CoreCivic, Inc. (CXW) Q1 2019 Earnings Report, Transcript and Summary

Good morning. My name is Justin. I will be your conference operator today. As a reminder, this call is being recorded. At this time, I would like to welcome you to the CoreCivic’s First Quarter 2019 Earnings Conference Call. [Operator Instructions] Thank you. I would like to turn the call over to Cameron Hopewell, CoreCivic’s Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

Thanks, Justin. 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. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. 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 first quarter 2019 earnings release issued after market yesterday 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 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 on our Investors page at our website 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 first quarter 2019 conference call today. I will provide a brief overview on CoreCivic, followed by a summary of our first quarter performance and our updated outlook and 2019 financial guidance. CoreCivic is a diversified real estate investment trust specializing in developing government real estate solutions to serve the public good. We are the country’s largest private owner of real estate assets and used by U.S. government agencies with 105 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 problems in flexible, cost effective ways. Our unique diversified portfolio of assets generates a steady reoccurring cash flow stream underwritten by investment grade government tenants. Each of our three complementary business segments provides specialized real estate to government tenants. Our safety segment owns and manages corrections and detention facilities, including 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 residential reentry centers and non-residential community-based correctional alternatives that help address America’s recidivism crisis, and includes 27 residential reentry facilities with a design capacity to support 5,274 individuals. Finally, our Property segment is a quickly growing portfolio of mission critical government-leased properties that, as of the end of the first quarter, includes 27 properties representing nearly 2.3 million square feet of real estate Our first quarter financial performance showed positive year-over-year growth across essentially every key metric. Total revenue in the quarter was $484 million, an increase of nearly 10% compared with the first quarter of last year. Each of our 3 business segments posted revenue growth with CoreCivic Safety growing at 7%; and CoreCivic Community and Properties both generating substantial year-over-year revenue growth of 23% and 65% respectively. Our top line growth produced a strong increase in cash flow with first quarter normalized FFO per share of $0.64, up 21% versus the prior year. Our adjusted EBITDA in the first quarter of $109.7 million represented a 19% increase from the prior year quarter. Our first quarter growth was driven by a combination of organic growth in CoreCivic Safety as well as attractive returns from recent M&A transactions that expanded our Community and Properties portfolios. Seven new contract awards from state and federal partners that came online throughout 2018 representing approximately 4,500 beds, more than offset the expected decline in average daily California inmate populations, increased interest expenses from our variable rate debt, and incremental debt from recent M&A transactions. We continue to take a prudent approach to allocating our capital to reposition the company to grow and diversify cash flows in our CoreCivic Community and Property segment. We have made these investments in response to the evolving challenges and needs of our government partners as well as the deep network of relationships we’ve made through our safety operations that uniquely position us to operate assets to serve them. Our M&A activity has been measured so far this year. We acquired a 60-bed residential reentry facility in North Carolina in February. And earlier this week, we closed on the acquisition of a 36,000 square foot office building in Detroit that is a 100% leased for use by the state of Michigan’s Department of Health and Human Services. However, our pipeline of M&A targets remains very robust as we are sourcing and conducting diligence on multiple possible transactions both for the Community and Property segments. Our diversification strategy has positioned 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, but they position us to benefit over the long term from expanding the scope of solutions we can provide to our government partners. I would now like to take some time discussing in more detail the trends and outlook for each of our three business segments, starting first with our largest segment, CoreCivic Safety. CoreCivic Safety currently accounts for approximately 90% of total revenue and 85% of our net operating income with roughly a 50-50 revenue split between federal contracts and state and local agencies. Our federal contracts come from three agencies; Immigration and Customs Enforcement, the United States Marshals Service, and the Federal Bureau of Prisons. Each agency has a different mission, and as a result, the real estate and services solutions we provide to each agency are different. The Federal Bureau Prisons is currently our smallest federal customer with CoreCivic Safety contracts accounting for less than 5% of our revenue in the first quarter of 2019. The Bureau recently elected not to renew our contract for the 2,232 bed Adams County Correctional Center in Mississippi, which was up for re-bid as part of the CAR XIX procurement. The procurement was originally issued in 2017 for 9,540 additional correctional beds from the private sector, including our Adams facility. Ultimately, the BOP chose to award only 6,700 beds of those originally advertised. While we are disappointed to not retain our contract at Adams or win additional contracts from the BOP, we were unwilling to reduce our return thresholds to the pricing levels that were ultimately required of a successful bid. As part of their notice to us last week, the BOP provided the pricing for the successful bidders in this procurement. If we applied the pricing for the highest winning bid to our Adam’s facility, the un-levered return on that asset would have been approximately 6% for the next 10 years, assuming all renewal periods are exercised. This is well below our long established return requirements, which the market has consistently shown to be achievable and we didn’t feel it would be prudent to inhibit our ability to provide solutions to other government partners at higher market rates, particularly in a market where a number of other federal and state partners have growing needs and the supply of available capacity is very limited. Dave will provide additional details on the expected timing for the transition of inmates from the facility, but once the BOP vacates the facility, on a go-forward basis, the BOP will only account for about 2% of our revenue. Populations with the BOP system have declined by roughly 39,000 inmates since their peak of 220,000 inmates in the summer of 2013 when their system was at 140% of capacity. The decline in populations has reduced the agency’s demand for privately contracted beds, which has historically served as a low cost overflow when their own system has reached peak capacity and has enabled the agency to pursue even more favorable pricing. We are comfortable with our pricing decision and we will market the facility to other government partners. We continue to value our partnership with the BPO and we will be responsive in the future, should they have additional needs, but we’ll continue to maintain pricing discipline, consistent with our strategy to appropriately value our real estate assets. Our second largest federal customer is the United States Marshals Service, accounting for 17% of our revenue in the first quarter. Throughout 2018 and continuing in the first quarter of this year, the agency has experienced significant increase in their average daily prison populations. The Marshals prisoner populations nationwide grew from approximately 52,000 average daily prisoners at the beginning of 2018 to roughly 61,000 today. 