CoreCivic, Inc. (CXW) Q4 2018 Earnings Report, Transcript and Summary

Good day, and welcome to the CoreCivic Q4 2018 Earnings Conference Call. Today's conference is being recorded. [Operator Instructions] And I now like to turn the conference over to Cameron Hopewell, Managing Director of Investor Relations. Please go ahead.

Thanks, Travis. 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 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 fourth quarter 2018 earnings release and in our Securities and Exchange Commission's filings, including 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. 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 provide on the investor's page of our website at corecivic.com. With that it's my pleasure to turn the call over to our President and CEO, Damon Hininger. Damon?

Thank you, Cameron. Good morning everyone, and thank you for joining our fourth quarter 2018 conference call today. We're also joined here in a room by our Vice President of Finance, Bryan Hammonds. Today, I'll provide a brief overview of CoreCivic for anyone new joining us followed by a summary of our fourth quarter performance, and finally some thoughts on our outlook for 2019 and beyond. CoerCivic is a diversified real estate investment trust specializing in delivering government real estate solutions to serve the public good. We are the country's largest private owner of government-leased real estate assets with a 104 facilities totaling over 17 million square feet of real estate and a 35-year history of delivering a broad range of solutions to help solve tough government challenges in flexible cost effective ways. Our unique diversified portfolio of assets generates a steady, recurring cash flow stream underwritten by investment grade government tenants. Each of our three complementary business statements provides 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 to safely and securely care for nearly 73,000 people. Our Community segment is a growing network of residential reentry centers and non-residential community-based corrections alternatives that help address America's recidivism crisis and includes 26 residential reentry facilities with a design capacity support of 5,214 individuals. Finally, our Property segment is a quickly growing portfolio of mission-critical government-leased properties that as of the end of the fourth quarter includes 27 properties representing nearly 2.3 million square feet of real estate. Our financial performance in the fourth quarter was in line with our expectations and with the result of strong top-line growth trends across each of our three business segments. Total revenue in the quarter was $482 million, a year-over-year increase of 9.4%. Our CoreCivic Safety segment experienced mid single-digit growth while both CoreCivic Community and Properties, both generated substantially year-over-year revenue growth of 33% and 84% respectively. Our top line growth was carried through to generate growth in cash flows as our fourth quarter normalized FFO of $0.63 per share represented a 5% increase in per share results versus the prior year. Our adjusted EBITDA in the fourth quarter of a $106.7 million also was in the middle of our range of guidance for the quarter and represented at 8.5% increase from the prior year quarter. Our fourth quarter growth was driven by a combination of organic growth in CoreCivic Safety illustrated by seven new contract award from state and federal partners representing approximately 4,500 beds as well as accretive M&A transactions to expand our community and properties portfolios. These positive developments more than offset the expected decline in average daily California inmate populations, increase interest expenses from our variable rate debt and incremental debt from recent M&A transactions. We have taken a prudent approach to allocating capital to reposition the company to grow and diversify cash flows in CoreCivic Community and Property segments. We have made these investments in response to evolving challenges and needs of our government partners as well as the deep network of relations we've made through our safety operations that uniquely position us to operate assets to serve them. This diverse case indication strategy has enable us to position CoreCivic to deliver the real estate and services solutions, our tenants need today and will need in the future. The Community and Property segments are not only a meaningful growth driver of current cash flows they should benefit the company over the long term through our expanded scope of solutions. I now like to discuss the trends we saw in CoreCivic Safety I'd now like to discuss the trends we saw in CoreCivic Safety from our various government partners in 2018 and how we see them shaping up for 2019. I'll begin with our federal partners. We currently have two correctional facility contracts with the Federal Bureau of Prisons in our CoreCivic Safety segment accounting for less than 5% of our revenue in 2018. We are continuing to wait an announcement from the BOPs car 2019 procurement which is advertised for 9,540 additional correctional beds from the private sector, although it includes the rebid of our Adams County Correctional Center in Mississippi, one of the two contracts I just mentioned. In addition to the Adams County facility we submitted a number of our idle facilities for potential new contracts and believe in an award announcement could be made in the second quarter. United States Marshal Service is our second largest federal customer accounting for 17% of our revenue in 2018. Throughout the year the agency experienced growth in our average daily prisoner population. The Marshals prisoner populations nationwide grew from approximately 52,000 average daily prisoners at the beginning of the year to nearly 59,000 by year-end this resulted in increased utilization by the Marshals across essentially all of our facilities under contract with the agency and led to a new 