Good morning. My name is Olivia, and I will be your conference operator. As a reminder, this call is being recorded. At this time, I'd like to welcome you to CoreCivic's Third Quarter 2020 Earnings Conference Call. [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 begin your conference.

Thank you, Olivia. 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 third quarter, general business updates 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 pursuant to the safe harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our third quarter 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 the Investors page of 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 us today for our third quarter 2020 conference call. Today, we will provide you with an overview of our third quarter financial performance, update you on recent contract awards and provide you with our updated outlook for additional opportunities in the market. We'll also update you on the progress we have made to reducing debt, which is our first priority of our current capital-allocation strategy, and provide a brief update on our evaluation of potential sale of certain non-Correctional real estate assets in our property segment and close with some comments about the political environment, the expansion of our multiyear policy initiative aimed at reducing recidivism and recent elections. First, I'll briefly touch on our third quarter financial performance, which remains strong, albeit impacted by COVID-19. On the top line, our revenue in the third quarter was $468 million, which is a decline of 7.9% over the prior year quarter. A majority of this decline was experienced in our CoreCivic Safety segment, but our CoreCivic Community segment has also been impacted due to COVID-19 as our government partners have sought to release their lowest risk residents or those closest to the end of their sentences. Normalized funds from operations, or FFO, was $0.52 per share in the third quarter, down from $0.70 per share in the prior year quarter. The largest impact on our revenue and normalized FFO in 2020 has been the lower utilization levels from our largest government partner, Immigration and Customs Enforcement, primarily due to COVID-19 pandemic and the closure of the nation's Southwest border. While current utilization levels by ICE are well below historic averages, comparing Q3 2020 to the same period of 2019 was already going to be somewhat distorted under any circumstances because…

Thank you, Damon, and good morning, everyone. In the third quarter, we generated $0.22 of EPS or $0.28 of adjusted EPS, $0.52 of normalized FFO per share and $0.49 of AFFO per share. Adjusted EBITDA was $94.6 million for the quarter. Adjusted amounts exclude $4.7 million of expenses associated with our change in corporate tax structure and $2.8 million of incremental expenses associated with COVID-19. Adjusted amounts also exclude a noncash impairment of $0.8 million, a $1.6 million net gain on the sale of real estate and $0.6 million for contingent consideration associated with the acquisition in 2019 of 2 residential reentry centers based on financial performance that has been better than estimated. With respect to COVID-19 expenses, we are following SEC guidelines and have taken a conservative approach, including only those that we believe are nonrecurring, incremental or separable from normal operations. Despite being impacted by COVID-19, we continued to generate significant cash flow and sign new contracts to provide essential services for federal, state and local governments in our critical real estate assets that are very difficult to replace. During the third quarter of 2020, we signed a new contract with U.S. Marshals Service to utilize our 1,692-bed Cimarron Correctional Facility in Oklahoma, enabling us to keep this facility operational for the long term with improved economics. Recall, last quarter, we announced that we agreed with the State of Oklahoma, which previously contracted for the full facility to idle the facility because of lower inmate populations resulting from COVID-19 combined with the consequential impact of COVID-19 on the state's budget. We completed the transition of the facility from Oklahoma to U.S. Marshals Service during the third quarter much faster than originally anticipated, and therefore, did not report any start-up costs in our non-GAAP metrics. During the third quarter,…

[Operator Instructions]. We will move to our first question that is coming from Joe Gomes with NOBLE Capital Markets.

Nice quarter in a challenging environment.

Good morning, Joe. Thank you.

Let's start off with some of the easier ones first. It sounds like some of the population levels might be seeing some type of stabilization here, even if it's at the reduced levels?

Yes. This is Damon. Thanks, again, Joe, for your question. So yes, I think that's right. If you look at our first two partners, Marshals Service and ICE, Marshals Service has been pretty steady during the quarter. ICE has continued to decline, but the rate of decline definitely has slowed down versus what we saw in Q2. And then on the state side and looking at numbers this morning, I think we have seen a pretty significant slowdown with our state populations. I think 2 states have shown a little bit of an increase in the last month, and I think we've seen 4 states increase a little bit in the last week. So yes, I think generally, looking at kind of both sides of the portfolio on the Safety segment, again, seeing a little bit of decline in a couple of partners, but the rate of decline has slowed down a bit. And then on the Community segment, that's been, I think, pretty stable over the last, probably a month or 2. And again, we're excited about the new opportunity in Oklahoma, which will be a nice opportunity for a couple of facilities that have been underutilized there in Oklahoma. But anything to add to that, Dave?

