Good morning. My name is Casey. And I will be your conference operator today’s call. As a reminder, this call is being recorded. At this time, I would like to welcome you to the CoreCivic’s Second Quarter 2020 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. I would now like to turn the call over to Cameron Hopewell, CoreCivic’s Managing Director of Investor Relations. Mr. Hopewell, you may now begin.

Thanks, Casey. 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. On the call today, we will focus on our financial results for the second quarter, yesterday’s announcements of our intentions to change our corporate structure and institute a new capital allocation strategy. And an overview of the evolving impacts of the COVID-19 pandemic. During today’s call, our remarks, including our answers to your questions, will include forward-looking statements pursuing 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 second quarter 2020 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 of our website corecivic.com. With that, it is 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 second quarter 2020 conference call today. today. But also joining us on a day of great historical significance for our company. With last night’s announcement noting our plan to convert to a Taxable C Corporation. We are putting our company that better position over time to improve our already strong financial position, and ultimately move our share price back to levels that reflect our strong fundamental business. By doing so, we will be able to build on our unprecedented leadership and supporting life changing reentry programs, policies and services that address America’s recidivist crises, and help those in our care succeed with their next step in life. So for today’s call, Dave and I will provide an overview of our second quarter financial performance. Yesterday’s announcement of our intention to revoke our re-election and become a Taxable C Corporation in 2021, including its implications on our forward-looking business and capital allocation strategy, and our ongoing response to evolving developments resulting from the COVID-19 pandemic. First, I will briefly touch on our second quarter financial performance. On the top-line, our revenue in the second quarter was $472.6 million, which was a decline of 3.6% over the prior year quarter. The majority of this decline was experienced in our CoreCivic Safety segment. Normalized funds from operations or FFO was $0.56 per share in the second quarter, which represented a 90% decrease from the prior year quarter. The largest impact on our revenue in normalized FFO 2020 has been due to lower utilization levels from our largest government partner, Immigration and Customs Enforcement, primarily due to the COVID-19 pandemic. While current utilization levels by ICE are well below historic averages, the second and third quarters in 2019 were already going to…

Thank you, Damon. And good morning everyone. In the second quarter, we generated $0.18 of EPS or $0.33 of adjusted EPS, $0.56 of normalized FFO per share, and $0.57 of AFFO per share. Adjusted EBITDA was $101.1 million per quarter. Adjusted amounts exclude $8.2 million of incremental expenses associated with COVID-19, non-cash impairments of $11.7 million $0.3 million of expenses associated with our evaluation of corporate structure alternatives, and a $2.8 million gain on the sale of a real estate property. Of the $8.2 million of COVID-19 expenses, $6.3 million represents the Hero Bonuses paid to facility line staff. Compared with the prior year, quarter adjusted EPS decreased $0.14 normalized FFO per share decreased $0.13, and AFFO per share decreased $0.10. As mentioned in our previous two quarterly earnings calls, we do not expect the elevated federal populations experienced in 2019 to be sustainable in 2020 and lowered our initial 2020 guidance from 2019 per share levels to reflect lower federal populations. The decision by the Federal government effective March 20, 2020 to deny entry at the southern border for asylum seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of COVID-19 has amplified the reduction in people being apprehended and detained by ICE. Declines in state populations and our safety segment and in Resident populations and case management services in our community segments, largely driven by COVID-19 also contributed through declines in per share results. Partially offsetting these reductions were new contracts signed with the U.S. Marshal Service and ICE in the prior year and the Mississippi in the first quarter of this year. Finally, a reduction in G&A expenses partly due to lower incentive compensation and partly due to reduction of certain other expenses such as travel due…

[Operator Instructions] We will take our first question from Joe Gomes of NOBLE Capital Markets.

Good morning. Thanks for taking the questions.

Good morning Joe.

Good morning Joe.

Lot to digests here but let’s start with the operating results and then maybe we will switch gears to the conversion. On the operating results, and looking forward I know the crystal balls is very cloudy today, but do you guys - when you are looking at you think that they are we are getting near a bottom on the ICE and U.S. Marshal type populations? They have declined I think the last time I have looked ICE was now below 22,000 on a daily pop versus in the 40s and is high as in the 50s last year, but just kind of get a little bit of your guys view on where we might be seeing a bottom on those.