1,350 bed contract award over the summer at our Tallahatchie County Correctional Facility in Mississippi. Our expectation is the United States Marshals populations will continue to rise in 2019. Our current Marshals facilities have a modest amount of available capacity and we are in the process of expanding Otay Mesa Detention Center in California to meet their longstanding needs in the region of the country. We also have available capacity in our idle facilities that could be activated for Marshals should their capacity needs continue to grow and finally our third federal partner. Immigration and Customs Enforcement saw modest increases in utilization throughout 2018. Over the summer, we entered into a new contract with ICE at our La Palma Correctional Center, utilizing available capacity at the facility that was no longer utilized by the State of California. We are anticipating utilization of ICE's facilities to remain consistent throughout 2019, however, the rate of border apprehensions in 2019 are well above 2018 levels. So ICE could have emerging needs as the year unfolds. We have capacity and flexibility to address any emerging needs from the agency should they arise. And let me state again as I have in the past that none of our immigration facilities previously or currently has unaccompanied minors. Our South Texas Family Residential Center which was opened at the express request of the Obama administration does house mothers with their children for three weeks or less to have the process of their asylum claim initiated. Moving next to our state partners, the majority of our contracts saw stable oxy rates throughout 2018. We experienced growth in the state portion of our safety business due to five new state contracts we were awarded or we're in a process of activating in 2018. In addition to the two new federal contracts we awarded in 2018 that I previously mentioned these new contracts more than offset the impact of declining populations from the State of California throughout the year. We began 2013 with approximately 4,300 inmates from California in our system and today they are down to approximately 1,600 inmates at our La Palma Correctional Center with the expectation that the remaining populations will be returning to California by the end of the second quarter of 2019. The gradual decline in California out of state program has consistently impacted our earnings as 2015, when we were housing approxi 9,000 in Mesa across five facilities. That said, our work with the state has been a wonderful example of the flexible solutions we can deliver to our government partners. Starting back in 2006 when we initially entered our contract with California for the out of state program, we started with just 80 beds. Over time that grew to over 11,000 beds and helped the state as part of its efforts to drastically reduce overcrowding and improve medical care. As California was able to reduce its overcrowded situation, they began to gradually reduce the al-stay program and they now appear to be on a path to no longer needing out of state capacity. They were able to accomplish this without using taxpayer funds to build new prison capacity, which they would now need to idle. Along the way we broaden our services offerings with the state of - through the - with the state; excuse me, through our course of a Community and course of a Property segment with the state of California as a supplement to the out of state program. California serves as a great case study for the three diversified solutions we can offer our government partners, be those short-term or long-term solutions. Because the safety space is all about addressing changing needs. We already successfully marketed the five facilities California exited over the past four years and have new contracts with other government partners in place at each of the five to use the capacity to help meet their challenges. We continue to see a number of state level opportunities across our three business segments and I would like to briefly touch on a few of those opportunities. We continue to pursue a new contract opportunity with the government of Puerto Rico, which has been pursuing efforts across all departments to improve its efficiency and reduce expenditures resulting in the initiative to transition a portion of it inmate populations off the island to generate cost savings. Additionally, a number of other Krutch facilities sustained severe staff damage from 2017 hurricane season and are in need a significant capital for repairs. Working with CoreCivic would offer a solution that provides ongoing cost savings and allows Puerto Rico to use their limited capital for other infrastructure investments, the island needs. We are actively engaged with the Department of Corrections and Rehabilitation of Puerto Rico in this process and believe a potential contract award could come at any time. If a new contract with Puerto Rico is awarded this year, it will likely come with start-up and upfront transportation expenses in 2019 and normalization in 2020. We are also actively communicating the value of our auto capacity, particularly in state that has significant prison infrastructure needs like Colorado, Kentucky, Minnesota and Oklahoma. Six of our eight Idol correctional facilities are located in these states and could offer immediate solutions to their infrastructure needs. Last year, we successfully activated our lead adjustment center in Kentucky to assist the state in easing overcrowding in their correctional system. And we believe that that successful activation can be replicated in these States. For our CoreCivic safety business has many opportunities in 2019, we are also seeing opportunities come to market for CoreCivic Properties, Property Solutions for aging infrastructure prison at the prison at the state level excuse me and also the local level. This is a critical infrastructure problem across the country and we believe the solutions offered by CoreCivic Properties shown