No. Well, I guess, I'd say, our Marshals populations were pretty flat. I think they were down like 50 from the second quarter to the third quarter. ICE's compensated populations were down probably about 500, something like that. As I mentioned in my script, the pops are -- total pops are actually up, even if you exclude Cimarron, which is the new contract ramping up, they were up slightly from the end of September to a couple of days ago. So fingers crossed. But as I mentioned in my script, there's a lot of uncertainty and still in the middle of COVID-19 and would expect to see some impact of that in the form of reductions in populations going forward, but a little bit -- I think it has slowed down.

Okay. And then in the fourth quarter, any significant contracts that are up for renewal? I saw in the third quarter, it looks like you guys had about a 90% retention rate. So just wondering what it looks like here in the fourth quarter for contracts up for renewal?

Yes. Nothing -- this is Damon again, Joe. Nothing in the fourth quarter, and I go out a little further into kind of first, second quarter, maybe even out 12 months, nothing really significant relative to significant contract renewals. The Houston and the Hutto contracts were ones that we're focusing on, but now that we've gotten those across the finish line, I'd say that the list of kind of near-term contracts that we think are at risk of being competitive to procure and whatnot, we think that's probably pretty unlikely here in the next probably 6, 12 months.

Yes. There is -- let me add, with contracts that are averaged 3 to 5 years in terms, generally speaking, you do always have a significant portion of them expiring in any 1 year. But as we look out over the next 12 months, it's pretty quiet relative to what it has been when you're looking at the material contracts. So I feel pretty good about those that are coming up that they would be renewed.

Okay. And then just kind of a technical question here. I know you guys suspended the dividend. At the time you suspended it, you said you thought you had paid enough in dividends that you would be able to retain the REIT status for 2019. That's still I'm assuming the thought process right now?

Yes. Yes. We had mentioned that there were some benefits under the CARES Act to accelerate some depreciation qualified improvement properties. Without that, we probably wouldn't have been there, but we obviously have that and don't anticipate an additional distribution required this year. If we were to sell a significant portion of our assets that are -- that we've talked about in the scripts, at a large taxable gain, there could be an additional distribution, but I don't anticipate that right now.

Okay. And kind of big broad from the 10,000 foot. I know, Damon, you touched on a little bit here. But obviously, if we look at your guys' stock price with what's been going on here with the election, there is a huge portion of the investor base saying, the feeling is that with -- if Biden was to win the election, that is a huge negative for the company, just based on what's happened to the stock price here. If you can fill in a little more color here, any more detail? I mean what actually can Biden do from a regulatory standpoint in terms of changing immigration or the U.S. Marshals? I know the Bureau of Prisons has reduced its populations over time. I don't know if that gives them excess capacity, can that allow the government to transfer detainees that are currently being helped by the private sector to the Federal Bureau of Prisons? Are those facilities just not set up to handle detainees versus inmates? It's my understanding, correct me if I'm wrong, please, ICE and the U.S. Marshals own minimal amount of beds at all. So that, again, the alternatives for the federal government to house these detainees is extremely limited. Any kind of overview or more detail you can give on all that would be greatly appreciated.

Absolutely, Joe. Thank you for the question. So yes, let me give a little color on all three federal partners. Let me start with the Federal Bureau of Prisons. So that was, as you know, about 10 years ago, that was about 10% of our revenue -- excuse me, about 15% of our revenue came from the Federal Bureau of Prisons. This year, on the safety side, it's going to be about 2%. So we started a conversation with our Board about 7, 8 years ago, noting that the need and the trends for the BOP was going to change because they, at that time, were going through some sensing reform and changed some policies on sensing for different criminal offenses. And so we went through a process to -- as we saw contracts come up, exploration most notably, the most recent one here, Adams County, just thinking about maybe alternatives for those facilities. So that 15% revenue from the BOP back in 2010, now it's down to 2%. So we think if there is a change in policy directed towards the BOP about utilization of the private sector, again, we think our risk is pretty minimal there just because we're down to one contract. I'll touch a little bit more on ICE and Marshals, but let me, I guess, answer one part of your question that was embedded there, and that is the BOP being able to support the missions for ICE and Marshals Service. We think that if there is some direction again for the BOP because utilization and occupancy has gone down in their system that it's likely that the contracts they have with the private sector directly like our one in McRae, maybe that's capacity or that's population they move back into their system. So facilities…