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 in the summer of 2018 at our Tallahatchie County Correctional Facility in Mississippi. In the first quarter of 2019, we saw a modest year-over-year increase in utilization of the Marshals across essentially all of our facilities, aside from our new contract at Tallahatchie. We have available capacity at select facilities under contract with the Marshals and we are in the process of expanding our Otay Mesa Detention Center in California to help meet their longstanding need for additional capacity in that region of the country. We also have available capacity in our idle facilities that could be activated for the Marshals since their capacity needs continue to grow. Our third federal partner is Immigrations and Customs Enforcement commonly referred to as ICE. Much like the recent trends from the United States Marshals Service, ICE has experienced a consistent increase in their average daily detainee populations since the beginning of 2018. In July of 2018, we entered into a new contract with ICE at our La Palma Correctional Center in Arizona to utilize capacity made available by the declining number of California inmate being transferred back to California in-state facilities. ICE also began utilizing our Tallahatchie facility in Mississippi last summer by coordinating with their counterparts at the United States Marshals Service to leverage our new U.S. Marshals contract entered into in June of 2018. In the first quarter of 2019, utilization of our Tallahatchie and La Palma facilities by ICE was higher than our initial expectations for the year, while utilization at our other ICE facilities was largely in line. We anticipate utilization of our ICDE facilities to remain consistent with that of the first quarter throughout the balance of 2019. It is traditionally more difficult to forecast future utilization levels of ICE because their needs can change rapidly. So ICE could have emerging needs as the year unfolds. We have the capacity and the flexibility to address any emerging needs from the agency, should they arise. The agency has also issued a number of RFPs in recent months to consolidate its detention capacity in various regions across the country including Chicago, Detroit and St. Paul, Minnesota. These RFPs are in their early stages and will likely not impact this year. Currently, ICE relies on multiple local county jails to house detainee populations in these regions. This is challenging for ICE because many local jails cannot comply with ICE’s performance-based national detention standards; their detainee populations are housed amongst the jail’s criminal populations; and it is logistically challenging to oversee the operations of multiple jail locations and transport detainees from these locations to their immigration court proceedings. This effort by ICE would improve the oversight and simplify operations in these regions. We are reviewing these RFPs and we’ll work with our government partner to provide solutions to these challenges. Moving next to our state partners, the majority of our contracts are at stable occupancy rates in the first quarter. We continue to see improvements in our Safety portfolio utilization rates due to 5 new state contracts we’re awarded or we’re in a process of activating throughout 2018. In combination with the two new federal contracts, we were awarded in the summer of 2018 that I previously mentioned, these new contracts, more than offset the impact of declining population from the State of California in the first quarter. We began 2019 with approximately 2,000 inmates from California at our La Palma correctional facility, which is down substantially from 2015 when we housed 9,000 California inmates across 5 facilities. We expect the remaining out state population from California will be transferred out of our La Palma facility in Arizona, by the end of June of 2019 as overcrowded conditions in California’s in-state prisons has substantially improved. We are very proud to have provided many years of critical relief for California, whose prison system was in a crisis with overcrowding exceed 200% of design capacity prior to our initial engagement with the state over a decade ago. CoreCivic Safety has a number of state-level of opportunities. Alaska, Idaho and Kansas have all publicly talked about pursuing procurement this year for out-of-state capacity. The latest reports we have seen indicate Alaska is looking for approximately 500 beds, while Idaho is looking for 1000 beds and Kansas has issued an RFP for as many as 600 beds. We are evaluating each of these opportunities and have the capacity across our portfolio to accommodate all three states. We also have ongoing dialog in Kentucky about the potential activation of our two idle facilities, our 826-bed Marion Adjustment Center and our 656-bed South East Kentucky Correctional facility. While a new contract is not imminent, there continues to be substantial need due to the shortage of correctional facility capacity and the overburdening of local jails. Last year’s successful activation of our 816-bed Lee Adjustment Center in Kentucky provides a perfect solution to reactivate our other facilities in the state. One other notable development during the quarter was that the Government of Puerto Rico has at least temporarily stopped pursuing a contract to transition a portion of its inmate populations off the island to generate cost savings and close a number of correctional facilities that have sustained severe damage during the 2017 hurricane season. Our understanding of the situation is that other areas of government operations for the Commonwealth took precedence over the long-term plans for its Department of Corrections. We continue to be engaged with this leadership and we’ll provide future updates should the matter be taken up once more. There continues to be a significant capital needs to repair many of the island’s correctional facilities, which has not been for provided. So we believe it is likely that challenges faced the private corrections and rehabilitation of Puerto Rico will need to be addressed in the near future. Transitioning next to discuss our second largest segment CoreCivic Properties, we continue to have productive dialog with a growing number of jurisdictions looking to address their aging criminal justice infrastructure. There is a growing consensus about the societal benefits of addressing states and localities’ infrastructure challenges. Modern facilities provide more space for rehabilitation, treatment and reentry programming, a safer workplace for correction staff, and a multitude of positive environmental benefits derived from modern design and technology. Modern facilities also save taxpayer dollars in the short run from no longer operating outdated inefficient facilities and in the long run, from reduced recidivism rates. There are numerous jurisdictions actively reviewing models for privately financed infrastructure projects and we believe more and more jurisdictions will be interested in pursuing solutions similar to those we innovated for the state of Kansas, for which we are currently constructing a 422,000 square foot correctional facility scheduled for completion in the first quarter of next year. On our last call in February, I discussed the potential opportunity to partner with the State of Alabama, as it looks to the private sector to build 3 regional prison facilities totaling approximately 10,000 beds to replace many of the State’s outdated and overcrowded male facilities. The state issued a request for