in our solution signed in 2018 for the State of Kansas are the key to addressing these longstanding challenges. There are also meaningful societal benefits when jurisdictions choose to address our aging outdated correctional infrastructure. To once again focus on our development project in Kansas as an example, which by the way, is replacing a Civil War era complex. The new facility will provide more space for rehabilitative and reentry programs provide for a safe to workplace for corrections staff provide more living and recreational space for inmates in a more environmentally friendly environment, all the while saving taxpayer dollars from no longer operating in an outdated inefficient facility. There are numerous jurisdictions actively reviewing models for privately financed infrastructure projects and we believe it's likely that multiple formal procurement process could commence this year. In fact just last week the governor of Alabama announced a plan to proceed with a formal procurement to build three large regional prison facilities costing upwards of $1 billion to replace many of the state's outdated and overcrowded mail facilities. The procurement is expected to be released in the coming months and the CoreCivic's properties model of privately owning facilities that are then leased and operated by the government is one of the solutions to be considered. The state's goal is to award contracts prior to end of this year in order to start construction in 2020. We are pleased to see that another state is taking bold action to address their longstanding prison infrastructure challenges and we believe we can offer multiple potential solutions to address these challenges. We also continue to pursue opportunities to expand our portfolio of real estate assets and complementary services through accretive acquisitions while market conditions have tempered the pace at which we can pursue attractive acquisition opportunities in the Community and Property segments we continue to execute selective trend - on selective transactions as evidenced by our acquisition of the recovery monitoring solutions in December of 2018. This acquisition further expanded our course of a community platform for providing non-residential community-based correctional alternatives to all levels of government and it's the second acquisition during 2018 of a company providing electronic monitoring and case management services. We know the need for these services is one of the fastest growing in the criminal justice arena as government agency seeks to increase evidence-based programs and services to reduce recidivism and better prepare offenders for reentry and in some cases were appropriate provide offenders an alternative to incarceration. Turning now to our initial 2019 financial outlook, we included in yesterday's earnings report the initial guidance for our full-year 2019. We currently expect to generate normalized FFO per share of $2.36 to $2.44 or a 2.1% to 5.6% increase versus our full-year 2018 results. This guidance reflects the positive momentum we've gained through our successes in 2018 across all three business segments which we believe position CoreCivic for an accelerated incremental growth. As always, our guidance does not include any assumptions for potential new contracts or accretive M&A transactions, however, there are market opportunities provide government partners with more than 10,000 incremental beds that could materialize and lead to additional growth in our CoreCivic Safety segment and we are still actively pursuing our growth and diversification strategy expanding our CoreCivic community and properties portfolios through accretive M&A transactions and new development opportunities. We also have two meaningful development projects coming online in late 2019 and early 2020 that will provide for additional momentum expanded beyond our 2019 financial guidance. Progress on the construction of our 2,432 bed Lansing Correctional Facility is on scheduled and is to be completed in January 2020 at which point our 20-year lease with the State of Kansas will commence. This facility will expand the total square footage of CoreCivic properties portfolio by over 17%. We are also expanding our Otay Mesa Detention Center in San Diego. The expansion is on schedule for completion in the fourth quarter of 2019 bringing the total design capacity of the facility to 1,994 beds in a location with a history of high demand from our federal partners that utilize the facility. Dave will provide more details on our 2019 financial guidance to his remarks, but we are pleased with how we position the company to grow and diversify our cash flows while generating long-term shareholder value, but before I conclude I'd like to take a moment to acknowledge and applaud the passage of the First Step Act in December, important legislation we very much supported publicly. I've said for years that America's higher recidivism rates are a tragic and unacceptable national crisis. One of the most encouraging dynamics to me personally is a positive change in tone and dialogue surrounding the needed investment to help people who are incarcerated in our country. So they are better prepared once they are released from prison. At CoreCivic, we are proud of the role that we have been playing through unprecedented commitments to strengthen reentry programs in our facilities and to advocate at all levels of government for policies aimed at reducing recidivism. We have invested hundreds of millions of dollars in building a national network or residential reentry centers that help thousands of people every day get ready with skills and opportunities needed to succeed after prison. We have never been better positioned to be part of the solution to one of the most costly complex and longstanding challenges our country faces at this time. I'd like to turn the call over to Dave to provide an overview of fourth quarter results and also initial 2019 financial guidance. Dave?