Yes, Joe, thank you so much for your question. And you nailed it and kind of framed it, looking into a crystal ball because that is exactly what we would be doing if we are-answer this. Kind of an obvious point. But all this is going to be also what happens nationally internationally is related to COVID-19. And then obviously the direction that that changes relative to CDC guidance and Federal state and local partners and in turn our government partners this one be an ICE. So it would be pure speculation and into a looking into a crystal ball to give any kind of view on that at the moment. But I would say what we are doing and things that we can’t control is continue to kind of recalibrate our resources, our staffing and our services within these facility as appropriate based on direction from ICE. It is very clear. And I think it is getting reinforced with this announcement, this last couple days with ICE on Hutto for a 10-year contract that our solutions, our capacity, the locations of these facilities and also the additional services that we can help them provide like courts and space for attorneys and case managers that this solution continues to resonate and with that they want to sign long-term agreements. So hard to give at the moment any kind of forecasts on populations. I mean, you can look at - I guess, when they kind of look at the trajectory is it has narrowed or I guess flattened a tad, but it continue to see kind of the decline based on all the reports. But I will let David Garfinkle with me on that to answer.

So yes, I think the pace of declines is slowing a little bit. And Joe is a reminder we discussed last quarter, about two thirds of our federal contracts have guarantees if you are a fixed monthly payments. So we are protected on the downside somewhat. That is really to provide the capacity to the federal government in the event that they see a surge or an increase in population. And I would say based on the conversations we have had with our federal government partners, they are expecting increases in federal populations eventually. The crystal ball and the challenge is predicting when that will occur.

And have any of the ICE or U.S. Marshals so I just said you have a guaranteed minimum guarantees. But with the significant drop in decline have any of them come back to you yet to say, Hey, we want to renegotiate?

No. So it is the contrary, and I would say kind of Dave’s point we have had some conversations with folks in leadership and they are always preparing potentially what happens in the coming days, weeks and months with not only the pandemic but also going into 2021 maybe some outcomes in Congress and in the White House. So they are preparing and without working with us to prepare. Yes, the other thing I would say, again, just to kind of reinforce again, the attractiveness of our solutions the announcement this week of our contract at Hutto. Again, we think we are probably there to right to get similar 10-year extension on our ICE contract at Houston. And then you probably saw to [Indiscernible] had an announcement this week with South Texas. So two announcements already, a third one is about to come again, I think just reinforces the fact that ICE really wants to maintain the capacity they have got nationally for their detention system.

Okay. And I’m going to switch gears over to the community segment. As you guys mentioned, you have seen a larger impact there. I noticed in a quarter you did take some impairment charges. If we start to see the community segment continue to see this bigger impact. Are we at risk of seeing more impairment charges going forward there?

Yes, great question. This is Damon, I would again talk with Dave on this a little bit, but I would say the value and the desire by government invest in these facilities with this mission is really, really strong. I think you have probably heard me say, I have been with the company almost 30-years. The last 10-years has been very encouraging to me, because governors, legislators, folks at the federal level have that we want to put more investment on increasing programs, but also Rangers facilities, and that that message continues to be very strong. But you do appreciate obviously, in a very tough fiscal environment, some of these jurisdictions has to make a really, really tough decisions, because obviously state level, they have got to close the deficit. They can’t go year-over-year with a deficit. So, I don’t see it as a widespread kind of potential action, but obviously something we are very sensitive and keep a close eye on in obviously the coming days or week. Would you add to that, David?

Yes. The only thing I would add, I think as I mentioned in my script, the government’s in the community segment had acted faster as a lower risk population. So I think they are more comfortable putting them on home confinement things. So we see it as a short-term drop in the community facility, and it can happen fast as I think our total NOI for the quarter was $3.8 million. So, for the company, it is not a significant number, but for the segments, as I mentioned, they are significant percentages. But eventually, we expect those populations come back. Again, eventually, putting a definition on when is very difficult, but as Damon mentioned, we continue to see nationwide, that dialogue about helping people in prison transition to society and to be able to reduce recidivism rates is still a very important part of the dialogue. So I think they will continue to make investments in those facilities and we could see a resumption or populations returning to pre pandemic levels faster in that community segment even then in the safety segment.

Okay. And on the cash flow, I think you think you have generated roughly 100 million from operations in the quarter. Are you kind of anticipating a similar level for the next two quarters?

I said our AFFO was pretty much flat with what it was in the first quarter. The $98.9 million is what you are going to see in the statement of cash flows for Q2 where we represent a year-to-date through June 30th. So to back out the first quarter, that is the number you get close to 100 million. That did include some positive working capital fluctuations, so we collected on some receivables, our receivables actually very low at the end of the second quarter. So I think going into the next two quarters, I wouldn’t expect to see that level of cash flow in the statement of cash flows. Again, we don’t have guidance out there, but as I alluded to, in our remarks, occupancies populations continue to decline. So it would be tough to say that we would achieved the same level of AFFO in Q3 as we did in Q2, but that is a little bit of crystal ball and that is why we don’t have guidance out there, it is tough to predict.