expression of interest or EOI, seeking qualified development teams interested in taking part in a formal procurement process. A few weeks ago, the Governor’s office released the names of 5 teams that responded to the EOI including CoreCivic. The Governor’s office also indicated a request for qualifications is expected to be issued later in the spring, followed by a request for proposals in the summer. The stated goal is to award contracts prior to the end of this year in order for construction to begin in early 2020. We remain engaged in the procurement process and we believe we can offer multiple potential solutions to the state to address their prison infrastructure challenges. We also continue to pursue opportunities to expand our portfolio of real estate assets through accretive acquisitions and will remain prudent in our pursuit, focusing on assets with the most attractive return profiles. As an example, our most recent acquisition of the Health and Human Services property in Detroit had a cap rate of nearly 9.5%. And finally, in CoreCivic Community, we are also pursuing an M&A strategy to expand our nationwide portfolio of residential reentry centers and services. Most notable of our 2018 acquisitions of two nonresidential community-based correctional alternatives providers further expanded our ability to provide comprehensive solutions to our government partners. While there are not large acquisition targets available in the Community segment, we will continue to selectively acquire to incrementally expand our portfolio. We believe the need for these services will continue to grow as government agencies seek to increase evidence-based programs and services to reduce recidivism and better prepare people for reentry, and in some cases were appropriate, provide individuals an alternative to incarceration. Turning now to our updated 2019 financial outlook, we increased our forecast for normalized FFO per share of $2.47 to $2.53, increasing the midpoint of our guidance by $0.10 per share versus our initial 2019 guidance or a 7% to 9.5% increase versus our full year 2018 results. This guidance reflects the positive momentum we have gained through our successes in 2018 across all three business segments, better than expected first quarter 2019 financial performance, and increasing clarity on utilization trends for the balance of the year. As always, our guidance does not include any assumptions for potential new contracts or accretive M&A transactions. There continue to be multiple market opportunities through our Safety segment to provide our government partners with incremental bed capacity from increased utilization of existing contracts and new contracts for idle bed capacity which currently consists of 8 facilities and about 9,800 beds. We are also pursuing M&A opportunities to expand our portfolio of real estate assets in our Community and Property segments. We also have 2 development projects coming online in late 2019 and early 2020 that will provide additional growth extending beyond our 2019 financial guidance. Progress on the construction of the 2,432 bed, 422,000 square foot Lansing Correctional Facility is on schedule and to be completed in January 2020, at which point our 20-year lease with the State of Kansas will commence. This facility will be included in our CoreCivic Property segment. In our CoreCivic Safety segment, we are expanding our Otay Mesa Detention facility in San Diego. The expansion is on schedule for completion in the fourth quarter of 2019, bringing the total design capacity to a total of 1994 beds in a location with a history of high demand from our federal partners that utilize the facility. We believe the capital investments in these development projects, coupled with the improving utilization trends across our portfolio and selective M&A transactions will continue to position the company to grow and drive long-term shareholder value. Now, before I turn the call over to Dave to discuss our financial results in greater detail, I want to take a moment to address false information that unfortunately continues to be repeated by some special interest groups to misrepresent our company. To be very clear, none of our immigration facilities under contract with ICE previously or currently house unaccompanied minors. Any statement otherwise is false. We have been working diligently to inform the media, elected leaders and others to ensure they understand this and we will continue to do so. When it comes to caring for families, in our immigration system, historical context is very important. In 2014, America faced an unprecedented immigration crisis on the Southwest border. In response, President Obama’s administration partnered with our company to build and manage the South Texas family residential center. This is a purpose-built civil residential facility specifically designed for immigrant mothers and children together. This facility has numerous features to meet the unique needs of these individuals and provide them a safe and appropriate environment while they prepare for the next steps in immigration process. For example, each of their residential complexes is equipped with a 775 square foot playroom, large screen TV, PlayStations, treadmill and exercise bike, board games, books and age appropriate toys. The comprehensive student education center for pre-K through 12 grade instruction includes 32 classrooms, a gym, computer labs, interactive multimedia instructional content, and 200 annual days of instruction in state-approved core ESL and special education, music and art curriculum. Recreation areas include 4 indoor gyms of 5,400 square feet each, 3 neighborhood park areas with multiple play structures, handball courts, basketball court, volleyball court, and soccer fields. The facility includes a 6,500 square foot library with more than 24,000 volumes for entertainment, study and law as well as computers. There are 2 separate 4,600 square foot chapel for worship. The facility cafeteria provides 3 meals every day that are culturally sensitive and approved by a licensed dietitian and snacks are available throughout the day 24/7. Families, so these are mothers with children, have freedom of movement throughout the facility from 5:30 AM to 8:00 PM. They can also receive visitor 7 days a week from 8:00 AM to 8:00 PM. There are no locks anywhere on this property. Parents provide direct supervision of their children, unless the children are attending school or another proved activity. And while CoreCivic does not provide a healthcare at the facility, ICE contracts for an overseas comprehensive onsite medical, mental health and dental services including a 24/7 walk in clinic, group and individual therapy, parenting classes and a stress clinic. South Texas family residential center is used by the federal government in order to maintain family unity while the initial stage of the asylum process is being conducted, family stay at the facility for less than 3 weeks before moving to the next step of the asylum process and leaving the facility. Families at the facility have typically just completed the arduous and often dangerous trek from Central America and arriving at facility represents the first time in weeks, if not months, these families have predictable access to food, water, shelter and medical care. It is unfortunate that politically motivated special interest continues to spread false information. We play a meaningful role in helping our government partners solve some of the country’s biggest challenges. The fact is our sole job is to help government solve problems in ways they can’t do alone, helping manage unprecedented humanitarian crisis and dramatically improving the standard of care for vulnerable people. Having once again corrected the record on the sensitive and often misunderstood topic, I’ll turn the call over to Dave to provide an overview of our first quarter results and our updated 2018 financial guidance. Dave?