Thank you, Damon, and good morning everyone. In the fourth quarter, we generated $0.40 of adjusted EPS compared to our guidance range of $0.39 to $0.41 and in line with first call consensus estimates. Normalized FFO totaled $0.63 per share compared to our guidance range of $0.61 to $0.63 and $0.01 ahead of the first call consensus estimates. AFFO totaled $0.59 per share compared to our guidance range of $0.59 to $0.61. Q4 2018 adjusted amounts exclude charges of $6.1 million for contingent consideration associated with the acquisition in 2017 of residential re-entry service provider based on financial performance that was better than estimated at $0.8 million of M&A expenses, while Q4 2017 adjusted amounts exclude $4.5 million for charges associated with the enactment of the tax cut and jobs act in December 2017 and $1 million dollars of M&A expenses. For the full-year, normalized FFO is $2.31 compared to our most recent guidance range of $2.29 to $2.31 and a penny ahead of the first call consensus estimate of $2.30. As we discussed on last quarter's call, despite a decline in populations from the state of California at our La Palma correctional center in Arizona and at our Tallahatchie County Correctional Facility in Mississippi, we've retained elevated staffing levels at these facilities in anticipation of a new contract awards from Puerto Rico or to utilize our available capacity under existing contracts. While we have not yet been awarded a contract from the government of Puerto Rico as we had hoped, we continue to remain optimistic about a new contract award. Because timing is difficult to predict, our guidance does not include this contract award. Puerto Rico notwithstanding occupancy increased La Palma from 80% in Q3 to 91% in Q4 an increase to Tallahatchie from 39% Q3 to 68% in Q4, as a result of higher federal populations and our successful execution of new state contract awards which together more than offset the financial impact from the California decline. FFO per share increased from the prior year quarter by $0.03 or 5% and AFFO increased from the prior quarter by $0.06 or 11.3%. Adjusted EBITDA increased $8.3 million or 8.5% from the prior quarter. Facility not operating income increased across all three business segments by $9.2 million or 7%, most notably in our CoreCivic Property segment, which increased $7.3 million or 112%. Financial results and our CoreCivic Properties segment we're favorably impacted most notably by the acquisition in the third quarter 2018 of the 541,000 square foot SSA-Baltimore property. Our CoreCivic Properties portfolio comprised of 27 properties aggregating 2.3 million square feet was 99.7% leased during the fourth quarter with very stable cash flows from fixed monthly rents. Although, the expected decline in inmate populations from the state of California in our Safety segment, created a headwind through 2018 including in Q4 where the average daily population decline by almost 2,500 offenders from the prior year quarter, higher U.S. Marshals populations across our portfolio and as I mentioned our successful execution of new contract awards more than offset the financial impact from the California decline. During June and July of 2018, we rewarded two new federal contracts at our Tallahatchie and La Palma facility. At December 31, 2018, we cared for over 1,600 federal offenders that at our Tallahatchie Facility replacing the 1,300 California inmates that were at this facility at December 31, 2017 who were transferred back to the state during the first-half of 2018. We also cared for inmates from the states of Vermont and South Carolina at the Tallahatchie Facility pursuant to two additional contracts awarded during 2018, as well as inmates from Wyoming under an existing contract that had not been utilized in almost a decade. Financial results in our Safety segment also reflected the activation of our lead adjustment center in Kentucky and higher populations from the states of Ohio and our Northeast Ohio Correctional Center and Nevada and our Saguaro Correctional Facility in Arizona pursuant to three new state contract awards from these respective states we believe these new contracts reflect not only the flexible capacity we can provide our customers with urgent demand, but also the value proposition we provide to states with correctional capacity and programming needs. Over the past five years, we have maintained an average contract retention rate of 95% at our own facilities, which we believe reflects the long term durability of our solutions and the quality of services we provide. Net operating income in our CoreCivic Community portfolio increased $0.9 million from the prior year quarter or 14% and reflected the operating results from $50 million of M&A transactions since the end of the third quarter of 2017. As mentioned in the press release, during the fourth quarter of 2018 we acquired Recovery Monitoring Solutions Corporation for $15.9 million. This is the second company acquired in 2018 that provides nonresidential correctional alternatives including electronic monitoring and case management services, which expands the scope of services we provide to government and further diversifies our cash flows. During the fourth quarter of 2018 our CoreCivic Property segment generated 13% of our adjusted EBITDA and our CoreCivic Community segment generated 6.9%. At December 31 we had $53 million of cash on hand and nearly $575 million of availability on our revolving credit facility in addition to a $350 million accordion feature under our credit facility. We have no debt maturities in 2019 and only $400 million of floating rate debt. Our 2019 capital expenditure forecast which is included in the press release includes $90 million of ongoing capital expenditures for construction of the new Lansing Correctional Facility in Kansas which began around this time last year and is on schedule for delivery in the first quarter of 2020. This project has a total estimated cost of $155 million to $165 million, $59 million of which has been incurred through December 31 under our guaranteed maximum price contract with the developer. The project will be 100% financed with a previously disclosed private placement and is drawn in quarterly installments to align with construction expenditures. Our 2019 capital expenditure forecast also includes $29 million of capital expenditures for the 512-bed expansion of our 1,482-bed Otay Mesa Detention Center in California which is currently utilized by both the U.S. Marshals and ICE under our contract that expires in June 2023 inclusive of extension options which we have held since 1998. This facility has had longstanding demand from both federal partners in a strategic location with limited capacity. We expect the expansion to be complete in the fourth quarter of 2019 a total estimated cost of $43 million including $14 million incurred through December 31, 2018. Moving next to a discussion of our earnings guidance, as indicated in the press release, adjusted EPS guidance for the first quarter of 2019 is a range of $0.36 to $0.38, normalized FFO for share guidance for the first quarter of $0.58 to $0.60 and FFO per share guidances $0.56 to $0.58. For the full-year, adjusted EPS guidances range of a $1.45 to a $1.54. Full-year normalized FFO per share guidances range of $2.36 to $2.44 and full-year AFFO per share guidance is $2.31 to $2.39. At the midpoint, our first quarter guidance reflects an increase over Q1 2013 adjusted EBITDA of 12%, growth in normalized FFO per share of a 11% and FFO per share growth of 14%. Adjusted EBITDA guidance for the first quarter is a $102.5 million to $103.5 million and for the full-year is $414.5 to $423.5 million. About half of the full-year growth and adjusted EBITDA from 2018 to 2019 is generated from organic growth and half is generated from acquisitions completed in 2018. Compared to the fourth quarter of 2018, Q1 is seasonally weaker because of two fewer days in the quarter and because approximately 75% of our unemployment taxes are incurred during the first quarter resulting in a collective $0.04 per share decline from Q4 to Q1. Although the current budget for the state of California contemplated returning to the state all of the California inmates we care for by January 2019 because of higher than expected populations in the state system, the state has been unable to return the populations held that are 3060 bed La Palma Facility. Our forecast assumes they will all be returned by June 30, 2019, consistent with the state's draft budget for fiscal 2019 to 2020 released last month. We currently care for 1,600 inmates from the state of California down from 2000, at December 31, 2018. We have several prospects to utilize the space expected to be vacated by California. And our forecast assumes a range of assumptions for the second-half of 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. Any new contract awards could also come with start-up costs that are not included in our guidance. Our guidance also does not include any M&A activity although we have an active pipeline and continue to identify opportunities in both our Properties and Community segments, we intend to be judicious and we're deploying our capital considering leverage of four times and what we believe is an undervalued stock price. The adjusted EBITDA guidance in our press release enables you to calculate our estimated effective income tax rate of 4.25% to 5.5% for the first quarter and provides you with our estimate of total depreciation and interest expense for the first quarter and full-year 2019. We expect G&A expenses to be approximately 5.5% to 6% of total revenue which is consistent with 2018. I will now turn the call back to Damon for closing comments before opening the lines for questions.