And guys, to be cautious took down the liquidity earlier this year. You recently paid back, 50 million you said, but you still have a significant amount of cash on the balance sheet. If you look at it prior to the draw down, why just pay back 50 why not a bigger numbers or something else out there that is keeping you wanting to have a large cash balance?

Yes, great question, Joe. As I mentioned that that was a drawdown in the first quarter of an abundance of caution. Then we launched the evaluation of the corporate structure and what we are going to do with the dividend. And so it is something we have been thinking about and I totally expect in the second half year, we will continue to take that cash and pay down the revolver.

Okay, and then let’s switch gears prior to the credit conversion. Maybe you could just kind of walk us through a little bit more on the thought process and what other alternatives your financial advisor here brought to the table tables you guys to look at when you make the conversion, is there either a positive or negative from the cost perspective of being the C-Corp versus a REIT, maybe you can you can talk a little bit about those. It is about some of the new program services that you are talking about and maybe be able to grow into and your confidence and your ability to do those and who you’d be going up against to access those services.

Absolutely. So this is Damon again, I will tuck-in with Dave on this, but answer of course, your questionnaire So, Joe, if you have heard me say and we have talked about this quite a bit, obviously that reinforces in my script. For I mean, this multiple for our stock is just not appropriate. I mean, you look at underlying real estate, and you look at the replacement costs of what it would take for government to replace that real estate. I mean, we are talking conservatively maybe three, maybe six, maybe up to $12 billion in our real estate is valued if you look at replacement costs. And so we are just not getting credit for real estate but also the services, especially in this environment COVID-19 that we provide to our to our government partners. And so it was that kind of with that context, you are talking about with the board of maybe us other alternatives to where we can kind of reallocate our cash flow and our capital in a more effective way to not only meet the needs of the business, but also think of some ways that we can return capital to shareholders in different ways. Like, share repurchases, P&L and other example. And the models have been great, we are going to work with them along with places [Indiscernible] on its analysis. They have done a very thoughtful working along with team process to evaluate this and work with the board. It has been kind of multiyear discussion, but I would say probably in earnest has been probably last six seven months where we have really as in earnest talk about this alternative going to a C-Corp. And it is probably through got probably eight nine meetings, we had the board. So it…

Obviously, I have got two things. So, G&A labor efforts and things like that the cost structure going forward is not material. In fact, it is probably nothing it is really just different I would say. Our finance department has to deal with the operating requirements as a REIT, so some back office things that we have to deal with in order to comply with the REIT requirements. As Damon mentioned, it has no impact whatsoever on facility staff, facility operations. They wouldn’t even know the difference between what we are doing as a REIT or as a regular Taxable C-Corp. Different issues as a C Corporation and Taxable C Corporation. There are tax consulting engagements to try to attach plans. So I would say it is truly just a difference. So I don’t see it any different really, in terms of what G&A expenses we would be projecting under a Taxable C Corp structure compared with the REIT restructure. And then going back to the cost of debt that Damon was talking about. Under a C-Corp structure, we can self fund the business, we can retain our cash flows. As we mentioned the prioritization would be priority would be on paying down debt, but you get to 2.25 to 2.75 times leverage which is a very comfortable leverage, very low leverage, we can potentially see improved credit ratings from the rating agencies. But it should improve, it will definitely improve our overall credit profile and should reduce our overall cost of capital them. So we like the ability to take control of our destiny rather than having to rely on the capital markets, which have become increasingly expensive. But if the capital markets are there for us, like Damon mentioned, if we are able to go out and issue data at a reasonable or very low opportunistic rates, we will take advantage of that, push out maturities and deal with the balance sheet like that. But under a Taxable C Corp structure, the important thing is we don’t have to, we have to rely on the capital markets for those things.