Thank you, Damon and good morning everyone. In the first quarter, we generated $0.41 of adjusted EPS compared to our guidance range of $0.36 to $0.38 and $0.05 ahead of the First Call consensus estimate. Normalized FFO totaled $0.64 per share compared to our guidance range of $0.58 to $0.60 and also $0.05 ahead of the First Call consensus estimate. AFFO totaled $0.63 per share compared to our guidance range of $0.56 to $0.58. Adjusted EBITDA was $109.7 million for the quarter, exceeding the midpoint of our guidance by $6.7 million, reflecting strong operating results. Our financial results accelerated beyond our guidance levels, largely the result of higher-than-projected federal populations in our CoreCivic Safety segment. Operating expenses in this segment also came in lower than our forecast. While federal revenue was generally strong across the portfolio, higher utilization of two new contracts executed in the prior year, both intended to replace declining populations at two facilities from the State of California, resulted in higher occupancy levels but also contributed to the higher returns in the quarter. Compared to the prior year quarter, adjusted EPS increased $0.10; normalized FFO per share increased $0.11 and AFFO increased $0.13 per share. The per share growth in adjusted EPS, normalized FFO and AFFO from the prior year quarter represent per share increases of 31%, 21% and 26% respectively. Facility net operating income increased across all 3 business segments from the prior-year quarter by $16.3 million or 13.4% with increases in our CoreCivic Safety segment by $9.7 million, our CoreCivic Community segment by $1.6 million, and our CoreCivic Property segment by $5 million. Occupancy in our Safety segment increased from 79.5% in the prior year quarter to 83% in the first quarter of 2019, contributing to an increase in our operating margin from 25.3% to 27.2%. During June and July of 2018, we were awarded 2 new federal contracts at our Tallahatchie County Correctional Facility in Mississippi and at our La Palma Correctional Center in Arizona. Since the first quarter of 2018, we were also awarded new contracts at our Tallahatchie facility from the states of South Carolina and Vermont and during the third quarter of 2018, the State of Wyoming contracted this facility that had not been utilized in nearly a decade. These new contracts more than offset the impact from the continued an expected decline in populations from the State of California at these 2 facilities, resulting in a combined increase in NOI of $4.2 million. Financial results in our Safety segment also reflected the activation of our Lee Adjustment Center in Kentucky in the prior year, pursuant to a new contract award from the Commonwealth, which contributed to an increase in NOI of $3.3 million. We believe these new contracts reflect our flexible capacity, a core competency we offer our partners with urgent demand needs as well as the value proposition we provide to states with correctional capacity and programming needs. Although occupancy declined in our Community segment from 81.4% in the prior year quarter to 78.4% in the first quarter of 2019, we increased operating margins from 25.4% to 29.7% while increasing same store NOI by just under $1 million. Net operating income in our Community portfolio also benefited from the accretive acquisitions in 2018 of 2 companies that provide non-residential correctional alternatives including electronic monitoring and case management services, which expanded the scope of services we provide to government and further diversifies our cash flows. Net operating income in our Property segment was favorably impacted, most notably, by the acquisition in the third quarter of 2018 of the 541,000 square foot SSA Baltimore property. At March 31, our CoreCivic Properties portfolio comprised of 27 properties aggregating 2.3 million square feet was 99.7% leased during the first quarter with cash flows from fixed monthly rents, providing enhanced cash flow stability to our 2 other business segments. Following quarter end, we completed the acquisition of a 37,000 square foot office building in Detroit that was built to suit for the State of Michigan’s Department of Health and Human Services. The property is a 100% leased, through June 2028 with one 6 year renewal option and is expected to generate a cap rate of over 9%. We continue to manage a strong prudent balance sheet with leverage of 3.9x using the trailing 12-months and 3.7x annualizing first quarter 2019 results. At March 31, we had $20 million of cash on hand and $562 million of availability on our revolving credit facility, in addition to a $350 million accordion feature under our credit facility, which matures in 2023. Our 2019 capital expenditure forecast includes $90 million of ongoing capital expenditures for construction of the new Lansing Correctional Facility in Kansas, including $75 million for the remainder of 2019. This project is on schedule for delivery in the first quarter of 2020 and on budget at a total estimated cost of $155 million to $165 million under a guaranteed maximum price contract with the developer. The project is being a 100% financed with a previously disclosed private placement 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, including $18 million for the remainder of 2019. This facility is currently utilized by both the U.S. Marshals Service and ICE under a 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. The expansion is on budget and on schedule to be completed in the fourth quarter of 2019 at a total estimated cost of $43 million. Moving next to a discussion of our earnings guidance, as indicated in the press release, adjusted EPS guidance for the second quarter of 2019 is a range of $0.40 to $0.42; normalized FFO per share guidance for the second quarter is $0.62 to $0.64; and AFFO per share guidance is $0.60 to $0.62. For the full year, adjusted EPS guidance is a range of $1.56 to $1.62, up from our prior guidance range of $1.45 to $1.54. Full year normalized FFO per share guidance is a range of $2.47 to $2.53, up from our prior guidance range of $2.36 to $2.44; and full year AFFO per share guidance is $2.42 to $2.48, up from our prior guidance range of $2.31 to $2.39. At the midpoint, our second quarter guidance reflects an increase over Q2 2018 adjusted EPS of 14%; growth in normalized FFO per share of 11% and AFFO per share growth of 15%, continuing the year-over-year growth trend we achieved in the first quarter of 2019. Adjusted EBITDA guidance for the second quarter is $107.5 million to $108.5 million and for the full year is $428 million to $434 million, representing increases of 11% and 9% at the midpoint from the comparative periods in the prior year. Our forecast continues to contemplate the removal of the remaining California populations from our La Palma facility during the second quarter of 2019. We currently care for 675 inmates from the State of California all at our La Palma facility, down from 2,000 at December 31, 2018. Although we are proud of providing critical relief for California since we first entered into a contract with California in 2006 when their system was at 200% of capacity, their declining populations have created financial headwinds in recent years that will be completely eliminated beginning in the third quarter of 2019. During the first quarter of 2019, federal populations probably replace capacity as it was vacated by California. Our forecast assumes federal populations at the La Palma facility, slightly higher than current levels. Therefore if California vacancies continued to be backfilled with federal populations, our guidance could prove conservative. Our guidance does not include any new contract awards because of the timing of government actions on new contracts is always difficult to predict. Any new contract awards result in the activation of idle facilities would also come with startup costs that are not included in our guidance. Our guidance also does not include any new acquisitions. As we reported last week, and as Damon noted, we were not awarded the new contract at our 2,232 bed Adams County Correctional Center in Mississippi proposed under the CAR XIX solicitation from the Federal Bureau of Prisons. When the BOP provided us notice of the awards last week, they informed us that the pricing information for the winning bidders. And while particularly disappointing for the exceptional staff at this facility, we do not believe the contract at even the highest price awarded would be the best long-term value for this real estate assets, particularly in an environment of shrinking supply. The financial impact assuming a ramp down of the facility expected to begin late in the third quarter or early fourth quarter of 2019 is included in our guidance. We have begun to market the facility to other governmental partners but our guidance does not contemplate any replacement contracts to fill the vacancy, which could be upside to our guidance if we are successful. The facility is young at 11 years old, in great shape, and has a full complement of experienced staff whose backgrounds have already been cleared by the federal government, which may be attractive to other federal agencies with urgent demand. The adjusted EBITDA guidance in our press release enables you to calculate our estimated effective income tax rate of 4% to 5% for the second quarter and full-year and provide you with our estimate of total depreciation and interest expense for the second quarter and full-year 2019. We expect G&A expenses to be approximately 5.5% to 6% of total revenue. I will now turn the call back to Damon for closing comments before opening up the lines for questions.