Just a couple of points. You touched on, though, the standards. Our facilities meet what they call the performance-based national detention standards that the alternative in a public sector facility, where they house them in county jails, just oftentimes cannot meet those facilities because of physical plant limitations. So where our facilities, our newer facilities, they meet all of those standards. In many cases, the alternative use in a public sector facility just can't meet those standards because of the physical plan. And then last point or last couple of points, I guess, I'd make is, many of our facilities also have courts within the facilities. And ICE officials, we have hundreds -- literally hundreds of ICE officials that when they get up in the morning, they report to their place of work. It's at one of our facilities that -- in the case where they have courts, is an extremely efficient -- much more efficient use of the space when -- as opposed to having to round them up from county jails and get them to court. So a lot of critical needs we provide within our real estate that's very challenging to replicate.

One of the other thing I'd add, Joe, is that we've got about 65,000 beds in our Safety segment that we own and we operate. And so if there was a -- for whatever reason, a desire either to lease or buy that capacity, if you put a dollar amount to it, new construction for federal facilities that we've seen over the last few years is anywhere in the range of about $200,000 to $400,000 per bed. State new construction is in the range of about $100,000 to $200,000 per bed. So if you just use $200,000, it's kind of the midpoint between state projects versus federal projects and put that against 65,000 beds, that's $13 billion in value of our underlying real estate. And again, about 1/3 -- maybe actually half of that is with the federal government. So that's -- we're willing to have that conversation, if appropriate, basically the alternative. But I guess, I would just say, again, both Marshals Service and ICE have been and continue to be very satisfied and really have a great desire to kind of keep the current situation in place, which is look at the private sector first, maybe city county's second for capacity, they have -- capacity needs they have around the country.

Great. One last quick one for me, and I'll get back in queue. So again, we'll go back to the stock price and, I quote, understand the first focus here is on debt reduction. But assuming we were able to sell the noncore assets in the Property segment, any consideration given to maybe using a portion of those proceeds to buy back some of the stock if the stock was to stay at these types of levels?

Yes. I mean, share repurchase program, obviously, would make a lot of sense based on current valuation. And as a large shareholder of the company, obviously, I agreed with that just because of my current holding. But we think the position we've put ourselves in now, which is now we can control our own destiny as it relates to if equity and credit markets are not available to us, we can pay down debt. So that is our singular focus at the moment. Let's pay down debt. Let's get our leverage level down to 2.5x. And along the way, we can evaluate, especially if the bond market opens up for us, we can evaluate and see if there is opportunity to refine some, if not all, of our outstanding debt. But the near-term focus is just to pay down -- continue to kind of evaluate market conditions, but clearly, a share repurchase program based on current stock prices would make sense down the road. And I guess the last thing I would say, especially for newer investors, I mean, it is a tool in the toolbox that we have used in the past. From late 2008 to 2011, we bought almost $18 million of shares back. These were in the early days when I was CEO, about $0.5 billion. So it's clearly the tool and toolbox that we've utilized in the past. But again, I just want to reemphasize, #1 priority is paying down debt and getting our leverage level down to a level we think is appropriate.

We will take our next question from Jordan Sherman with Ranger Global.

Just want to make sure I understand the Alabama opportunity. I think you mentioned 7,000-plus beds, and maybe you can compare that to Kansas?

Absolutely. So this is Damon. I appreciate your question. So yes, Kansas was about 2,400 beds, primarily two compounds. One was a secure facility about medium to high security. There was a big investment there, too, for medical infirmary beds or whatnot as in about 500 beds that were outside the facility. So combined, that's about 2,400, 2,500 beds. Capital project, if you want to put a dollars to it, was kind of in the range of about $160 million. So Alabama, obviously is a much larger project, and I should say projects because it's going to be two facilities that we've been selected, assuming we are successful on lease negotiations. And this will -- this is going to be pretty fluid, probably here to next probably 60 days, but one facility will probably be in a range of about 3,000 beds. The other one will be in a range of about 4,000 beds. One of them is going to have also a very big investment for specialty medical care, so probably some infirmary beds and whatnot, that's conceptually what the state wants to accomplish. It's hard to put a dollar amount to it right now just because it is pretty fluid right now. One of the key things we bring to the table is, we know how to build facilities obviously very efficiently from not only a systems and utilities perspective, but also from a staffing perspective. And so that's really the meat of the work that we're doing right now is continue to kind of work with the design with the folks in Alabama to ultimately give them the most efficient facility that meets their goals of the project. But anything, I guess, you'd add to that, David?