You know, one thing I would add Joe to is that, this is really significant step, but it is part of the other steps we have taken to kind of do this business. And so as you know, over the last four, five, six years, we have really taken some steps I think as we go into 2021 is really lower the risk profile even more so with the company. Notably, in last 10-years we have continue to kind of shy away from our managed only business. So the last 10-years - this is the time, I have been CEO, we have lowered our exposure to business. So this is again, the business that government owns real estate, we provide the service. We have lowered that by about 16 facilities about 20,000 beds. It is just the top line. So we obviously hit revenues is about $240 million in annual revenues with those 19 facilities that we have transitioned back to the government. But this was your single-digit margin business and with that it had about 4000 employees and about $1 to $2 million in kind of annual CapEx for these facilities. So we have also put aside now with this completely kind of narrowing the [May and July] (Ph) business not only the CapEx need for the business against small, but significant, but also the risks with that business being a single digit margin. So that is one step. And then also, I think, as you and I talked about the Bureau of Prisons and the State of California with our state program both those partners individually are about 15% of our revenue in 2010 or combined about 25% or 30% of our revenue. Today, I would say California is zero, and BOPs now only 2% of our revenue. So we have taken it again from about 25%-30% of revenue down to 2%. So the volatility with those partners obviously been taken down dramatically from a risk perspective. So those steps along with the one that we announced yesterday, we just think would really positioned the company going into 2021 to be really a lower risk and be able to control our own destiny in a very meaningful way.

Very thoughtful. Thank you for those answers. I will step back and let someone else ask a few here. And thanks again.

Thank you.

Thank you Joe.

Thank you. [Operator Instructions] We will take our next question from [Indiscernible] of Rubicon Partners.

Good morning, gentlemen. Thank you for taking my call. Just a couple of quick questions about the debt levels that you are targeting. Based on what I’m seeing, and maybe I’m obviously working based on the numbers that I can green here. The level of debt reduction you are targeting is that if you are looking at the current numbers, or the trailing 12-months is that around we are looking at $800, $830 million.

I’m not sure, which period of time you are talking about. But I would say this. In 2019 to regenerate over $300 million of AFFO which as I mentioned in my comments were used as a proxy for cash flow after maintenance CapEx but before debt repayments. Our pre-pandemic guidance included AFFO say $283.5 million at the midpoint for 2020. Now will incur taxes so if you apply a 28% tax raise and 2019 pretax income, we would have paid an additional $15 million in annual taxes and $43 million if you applied it to the pre-pandemic guidance for 2020. So that will translate into slightly over $200 million of annual pay downs of debt.

And let me, add a little bit to that answer and the previous too. I mentioned earlier about kind of, what we are seeing within the industry on kind of yield for outstanding bond maturities. I will tell you and virtually I bet everybody on the call knows this already. But if you watch our bond prices right now, in the last 30- days to 45-days, we are trading much tighter than others in the industry with this announcement. So the bond market, I think his hands are pretty loudly, they liked his idea of going back to a C-Corp and be able to control our destiny. So I think that is, again, virtually I bet everybody on the call knows already, but if you follow the move in the last 30-days to 45-days, there is a delta, 500, call it 600 basis points of our maturity versus others in the industry. And so that, again, they just say in the bond markets to say and this is a really good step and kind of turn it on.

Yes, and one more comment of mine. That didn’t take into consideration the property sales. So we have identified that we call lower yielding, GSA government leased properties outside the corrections portfolio, that would only accelerate the capital allocation strategy. And we could even do those potentially creatively. So it is not like we are going to be killing the earnings by disposing of those properties because they are just lower cap rates. And so we think we could potentially sell those potentially creatively but certainly not significantly dilutive while delivering the business at the same time. Like I said, accelerating the capital allocation strategy, getting to our target leverage ratio sooner, and being able to, at that point then do other things like buy back stock and pay dividends.

Thank you for the color. I was referring to I guess the amount, the total amount that we need to reduce the debt by, so to go back to 2.25. So just if you look at, for instance, that the guidance you guys gave pre-COVID. And you applied those numbers and the 2.25, 2.75, what level of I mean, how much in that we are looking at like that would be required to be paid down over the next couple of years?

Yes, I’m sorry, it would be about $500 million. If you go back to our pre-pandemic guidance, and split the baby on the 2.25 to 2.75 leverage, that would be about $1 billion so we have about $1.5 billion of that is recourse debt. So we would be paying down 500 million to get to that level, the targeted level.

And then so once you sell those properties, and I think those properties, if we are talking about the same properties is a regionally guys paid for them about $428 million, those the properties you are talking about?

Those are the properties we are talking about, that is probably I don’t remember the exact number but that is in the ballpark for sure.

And some of them they have debt on them. So that is how you are getting down to a net proceeds and you are assuming the whole portfolio. So, you pay off with the non-recourse debt, any defeasance costs and so forth. So, we are comfortable putting out we put in our press release, net proceeds after all that about 150 million could be more, could be less, but that is kind of a marker out there for us.

