizona, Florence Correctional Complex where we care for both U.S. Marshal's prisoners and ICE detainees. The combination of maintaining higher staffing levels and the transitory impact on revenue at our central Arizona complex negatively affected our per share results by approximately $0.03 relative to our prior guidance. When compared with the prior year quarter, total revenue increased to $462.7 million in the third quarter of 2018 compared with $442.8 million in the prior quarter; an increase of 4.5%. This increase, the largest quarterly increase in 10 quarters was achieved despite reductions in revenue totaling $19.6 million resulting from the expiration in the third quarter of 2017 of three load margin managed only contracts in Texas and the reduction in California populations. FFO per share increased from the prior year quarter by $0.02 and AFFO increased by $0.01. Adjusted EBITDA increased $6.4 million or 6.8% from the prior year quarter and EBITDA margins improved to 21.5% in Q3, 2018, from 21.1% in Q3, 2017. Net operating income increased across all three business segments by $5.4 million or 4.4% most notably in our CoreCivic property segment which increased $3.7 million or 48%. Financial results in our CoreCivic property segment were favorably impacted by the acquisition on August 23rd, 2018 of the 541,000 square-foot SSA-Baltimore property. Earnings from our CoreCivic safety segment were positively impacted by higher contract utilization by the U.S. Marshal Service across the portfolio, a new contract with the state of Ohio for up to 996 offenders at our Northeast Ohio Correctional Center which began during the third quarter of 2017. A new federal populations at our Tallahatchie and La Palma facilities resulting from new contract awards executed in June and July 2018 respectively. Although still ramping during the third quarter, the new contract to Tallahatchie for up to a 1,350 offenders essentially replaced the California inmate populations at this facility that were transferred back to the state during the first half of 2018. Over the past 18 months, we have also executed six new state contracts for correctional capacity in our CoreCivic safety segment including the afore mentioned contract with Ohio and the contract we just signed with Vermont. Five of these contracts are with new state partners which we believe reflects the value proposition we provide to states with correctional capacity and programming needs. We also maintained an average contract retention rate of 94% that our own facilities over the past 5 ¾ years which we believe reflects that long-term durability of our solutions and the quality of services we provide. These financial results were partially offset by higher interest expense primarily resulting from the repayment in October 2017 a variable rate short-term borrowings under our revolving credit facility with net proceeds from the issuance of $250 million 10-year unsecured notes that affects interest rate of 4.75% as well as the $242 million acquisition of SSA-Baltimore fine as partially with an assumed $157.3 million mortgage note with a 4.5% fixed rate with over 15 years remaining. The remaining balance was funded with our revolving credit facility. In addition to this acquisition, we completed five accretive M&A transactions since the end of the third quarter of 2017 with investments totaling $92.5 million. These acquisitions included three residential reentry centers, a company that provides non-residential correctional alternatives including electronic monitoring and case management serves as reported in our CoreCivic community portfolio and 14 government least properties operated by third party tenants under our CoreCivic properties portfolio. During the third quarter of 2018, our CoreCivic community portfolio generated 6.2% of our adjusted EBITDA and our CoreCivic properties portfolio generated 11.3%. Our CoreCivic properties portfolio was 99.7% leased during the third quarter with very stable cash flows from fixed monthly rents. The platform of SSA-Baltimore, our brokerage network has grown and our pipeline of government leased properties has increased. We are evaluating acquisitions with cap rates from 7% to the low-double digits with a potential for higher returns depending on individual property characteristics and complexity like we achieved with the 12 property portfolio acquisition completed in July and the property we acquired in September leased to the GSA to the national archives and records administration dedicated to the IRS. The cap rates on these acquisitions were 10% 15% respectively. To the extent we continue to identify properties like these, we will be able to execute our growth strategy of accretive acquisitions without relying on non-recourse secured debt and instead using our corporate balance sheet to finance many of these acquisitions leaving our balance sheet largely unencumbered and growing our availability of contingent liquidity. At September 30th, we had $94 million of cash on hand and nearly $600 million of availability on our revolving credit facility and no debt maturities until 2020. Our capital expenditure forecast which is included in the press release, includes $27 million of capital expenditures for the remainder of 2018 for construction of the new Lansing correctional facility in Kansas. This project has a totaled estimated cost of a $155 million to a $165 million, $31.8 million of which has been incurred through September 30th under our guaranteed maximum price contract with the developer. The project will be 100% financed with the previously disclosed private placement and will be drawn in quarterly installments to align with construction expenditures. As disclosed in yesterday's press release, our capital expenditure forecast also includes $11 million in capital expenditures for the remainder of 2018 for the 512 bed expansion of a 1,482 bed Otay Mesa Detention Center in California. This facility is currently utilized by both U.S. Marshal's and ICE under a contract that expires in June 2023 inclusive of extension options which we have held since 1998. This facility had had longstanding demand from both federal partners in a strategic location with limited capacity. The expansion is expected to be complete in the fourth quarter of 2019 at a total estimated cost of $43 million including $5.8 million incurred through September 30th, 2018. Moving next to a discussion of our earnings guidance. As indicated in the press release EPS guidance for the fourth quarter of 2018 has a range of $0.39 to $0.41, normalized FFO per share guidance for the fourth quarter is $0.61 to $0.63 and AFFO per share guidance for the fourth quarter is $0.59 to $0.61. For the full-year, adjusted EPS guidance is a range of a $1.44 to a $1.46. Full-year normalized FFO per share guidance is a range of $2.29 to $2.31 and full-year AFFO per share guidance is $2.18 to $2.20. At the mid-point, our fourth quarter guidance reflects increases over Q4 2017 in EBITDA of 9%, normalized FFO per share of 3% and AFFO per share of 13% and setting up an attractive run rate as we head into 2019. Our updated guidance contemplates higher salaries for a tight labor market and includes continued current staffing levels at our Tallahatchie and La Palma facilities that will be needed if we secure further opportunities to utilize available capacity of these facilities which impacted our prior guidance by about $0.06 per share for the full-year 2018. The negative impact of these assumptions was largely overcome through revenue growth including the new contract with Vermont, higher populations from the U.S. Marshal's and ICE and from accretive acquisitions which we believe will also generate sustainable growth in and higher per share results in 2019. Our guidance does not include any new contract awards beyond those previously announced because the timing of government actions on new contracts is always difficult to predict. Our updated guidance includes an additional penny of FFO and AFFO per share for the SSA-Baltimore acquisition which is a penny dilutive for EPS because of the non-cash real-estate depreciation and amortization expense impact on earnings but not FFO or AFFO. Although our California populations were slightly below our forecast for the third quarter, we have recently seen an uptick in such populations on some days and the general pace of decline has slowed. Our guidance therefore reflects a range of assumptions for California populations which averaged approximately 2,200 during the third quarter. The adjusted EBITDA guidance in our press release enables you to calculate our estimated effective income tax rate of 4.5% to 5.5% for the fourth quarter and provides you with our estimate of total depreciation in interest expense for the fourth quarter and full-year 2018. We expect G&A expense to be approximately 5.5% of total revenue. Finally, our dividend is currently yielding a very attractive 7.8%. each quarter, we review with our board our dividend and factors potentially effecting the dividend including the trajectory of our cash flows, our forecasted AFFO payout ratio, leverage levels and opportunities to deploy capital into new investments. We have traditionally announced any dividend increases in February like we did this past February when we released our year-end results and projections for the upcoming year. I will now turn the call back to Damon for closing comments before opening up the lines for questions.