Thank you, Dave. Before we open up the call for Q&A, I want to take a moment to highlight the release next week of the company’s first Environmental, Social and Governance Report. Our report, the industry’s first, will provide a wealth of information to our shareholders and other interested parties about how we responsively and ethically manage our operations. We have invested a great amount of time and effort over the last few years, engaging with our investors, government partners, employees, multiple NGOs and others to develop this comprehensive report. We benchmarked CoreCivic activities against those of peer companies and other organizations including, sustainability leaders across various industries. The report will include new disclosures and company-wide goals focused on the area stakeholders told us that were the most material to them, including our people and culture, including data on our investments we make in workforce training and retention, compensation and benefits, how we operate including data on our corporate governance, facility oversight, and our operational transparency. You will gain a much greater appreciation for the numerous layers of rigorous internal and external oversight of our operations. It also provides a clear picture of how Considerations for Human Rights are integrated throughout the entire organization. How we make an impact? More fully detailed in our commitments to reentry, preparing individuals entrusted in our care with the tools they need to successfully reenter society and to helping removing barriers and impede individual success post release, such as our support of Ban the Box initiatives across the country. Environmental sustainability, while typically not the first thing that comes to mind for our industry, we own and operate over 17 million square feet of real estate. So our environmental impact is very important. We look forward to the release of this report and to receive feedback from the investment Community to expand and further improve our ESG program moving forward. I will now turn it back over to the operator to open the call for Q&A session.