Thank you, Dave. So before we turn it over for Q&A, I would like to take a moment to highlight some of the notable accomplishments of our reentry programs in 2018. Thanks to the dedication of course of a teachers, counselors, case managers, chaplains and other company professionals. In 2018 we were nearly able to get 6,500 offenders to receive their high school equivalency or career technical education certifications. Our Crowley County Correctional Facility led the State of Colorado and GED completion for the second year in a row, our newly activated lay adjustment center in Kentucky we coordinated with the Department of Corrections to offer a 10-month online information and support services computer program to offenders. Upon completion, offenders will receive a base national Occupational Competency Testing Institute credential. Over 2,000 offenders completed evidence-based substance abuse recovery and treatment programs, a 10% increase from 2017, and finally, we expanded our Go Further reentry program from five to 13 CoreCivic facilities. This program supplements our facility of reentry programs by adding a proprietary cognitive behavioral curriculum and encourages staff and offenders to take a collaborative approach to assist in reentry preparations. This is only a small sample of the programming accomplishments achieved in course - facilities in 2018 and I am very proud of the real lasting impact these programs have for the men and women interested in our care. I invite you to look at the reentry section of our website which is constantly being updated with information, with information on and accomplishments of the programs and services we offer. Our commitment to reentry through these programs is making a difference in reducing recidivism in America. So with that, I'll turn it over to Travis to open it up for Q&A. Thank you.