Thank you, Dave. Before we move to Q&A, I want to take a moment to recognize our employees who are teachers, chaplains, nurses, mothers, veterans and many others. These are really good people doing great work for our government partners and the individuals entrusted in our care. You know over the last five years here at CoreCivic, we have held more than 38,000 individuals in our care further their educations by earning GED and industry recognized certifications that prepares them to restart their lives but also as studies have shown they are 40% less likely to come back to prison. So, it's not last on me that to have this type of success of helping people get their lives back on track, it takes a talented and passionate team making reentry at Day one priority. So, to the CoreCivic's team, I'm sincerely honored to serve alongside you all and I'm grateful for all of your efforts. So, Ryan, we'll turn it over you now for Q&A.

Thank you. [Operator Instructions] It looks like our first question will come from Kevin McClure with Wells Fargo Securities.

Hey, great. Thanks, good morning. Thanks for taking the question. I'm on a pocket, so I apologize if I missed a couple of things. But Dave, you said on toward at the end of your script that you are looking to finance some of the new office acquisitions on encumber basis with the balance sheet capacity, is that correct?

That is correct, yes, for the most part. And we're finding attractive acquisitions like the 12 property portfolio that we bought in July, was a 10% cap rate. The national archives and records administration property was a 15% cap rate. So, to the extent, we continue to identify properties like these, I think that narrow buildings a little bit of an outsized cap rate. But to the extent we're able to find opportunities like these where the cap rates exceed our cost of capital, we will find at the mark of our corporate balance sheet.

Yes. And I will just add to it. This is Damon, that we have been pleasantly surprised by the opportunities for these type of properties that have these really nice cap rates. We've mentioned the two that we saw in here recently the 10% for the portfolio and the 15% for the property up in Ohio. And Dave and I actually just said this together yesterday when we did our build review on potential transactions. We've been really pleased by the amount of inbound interest we're seeing for these properties that are kind of unique, maybe have some complexity, maybe have some CapEx and these kind of Day one. We can quickly and efficiently go in with our real-estate team, take a look at these properties and be now efficient buyer but also kind of do whatever the needs are, is it renovation or expansion or improvement very quickly for the tenants. So, can't put a complete number to it but I think we've been pleasantly surprised in kind of this M&A market that we've got these opportunities for some nice returns for these transactions.

Got it. And how many people would you say you're bidding against for some of these properties as there's some fairly high cap rates for office assets -- keeping the market.