Thank you. [Operator Instruction] Our first question will come from Tobey Sommer with SunTrust.

Thank you. What are the highest probability new business opportunities that you maybe able to close in 2019?

Tobey, good morning. This is Damon. Thank you for your question. And a couple of answers there, let me first start with Safety. So you have seen, obviously from us, in the last year a couple of new contracts with Marshals and ICE both at Tallahatchie and La Palma. I think there is a very good chance just because we know they have been very active and touring our facilities and we have been talking about kind of different programs and scope of services we can provide that Marshals and ICE potentially award contract or contracts, additional ones during the course of this year. You obviously saw that recently with a recent contract the GEO has awarded, I think 2 weeks ago in Louisiana. So, I think that’s very likely where you see one or both agencies do a contract or more contracts within the industry. And I should say not new contracts, but as I mentioned and as you have seen here in the first quarter, I think increased utilization of our capacity under existing contracts, I think is very possible too. On the state side, Alaska, Kansas and Idaho that I mentioned in the opening remarks, all three of them, one of them has got a procurement on the Street, we think the other two would probably be out this summer going to early fall. And I think potentially all three of those get acted on this year where you potentially got an award and then depending on location and where we are at on the operation, you know if it’s a place like Adams County, we could take them immediately. If we have to activate a facility, then it maybe a little further down the road, so it’s more impactful for 2020. So, that’s on the safety side. And then as I mentioned in my script on the properties, we are looking at several portfolios that are multi-property and I think one or a couple of those potentially could be across finish line this year, again that will be, depending on timing, more impactful potentially for 2020 versus ‘19. But we are seeing a very active market and we’re having a lot from their brokerage community, people that are looking at us as a potential buyer of those assets and for all the reasons we have talked about, we are very efficient and we can close quickly. We’ve got a good balance sheet. And then, staying on the Property side, as I mentioned, Alabama, you’ve heard kind of the timetable there and you know those are going to be several years away relative to impact from a financial perspective, but it does appear that there’s a lot of urgency on Alabama’s part to move forward onto procurement and potentially have one if not all 3 awarded of these new facilities by the end of 2019. And then finally, on the Community side we’ve got probably about, not quite half a dozen – pretty close properties we are looking at right now for acquisitions. So those could be nice incremental increases to this year depending on when we close and getting forward in the Community portfolio. And then we’re also, I guess on the non-residential side, we’ve got these two companies, we bought in the last 2 years, they are going through the process of kind of be merged together because one of them was in Colorado, the other was in Dallas. I spent a lot of time here recently meeting with management team of the one in Dallas and they’ve got a very interesting opportunity kind of around the country to expand either with existing relationships or to have new relations, so that could be a nice little incremental. But I think it could be a little later on more of a catalyst for us on those types of solutions with, again, either existing or new partners. Anything – I’ve talked about Kentucky little bit too already in the script going back to Safety, but Dave, anything else that you would add to that?

No, I think you covered them all, so I have nothing to add.

Thank you. Is the expense control that the first quarter showed and the higher margins, is that level of profitability and degree of expense control sustainable or how do we kind of think about that as we lap this a year from now? Thanks.

Yes, Tobey, this is Dave. I’ll take that one. Yeah I think so. I mean it’s obviously a very challenging labor market today with unemployment of 3.6% or something around that level. So we continue to see those challenges, but we have made investments in some salaries where we’ve experienced the most challenges and it’s eliminated our requirement to transfer correctional staff to other facilities which kind of cuts down on the amount of travel and accommodations we see. But we’ve also tweaked our PTO policy to provide more flexibility to our staff and when they take PTO as well as have made some initial investment or made investments in a new workforce management scheduling system that gives our employees better visibility on their schedule, gives us better visibility on overtime and things like that. So I think that’s just really being rolled out now. So it’s in the early stages. So I wouldn’t want to commit any dollar amount of savings going forward, but those are certainly things we are looking at as we try to address the challenging labor market.

You know one thing I would add to and Tobey, this has kind of really been the case historically too, but going back to Dave’s first comment, which is the labor market. Obviously, you have seen the jobs data and unemployment data is obviously very favorable here in the U.S., continues those trends, but as it relates to us, we really only have about two or three key markets where we are seeing tightness. I mean there is generally, obviously you want to keep your eyes on labor markets in every market that we are in, but I’d say it’s really kind of two or three kind of key markets where we are seeing some tightness. And with that now, thinking about the investments we need to make to make sure we continue to kind of recruit and retain the best and brightest, as it relates to our correctional staff. But also how we can offset with pretty increases or maybe estimates that others are making within your department correction, so that is a kind of key area of focus. Well, it has always been and will continue to be. And the other thing I’d just for the benefit, you know this already Tobey, but benefit of the listeners is that on the labor side, with about half of our Safety side under federal contracts, those are typically driven by wage determinations, that are rates that we have to pay our staff and if there is any increases there, we do get reimbursed by the federal government. So that is a nice hedge on that part of the business. So they are going back to the overall the state markets, a little tight in a couple of markets, but in the federal side, we are well positioned just because we have got the ability to get reimbursed for any wage increases there on these federal contracts.

Right, thank you. Couple of questions on the guidance just in terms of your assumptions, just want to be clear with your assumption for the California business you had that kind of zeroing out here relatively soon and then what do you assume for ICE detainee population levels for the balance of ‘19?

Well, probably it’s Dave, again, I’ll take that, Tobey. At La Palma, so we do have California exiting their 675 inmates something like that yesterday. They are projected to leave by June 30, which is consistent with our guidance last quarter. I would say federal populations have backfill those populations faster than what we had expected. And that’s not – we have a little bit of an upside to populations at that facility and as I mentioned in my remarks, not expecting a complete replacement of those populations during the back half of the year. So that could be upside to our guidance. Generally speaking, we also have some increases at our Tallahatchie facility federal populations. Those are the two new contracts that we entered into in the middle of 2018. But beyond those we have, what I’d characterize as modest increases in federal populations. We don’t have that many facilities, although we do have some where there is capacity. I think what could more likely happen is if there’s a continued surge in demand from our federal partners is that we’d end up activating some idle facilities. That will take some time, as you have to ramp up the staff, train the staff. So that’s a 3, 4, 5 months process. And then comes a startup cost too. So that would probably not have as big of an impact on 2019 as it would on 2020.