Okay. So $150 million and then this year, the fact that this year, the debt was suspended, I’m sorry, the dividends were suspended above 100 million as well. So we are looking at 250. So that is, I guess, even without the conversion, you guys could already, like raise half of what the overall target is, if I understand correctly. Is that right?

That is all right. And yes, I think we paid 100 million this year is I think we should we are saying for 200 million on an annual basis. So yes, I mean we can delever pretty quickly with the cash flow as the business generates.

Right. I mean, it is your decision you guys made. Even without a conversion, you could have sold the properties get $150 million in equity, at least in them. And then because from a tax perspective, you don’t have to pay any extra dividends. Even if you decide to continue with the REIT structure then that is another $100 million in cash altogether $250 million so that gets you halfway where you want to go. Is that right.

Yes, I saw the 150 the dividend was 200. You are saying if we reduce the dividend or maintain the dividend?

I’m saying even if you just - I mean, you guys suspended it and you could still retain the restructure until next year. I guess - the dividend at whatever level -.

Yes, that is right. I mean it would have been this year. So if we had suspended the dividend this year and resumed it next year, we would have saved $100 million dollars in dividends for the second half of the year. And if we are able to generate $150 million in net proceeds from the asset sales, that would have been a total of $250 million this year whenever you lose sales.

Okay. And then so it seems you guys are going to go ahead with a conversion in next year. So beside this 150 this year and 100 next year, are you looking at what level based on the pre-COVID estimates or guidance. We are looking at the payout or I’m telling you they pay down of what a level of $160 million a year in cash. Is that what you are looking at?

Yes, I would say it is probably $200 million a pre-pandemic level would have been about $200 million after taxes.

I will say the question is at what 202 was like with the pandemic. But pre-pandemic it is appropriate number.

So we are looking at reaching that debt level target, I guess the middle of 2022.

Again, if you get to kind of back to normal level. And again that is the crystal ball question, you get the normal level in 2021 or I think extended. So it could be a little longer than that.

Okay. Okay, that makes a lot of sense. And I guess the ultimate objective here maybe is to go to investment grade just to expand the universe of creditors that can invest in the debt?

I think investor grade, it is a little bit hard nut to crack. And we did have a one time as a REIT. But we think the bigger goal is that this will get awarded for investment both in the bond and equity side is just to lower the credit profile to company period. Now that leads credit rating upgrades investment grade possibly, but I will say that keeping we also want to do is control flow that is the lower credit profile of the company lower leverage and again kind of their away based on the needs we have with the debt maturities but also the need with the business.

Yes, let me be clear, I think, we think we would be investment grade to the quarter to two and three quarters times leverage with the cash flow that we generate. But that is not MLBL be all. We are not going to continue to change levers policy if the rating agencies say you got to get a loan one time just as an example. We are not going to manage the business to get to investment grade, we are going to manage the business to leverage level that we believe is appropriate and we believe our credit profile will be substantially improved with this decision because of our ability to retain our cash flows and uses it to pay down debt or for other things other than the mandatory dividend.

Okay, understood. I guess the last question is more of a housekeeping. I know there was some issues with the a little bit Detention Center in New Jersey, what was the that center’s contribution to FFO in 2019?

I will let you answer that last part, I guess just to give a little bit of context there. So we got a lease with the current landlord through 2022. And then we have got the unilateral rights extend at least through 2027. So we have got visibility on that property for the next seven years, but I will let Dave answer your question.

Yes, I mean, we don’t - if it is - how many beds facility. 200 bed facility. So it is a relatively small facility. We don’t disclose EBITDA by facility or facility that we continue to operate for competitive reasons, but it would not be material one, but it is one that we still believe that we are going to be able to retain.

Okay, understood.

Thanks you very much for your questions.

Thank you.

Thank you. This concludes today’s question-and-answer session. I will now turn the conference back over to Damon for closing remarks.

Thank you so much, Casey, and thank you so much for everybody joining on the call today. In the coming days and weeks feel free to reach out to Cameron Hopewell or other members of the management team. With this announcement, we made today’s happenings additional questions offline. And also just a reminder what Dave said earlier, we do have a updated investor presentation in website or has been uploaded and provide a little more color and context with the strategy with the conversion. So with that, thank you so much for your continued interest and the support of our CoreCivic. Have a good rest of your day.

Thank you ladies and gentlemen. This concludes today’s presentation. You may now disconnect.