Thank you. [Operator Instructions] First question comes from Tobey Sommer, SunTrust.

Thanks. Damon, I wonder if you could talk a little bit about CAR XIX and BOP inmate population forecasts both from an overall perspective as well as more specifically the criminal alien subset, what kind of signs are you seeing that CAR XIX the process is proceeding kind of behind the scene and then what's your expectation for both of those populations and the trajectory this year and then next?

Very good. Tobey, thank you very much. So a couple of answers there, let me first say, with the government shutdown, it did slowdown some of that kind of regular communication we have with BOP, notably, I think I've shared with you that the [technical difficulty] to their credit made twice a year meet with the industry at ACA Conferences to give a full forecast of populations, but also budget and then our procurement activity along with some kind of shared interest on kind of operational changes or merging issues within the facility. So with ACA, it happened right in the middle of the government shutdown. So during ACA, BOP didn't actually have any officials there. So we missed our kind of early year report that we usually get from the BOP. So, I hear that the last data point we had with a BOP kind of formally as the communication industry was going into fiscal year 2019, they expected a continued kind of decline in populations through their first part of the year, kind of bottom out and then it starts to increase towards the end of the fiscal year of 2019. And if you look at the numbers, kind of the most recent numbers that appears to be pretty accurate, if you look at kind of the - in first couple months into this fiscal year, as the data appears to be pretty accurate based on the kind of last forecast they gave to the industry. But I guess more informally also we talked to the BOP on a regular basis. We do know that with the first step back and also some of the activity around the implementation of the budget, we do know that they're kind of working behind the scenes to kind of get a full and accurate kind of forecast for the rest of this year. So, I think in the coming days and weeks especially with the government shutdown in this week with the present day holiday we'll get probably a little more clarity of kind of how to think in the rest of the year. I guess the final part of your question was back or 2019, we did hear late last week that you're still indicating an award on the procurement in the second quarter, so we're thinking probably April, May of this year. Don't know, anything to add to that, Dave?

That's right. Yes.

And if you could refresh me on CAR XIX, I know you have a - one of your facilities up for week and completed part of that, of the total procurement how much of it represents sort of incremental capacity in potentially new contracts for the industry essentially?

Yes, I think make sure I get the math here right, David, but I think yes, if you look at 9,500 of beds of that total Adams County is part of a re-bid of that total, so if you subtract that, which would be about 2,000, 2,200 beds then I'd say that kind of the net increase for the industry will be about 7,000 right. Is that about right, Dave?

Yes. And there are couple contracts that are under extension that could use about 5,000 of those beds that could be awarded under…

-- under short-term agreement. I think we can get long-term agreement yes, that's…

Under CAR XIX, yes.

Yes, so let me restate that last point, Tobey, because this is an important one but there are a couple of agreements in place today. Very short term in nature that bureau is using, it could be the case where they get awarded a new contract on CAR XIX that could be out there for a longer term, so that obviously could impact the net increase of the industry in to the company.

Okay. Thank you for that clarification. And then with respect to your comment on the U.S. Marshals population kind of thinking that, that might be rising continuing to rise this year. How do we think about the relationship and the timing difference between U.S. Marshals populations rising and a later effect on BOP population?

Yes, good question, and it's not precise, but you would have, if, if you ask the bureau and the marshals too of course. I think they would generally say a kind of like six month to 12 month lag. So from the time you start to see a, a meaningful increase in marshal population as they go through the court process through the various federal districts around the country, it's usually six months to 12 months, it could be a little longer again depending kind of the location and the kind of complexity of the individual cases obviously, but that's probably a pretty good pretty good number. So I think if you see the increases that we talked about in 2018 Marshal Service and then you've got the bureau talking about kind of incremental demand that they hopefully will have satisfied through Core team that would be about 12 months maybe a little longer maybe about 18 months if you kind of start from the beginning of the increase with Marshal to the ultimate timing of when the BOP awards then activates those contracts. So anything add to that, David?

That's right, yes.

Okay. I'll just ask a couple more and I'll get back in the queue with respect to your, your better guidance for profit in 2019. How do you assess the, the dividend payout and kind of where you want that to be now that you are, you've got an upward trajectory in, in EBITDA?

Yes, so, great question. So actually timing wise tomorrow actually is our first of the year board meeting here in Nashville. Hence that will be our natural conversation that we will have with the board. So yes, now that guidance has been fully communicated to the market that will be a topic for the, agenda for the, the full board. So and I think it will be indicated that yes that's we talk about the dividend and I'll say every quarter but obviously give it a little more discussion as we get the full-year guidance out for the full-year and gives the board a kind of a full wholesome view of kind of all the dynamics throughout the company inter-forecast. Anything to add to that, David?

Yes, obviously Tobey, they look at a number of factors including trajectory of our cash flows or cash today FFO payout ratio we've guided to around an 80% AFFO payout ratio, leverage levels which we're, we're on the high end of the, of our leverage policy, and then opportunities to deploy capital into new investments so some of these factors lean toward a, a dividend increase such as the trajectory of our cash flow and the AFFO payout ratio. On the other hand we see a lot of opportunities full of capital in the, in two new investments with attractive risk adjusted returns that will further diversify our cash flow. So it's going to be a robust discussion I'm sure and we'll make an announcement following the, the meeting tomorrow.