And one thing, just add on that a little bit is that, as I mentioned earlier, we’ve seen a lot of activity on the federal side and on the state side, but every single facility in our portfolio are actively being considered by jurisdiction and that probably hasn’t happened in a while where not only incremental capacity in existing facilities that are in already operation, but also vacant facilities. We have had tours. We have had inspections. We have had discussions on scope and services, really on every single facility that we have got in the portfolio. And again, that’s probably haven’t happened in a while.

Thanks. Last question from me and I will get back in the queue. What are you expecting for pricing from states as they start their next fiscal years this summer? Thanks.

Historically, as you know Tobey the increases are usually kind of tied to CPI, so kind of 1% to 3% depending on what the index is. We are trying to be a little more thoughtful on those just because my earlier point where we are seeing a little bit of an escalation in salaries in certain markets and we are also seeing our public counterparts making some investments on salaries on their side with their public facilities. We are kind of ratcheting up the conversation a little bit saying, hey, we got to make sure we got to keep pace and again kind of recruit and retain the best workforce for our facility. So, generally kind of 1-to-3, but it could be a couple of markets where we are looking for bigger increases just so we can make the needed investments within our employees.

Thank you.

Absolutely.

The next question comes from Kevin McClure with Wells Fargo Securities.

Good morning. Thanks for taking the questions. Just going back to the Adams County contract, let’s say, ICE or U.S. Marshals wants to backfill some of those beds, that would require a new contract correct or is there an existing capacity within [indiscernible]?

Yes, good question, Kevin. This is Damon. Thank you for that question. So, a couple of answers there, we do think that there is a possibility, just like ICE and Marshals use existing agreements between themselves. We think there is a chance that ICE could use the existing BOP contract, because there are vacant beds there today. So they could use that a vehicle to where potentially use capacity immediately. And then on a parallel path, we work with them on an agreement once the BOP contracts expire. So the current contract as you probably know expires with the BOP at the end of July I believe and then they will probably look to do some type of extension, maybe 3 to 6 months that potentially could take us into third and fourth quarter even first quarter. So, if there is agreements between ICE and BOP to use the existing contract structure and they could piggyback on the BOPs contract with us and work on a parallel path. That might be a good course of action for them.

Got it, okay. And what’s your sense of ICE’s ability to sign new contracts I know they had a step up in their appropriation of the last spending bill. Are they still spending ahead of their annualized run-rate? Is there room for them to go out there and contract for some new beds in chunks, what’s your sense of their ability to go out there and award new business?

Right. So, that’s a good question. So a couple of answers there, is that, yes I think, based on the actions here in the last couple weeks with GEO and the new contract with them in Louisiana. I think that’s clear and we are kind hearing the same thing, because again they are talking to us and touring facilities like Adams County. So I think the ability and desire to sign new contracts. I think is still very interesting and very appropriate for them to do or they are doing, I should say. And then as it relates to your question about funding, as you have probably seen in press reports here in the last couple of weeks, there is a request to Congress for additional funding. You probably have seen really kind of all corners of the cost you are supporting that funding just because of the crisis on the South West border and the activity they are seeing this year. So, you don’t know for sure obviously till it gets enacted if that’s ultimately going to cross finish line, but I would say based on kind of activity we are seeing with them interacting with us directly, touring facilities, talking about contract terms, but also signing the most recent contract with GEO in Louisiana, then obviously the contracted deal with us last year, I would say they are continuing to be moving forward with pretty brisk pace on signing new agreements for additional capacity. I don’t think anything to add to that, David?

No, that is it.

Okay. Do you anticipate a CAR XX down the line or when is the next major BOP procurement?

They have not said, as you may know, typically they do an industry kind of meeting at ACA so that happens in Boston, I think in end of July. So we will have that meeting and I suspect they’ll give us some kind of forecast on not only populations but also potentially new procurements. So I expect we probably won’t hear much until then. I think it is curious though that they had a lot of proposals. I think probably well in excess of the 9,500 beds and they didn’t award it all. They awarded the 6,700. So I think maybe that’s a sign that they may be tapped the brakes just at the moment relative to quantity of beds they want from private sector. But again, I don’t think we will get clarity on kind of future demand until probably later this year.

Got it, okay. And then turning to family detention, what are the current populations at your South Texas facility, family facility?

Yesterday, they were a little over 1,100.

Okay.

Which is as you know that the populations that slowly fluctuate very significantly because it’s a very transient population where the mothers and children are only there for less than 3 weeks, so you can see ebbs and flows that go down to the several hundred and up into the high one thousands I’d say, the max capacity is probably around 1800 maybe 1900 somewhere on there, even though it’s a 2400-bed facility just because of restrictions on the ability to have a certain – boys and girls together and things like that. Dave and I took a large group on a tour late last year and the staff were telling us there that you’d see maybe 100, 200, 300 families kind of transition out through the facility in a 24 or 48-hour period. So it is kind of high volume sometimes.

Okay. So you don’t see much of a risk that ICE could decide to early terminate that contract and focus more on adult immigrant detention and the families, given the transient nature of the population?