Yes. That's a great question. And I think that's I think that's kind of the opportunity there is there really is much competition. I think you got some of these properties where kind of these typical owners who maybe just looking at just the return but don’t have any kind of expertise to evaluate not only the real-estate but also have the kind of deep government relations expertise we got both at the federate state and local level where we can quickly pick up the phone and talk to some of these tenants. We're seeing not a lot of competition. So, that allows us to getting to be pretty thoughtful on the price and get some of these good returns. Have anything to add to that?

And I guess, Kevin, mean to say expectations at every asset we're going to buy between 10% or 15% cap rates as I mentioned in my script. What we're evaluating properties with cap rates typically around 7%, maybe to 10% except the narrow buildings are little outsized that and we don’t expect to see many of those. But to the extent we're able to find cap rates between 7% and 10%, a good number of those or perhaps a majority in that rate, in that cap rate, we would be able to find this out of our corporate balance sheet.

Got it, okay. And then, I know it's too early and haven’t released 2019 guidance. But could you maybe give us a preliminary view on how much you're willing to spend on acquisitions in the next year in CapEx?

Yes, cap -- we're going to the budget process right. See, right it's a little bit premature to talk about 2019 guidance or capital expenditures. We do have an active pipeline, I think Damon said in his script you're evaluating a couple of $100 million. Obviously that might kind of close on a couple of $100 million. But what's interesting to me is the pipeline turns over relatively quickly. So, we're seeing new deals coming online every week. There's some number of attractive opportunity, so not quite ready to disclose what we'd expect for an acquisition pipeline. We actually haven’t done that in the past but I think as we go into 2019 that might be something we'll be willing to do. We really haven’t matured the M&A pipeline in this market. And I think it's getting there to the point where we may be able to do that and provide some guidance in February.

Got it, okay. And then, last one from me just kind of switching gears talking about integration, integration side of your business. Obviously today's the Election Day. Do you anticipate any movement from Congress in the lame duck session to address integration? And then also I mean it clearly has a need that a caravan on the way, apprehensions have been elevated, the Congress has traditionally been the bottleneck and reluctance to find additional detention capacity or a meaningful expansion and tension capacity. Do you expect that to change in the lame duck or the next Congress?

Yes, this is Damon. Let me give you a couple of observations. I think one just to highlight we are an active conversations with ICE really going back 35 years but here more notably here last 24 months. It's almost a daily conversation kind of what their needs are with the Southwest border, as I think you know also we've always there if they've got a kind of natural disaster or a hurricane they're preparing for where they need to make a facility. So we're constantly talking about an emerging needs either on the southwest border or something else unique happening within their system. So I see that continuing even after today's election. I think, that's going to continue going into the lame duck session. The second part of your question, I think is a little bit about the kind of funding and the bottleneck potentially on funding from the Congress on increased needs. As you know, the current funding bill expires on December 7th. It's our view that probably after today there will be probably some activity from now till the end of this year, into this calendar year, I should say on a funding bill. And we think there’s probably a pretty good chance that the funding bill is for the full fiscal year, so they complete a fiscal funding bill through September 30th next year. And I think during that deliberation with the House and Senate and administration, there is probably a likely discussion about kind of immigration needs and what’s going to happen ourself with border, and is there increased funding that needed during this coming year or this current fiscal year. Anything to add to that, David?

Not really.

Okay. And then A final question for me. Has your thoughts around family detention changed? Do you guys have more appetite to expand family detention purpose built capacity, or are you content with the South Texas facility as the sole location?

Let me -- let me first say that our South Texas facility that's now been operational about four years, we've been really pleased with the operations. And I think if you talk to ICE leadership and folks within the field office, they've been very pleased also. We think it's really no other facility like it in the United States that is built in day one for this mission. It's a very safe and humane way to house these families that are coming across the southwest border. And with that, that if there is increased needs from ICE for that type solution, we think, we've got potentially some expansion capacity at that facility to kind of meet their needs. Nothing to report on that today, again, it’s an overarching kind of conversation with ICE on kind of overall needs that they've got potentially now or forecasted at any point or time, so we're always talking about you know solutions we could do it daily, but also at other facilities that we've got within the other portfolio. So I'm very pleased with our operation and if there was an increased need for him from ICE potentially you can you add [Indiscernible] we think we're well equipped to do that and happy to do that.

I mean, you have seen the news articles and presumably you've seen the September numbers on family apprehensions. And they are off the charts. So there is certainly a high demand for that facility at this point.

Got it. Thank you for the time.

Thanks, Kevin.

Thank you. [Operator Instructions] We will pause momentarily. This concludes the Q&A session as there are no more questions at this time. I will turn the conference back over to Damon Hininger.

Thank you, Ryan. I would like to thank everyone for joining us on today's call and we look forward to reporting to you our full year results in February and provide an initial outlook for 2019. Thanks again.

Thank you. Ladies and gentlemen, thank you for joining today's conference call. The call is now concluded. Please disconnect your phones and have a great day.