Okay. Thank you. And then last question from me and I'll get back in the queue. Damon, could you may be of your idle facilities, which ones are the most desired as reflected by your customer conversations and not to say you don't like them all but which one may be the least desired?

Yes, good question. So let me kind of go from east to west here, so the two additional facilities we've got to say that Kentucky obviously, Kentucky would be the most interested in those. And I think the activity we've seen in the last 18 months with the new contract that lead and our effort to make sure we really had a great start up there and activation by all accounts and they feel really good about that. Then I think it positions us very well for incremental opportunity there inside of Kentucky. So I feel good about those opportunities within that state. And then going, going out west in Oklahoma then we've got the Diamond backs still, it's still vacant within, within Oklahoma just south, or excuse me, Northwest of Oklahoma City and Oklahoma continues to have challenges that you see from some of the recent press clips here in the last few months about kind of the need they have within their own department but also potential initial capacity. So we're going through a change with the new government or just got inaugurated here in the last 60-days. So we're educating him and his administration along with the department on kind of what the opportunity could be there within that state. But I also would say with that facility being located in the United States that is I think a great facility for solutions either from another out of state partner or a federal government. So I feel good about opportunities within that facility to provide some really great solutions if it's dealing with overcrowding or dealing with infrastructural issues or like there was a new opportunity like Puerto Rico that we talked about earlier that could be a great solution too. So, I feel good about that facility just because and with location, the demand both in and out of state. And then, New Mexico, we've got a facility near Albuquerque, that facility has I think opportunities within the southwest border primarily with the federal government. I don't see there any kind of in-state as an opportunity I think with ice and marshals if they have emerging needs within supporter and be in a good location where the demand there. I think that could be an opportunity for those agencies and then kind of going south from there to Texas you've got even that facility is in CAR XIX, I think we've said that before that be a great solution for incremental demand for the BOP, if they do need additional pass through the CAR XIX procurement and also I'd say for Southwest border needs for ICE and Marshal Service. And then going up north and you've got two in Colorado. Those two facilities have potentially some demand in Colorado. We've obviously seen some demand from time-to-time and kind of the Northwest, places like Idaho, Wyoming with core signed a contract [indiscernible] last year. So that could be a good solution for some need to kind of the out of state based on location, those two facilities, federal demand maybe not as much I'd say is probably more kind of a state demand either in state or out of state for those two facilities and then going further north up to Minnesota with the Prairie facility that could again we think could be a good solution for state of Minnesota that's another state that's going through changes with a new governor and I would say new administration here in the last 60 days. Could be some federal demand in addition to Minnesota and I think with an entire or northern Midwestern states could be some opportunities there. What did I miss on the list there, Dave?

[Indiscernible] that's all.

Yes. So they keep me honest here, but yea I think I got all of them. So hopefully you give little more color.

Thanks very much. I'll get back in the queue.

Tobey, thank you.

[Operator Instructions] Our next question comes from Kevin McClure, Wells Fargo Securities.

Good morning. Thank you for taking the questions. So the border security bill that was just passed provided more funding on average for detention beds. I'm curious your thoughts on where you see ICE deploying that capacity. Alternatively, they also have an RFI out there for up to 3,000 beds they issued about two years ago, I'm wondering if the enhanced funding prompts them to kind of resurrect that RFI and turn it into RFP and where do you see those beds going.

Good morning. Thanks for your question. So the short answer is it's going to be a little bit of a wait and see on what ICE does. As you know, we just got signed last week and with the Presidents Day holiday this week, we really haven't gotten any kind of direction or thoughts from additional need from ICE here near term. But I think in the coming days or weeks that'll manifest itself I'm sure through conversations with the company and through maybe other form for the industry, but anything to add to that David?

No, we've got probably a couple thousand beds available for either U.S. Marshals or ICE. So we'll see I would expect that they would utilize existing contracts before they enter into new contracts. If that's the route they take, but we're positioned well with available capacity.

Okay. And then Puerto Rico, thanks for that color there, you maintained elevated staffing levels at Tallahatchie in anticipation of the contract. I'm wondering how much did - do you estimate that cost you in terms of just inefficiency during the quarter and how long would you be willing to continue with those staffing levels while you await a contract before you decide to look for other customers?

Dave and I are tag team on this. So I'll have Dave kind of answer for your question then I'll give you a little more color on Puerto Rico itself.