We have not had. This is Dave, Kevin. We have not had any indication from ICE that they would want to change the mission of that facility or change its utilization. In fact what we did see was in the funding request that Damon just mentioned, there was actually a request to expand that facility by 910 beds. You know we will have to stay tuned on that.

Got it. Okay, last question for me. Can you provide an update on the class action that’s out there? Where do we stand in the process? I know that you guys had about 2 weeks to initially appeal the class certification that was in mid-April, where do we stand today? Thanks.

Yes. We have filed that appeal with the Sixth Circuit and we are awaiting their decision on whether to accept that appeal – to review it, basically.

Okay. When do you anticipate a decision on whether they will decide to hear the appeal?

I don’t think we have gotten an indication.

Yes, it could be any time, but it also could take a month or several months. So we don’t expect to hear anything in the short term.

Got it. Okay, thank you for the time.

Thank you, Kevin.

We have a follow-up question from Tobey Sommer.

Yes. Just two questions from me. Thank you. With the California business winding down and several years of that being a drag on the company, is there another customer that we should have our eyes on perhaps experiencing inmate population declines and therefore vulnerable to in-sourcing, how do you assess the risks in the portfolio at this stage?

Yes, Tobey, this is Damon. Great question. It’s something that we watch closely and interact with our customers, especially as they think about kind of their needs going forward and also things we can maybe do as I think about consolidation or additional program. So, it’s a constant conversation and kind of forecasting needs, but also what’s the needs of the population and at the moment and this has been pretty consistent. Outside of California, I would say all of our other state partners have been pretty, pretty stable. Some have been kind of flat on population. Some have been growing kind of incrementally a couple of percent, but California is just as you know such a unique situation. I mean they were just severely overcrowded, so a lot of reform that had to be taken place, but I don’t see, as I sit here and look at the map, I don’t see another state that has anything in the near-term where they will do to kind of that activity or have that type of change of population or the ATIs.

Not at the state level. As we mentioned in our script and Damon mentioned in his script, the BOP is down 39,000 inmates over the past several years. So, that’s obviously had a significant impact on their overcrowding situation which has gotten more under control. So we have really been successful at diversifying our cash flows, our exposure to the BOP is down to 2%. Our exposure to California will be 0% beginning in the third quarter. So, looking out, all the other state populations seem to be have reached stable populations probably growing – California aside, state population is growing probably 1% to 3%, consistent with overall population changes.

That’s a good point. You know, let me add one more thing. So keep me honest Dave on the numbers, but in 2010, we had about 15% of our revenue come from BOP. I think, about the same amount from California. So you’ve got California, that will zero, you’ve got BOP that will be 2% going into 2019 and into 2020. So obviously we’ve been very thoughtful in how we’ve been able to not only diversify, but also talk to the existing new partners to utilize the existing capacity being vacated by those two partners.

Right. Thank you. And two kind of numbers question probably for Dave, what should the trajectory of quarterly revenue look like in 2019? I’m just trying to get a sense for whether there are any seasonal patterns you may be able to point us to, not asking for detailed guidance, but broad strokes. And then, when you look at the company’s balance sheet, where are you with respect to wanting to extend debt or credit facility maturities? Thank you.

Yes, sure, Tobey. On revenue we don’t obviously provide revenue guidance, but I’d say directionally first quarter we had $484 million of revenue. I’d expect Q2 to be relatively flat. I mean we do have one more day in the quarter but that’s going to be offset by a decline in California populations, which were at around 1,100 at March 31, down to 675 today and going to zero by June 30. We do project some increases in, I’d say several million dollars in revenue at La Palma for the higher federal population, so somewhat flattish going from Q1 to Q2. And then, on the balance sheet side, with our credit facility matures in 2023. So we’ve got several years before we need to worry about that credit facility. We’ve got $325 million of unsecured notes maturing in April 2020. We’re thinking about that right now, obviously, about how we’re going to deal with that. Most likely, it will be paid off with our credit facility. We’ve got capacity today to pay it off, but it would put that credit facility tight in terms of what its availability would be, if we were to just pay it off on the capacity today. So we are looking at like a term loan B would be in the cards for us as we look out to the second half of the year. That would create some liquidity on the credit facility, so that we could continue to execute on our M&A pipeline, particularly in the property segment. Always want to have capacity to execute on anything that looks attractive to us. So we are in good shape from a liquidity perspective over, I think I have said $570 million plus of capacity today on that credit facility, but thinking about that April 2020 maturity is probably what we are thinking about in the short-term for our balance sheet.

Thank you very much.

Thank you, Tobey.

Thank you, Tobey.

There are no further questions in queue.

Thank you very much. Well, this is Damon again. I want to thank you for joining the call. Before we conclude, I want to highlight that this week is National Correctional Officers and Employees week and really, really great week to recognize the important work that Correctional staff across country, both our employees, but also our public sector counterparts doing great work every day bettering the public good. But I want to take a moment really to recognize our employees, who I just think world of. Our employees are teachers, they’re chaplains or nurses or mothers, veterans and many others and they are really good people doing great work for government partners and individuals that are entrusted in our care. You know that over the last 5 years here at CoreCivic, we have helped more than 30,000 individuals in our care further their educations by earning GED’s 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 lost on me that to have that type of success with helping people get their lives back on track, it takes a talented and passionate team that’s making reentry a day one priority. So, to the CoreCivic team, I am sincerely honored to serve alongside you and I am grateful for all of your efforts. So in closing, I would like to thank everyone for joining our call today. We look forward to reporting to you our second quarter results in August and providing an outlook for the remainder of 2019. Have a great day.