Yes, I guess I'd say we did maintain elevated staffing levels in the third quarter as well we announced that we're going to maintain higher staffing levels in the fourth quarter for either the Government of Puerto Rico or utilization of existing contracts and I think that turned out to be a smart decision because we're able to accommodate additional federal populations not only at Tallahatchie, but Tallahatchie in La Palma as well. So we're in the same situation today. We're able to utilize staff at those facilities. Sometimes we transfer staff to other facilities if there's not a need at that facility and we have a need at another facility that's one of the benefits we provide as we provide flexible staffing solutions as well. But sitting here today I wouldn't say where we have excessive staff going into 2019 in the first quarter here because of the increases in populations that we've seen from the federal government at, at both those facilities.

And I'll just add I was down in San Juan recently and met with the team that we've got working on the island for this solution. And I walked away kind of incrementally more encouraged about the opportunities provide a solution to Puerto Rico, it's clear that the, the challenges continue and persist which is the fiscal situation and also some of these facilities are just really challenged from a fiscal plan perspective. So as I've kind of went around San Juan and met with various stakeholders the message was clear that our solution is providing safe humane with a very robust program solution to Puerto Rico was very attractive to all stakeholders. And I think kind of near-term what the Commonwealth is doing is just putting a little more clarity on exactly what they would do on kind of the back end for consolidation of facilities on the island for inmates that are vacating that capacity and move into the course of the facility. So more to come on that front, but it's clear that conditions continue persist on an island and our solutions are broadly accepted and very much supported by various stakeholders.

And one final point on that Kevin, if we do get that contract award depending on how many inmates they want to send to the mainland and, and how quickly we could need additional staff and we've offered the government of Puerto Rico that we would be happy to take some of the staff that they currently are using in Puerto Rico since they are obviously familiar with population.

Got it, okay. Thank you. California, so they're down to one facility now La Palma got 90% occupied. Just how curious is, they have first right of refusal to use that facility. Can you remind me how many beds they can, they theoretically have a claim on? And the reason I ask is, is they say populations don't decline as quickly as they forecast and at the same time you have growth or demand from federal customers. Can the federal customers supersede California, that they communicated desire to drawdown their population or do they have a claim on a certain number of beds?

I'd say they have a contract that expires in June. Right now their budget calls for them to reduce their population completely by the end of June and that would be a conversation we have. I don't think we'd get into a spat over who has claimed to which bed. They've been a very good partner as we worked with them over the years. And know transferring populations in some cases to different facilities. And so, that's a conversation we'd have at appropriate time, but right now we're planning - they've reduced from 2,000 to 1,600 as of yesterday. It looks like they're going to exit that facility by the end of June, if they don't, we're there for them. We will not abandon them and we'll work with them as well as the federal partners. As I mentioned we've got capacity at other facilities even in Arizona where the California population resides today, so we'd be able to work, we believe we'd be able to work with both partners in order to satisfy any demand that's needed.

Yes. And let me just add. It's a great question. Let me just add, we look at kind of the trends within the state of California and their most recent report indicates that they are at a 133.9% within their facilities in the state of California. And so it does give you a number that means there are about 3,000 vacant beds below the cap, which is also important number for them to kind of keep an eye on, because obviously they don't want to make sure they're well below that cap. So, and I think if you also go back, I was looking at this yesterday if you go back to August of last year the weekly reports for populations I think of all those weeks since August 1 to today or this week, they've only increase it I think three weeks out of that whole period, so most of the weeks are showing a week-over-week decline. So all indications is they'll be out by June. Obviously [indiscernible] issue that may arise in California, but I think the trend is pretty clear that they probably are going to be out by the end of second quarter.

Okay. Thank you. Final question for me and then I'll hop back in the queue. Any thoughts on your 2020 notes taking them out early, take some of the refi risk off the table or are you kind of content to address them next year? Thank you.

Yes. That's something on the forefront of my mind, Kevin. Obviously those $325 million mature in April of 2020. They do have a make whole through December 31 I believe it is of this year. Bond market is improving, but probably not at a place where we'd be interested in doing something opportunistically at this point. We've got few quarters yet before we need to pull the trigger on that. I think another avenue at least more likely depending on where bond markets go between now and the end of the year, we've got the $350 million accordion on our credit facility so we could execute term loan either term loan A or term loan B. So that would be the back-up plan or the number one plan depending on where the bond market, if the bond markets not there, I'd expect we'd be looking at a term loan.

Got it. Thank you for the time.

Thank you.

[Operator Instructions] We have no further questions in the queue at this time.

Thank you very much, and to our investors we're very grateful for your investment. We're excited by the important work that we're doing in our facilities. We are making obviously big, big impacts and the people are interested in our care. So we're grateful for your investment, so we can make those changes in people's lives. So we will have another call in May and give you an update on our, our results for the first part of the year. Thank you so much. Have a good day.

Thank you. Ladies and gentlemen, this concludes today's teleconference. You may now disconnect.