Yes. I think the state had put a total estimated cost of close to $1 billion for all 3 of them. As Damon mentioned, that's the process we're in right now, working with them to try to minimize the cost and obviously, the lease rate that they would ultimately pay. So much more...

I apologize. The phone cut out just as you were saying the dollar amount.

Actually the state put an estimate of about $1 billion, close to $1 billion on.

And that was for the -- for all three facilities to almost 10,000 beds or something?

That was their estimate. That's right.

Okay. And were expected returns for you guys similar to Kansas?

I hate to get into the details of that, but I'd say, at least, some returns is Kansas. Kansas was the first one in the industry ever done. Kansas is also one where ownership reverts to the state at the end of the lease -- 20-year lease term. That is not going to be an option in Alabama. So we would expect to retain ownership at the end of the 30-year lease term. So I think it's what they're shooting for, but yes, there'll be returns that hit our thresholds.

Okay. And then just wanted to ask about the facilities to be sold. I'm not sure I quite know my mind around, which is how many facilities total are you thinking of selling? And then what's the associated NOI with those and what type of pricing ranges? I don't know. No one will probably be careful about what you say about that. But I'm just -- just sort of -- any sort of parameters around that?

Yes. The 46 facilities, NOI of about $30 million on an annual basis. If you look at our supplemental disclosure report, they're all in the CoreCivic properties segment and their lease -- most of them are leased to the GSA, General Services Administration. Most of them like SSA building, social security administration buildings, IRS buildings. And so it's really your noncorrectional portfolio. And yes, I probably wouldn't want to talk about price at this point.

Understood. And these are -- some of these were part of the newer direction you guys had been headed in?

That's correct, yes. So we started acquiring these a couple of years ago. There was a couple of reasons why we thought that was advantageous, one of which is to diversify the cash flows through the overall company. But clearly, with the current valuation of the stock price, we're not getting any credit for those assets. But what also has happened on a parallel path is that government lease assets like these, I mean, this market is red hot because other real estate asset classes obviously are distressed right now for obvious reasons. So we think there is a market opportunity to take advantage of the current market, interest in the market, I should say, to buy these assets, understand that we're not getting any credit with it being embedded in our portfolio. But the other strategic reason we thought these assets make sense and now we feel like we've kind of cleared that hurdle is when we were building the properties line initially, there was a lot of trying to kind of misunderstanding or maybe not complete awareness of what we're trying to do in places like Kansas and now Alabama. Now that we've completely developed that market, it's very, very well understood. It's seen as a very attractive option for states like Alabama and Kansas and Oklahoma, Kentucky and even Nebraska, we think having a portfolio of government lease assets. We've kind of made the market, kind of aware of how we can do it, but we've also made the market aware of that this could be on an individual project basis, something that might be interest for investors if they want to help with the development of the cost and maybe do a specific loan for projects like Alabama, like Kansas. So there was a couple of reasons. Strategically, we thought these portfolios added value, but we think now is an opportunity with the market being red hot from a buyer's perspective and also not getting credit. It's a good time to go ahead and see what the market will bear relative to potential purchase.

Scary thought, considering what people think about private prisons these days. Maybe you are getting credit for that, but I'm just kidding. Just a question on, so obviously, there is some concern with the Democrats -- if Joe Biden wins, and I would think that the concern would be less now with a -- if the Congress doesn't turn over. But I'm just wondering, in your experience, and I gathered from all your comments that you think these concerns are not well founded in either history or in your expectations? But how long will it be? Say, Joe Biden's elected and we have a Republican Congress, how long will it be before we start to see whatever policy that the new administration has for immigration and private prisons taking shape? When will the rubber start hitting the road to sort of demonstrate that life is not going to be as bad as feared with the change in administration?

Yes. Good question. And I'll tag team with Dave on this, but I'd say a couple of answers. Let me first say, it was the Marshals Service. So again, the Marshals Service 100% rely on private sector or our local facilities. They do not have any own facilities, they have no alternatives, and again, they completely take every prisoner that's produced to them from the federal judiciary. So I think if there is a policy decision made where the Marshals Service can no longer use the private sector for whatever reason, that would be very, very hard, if not impossible, to affect. And again, I've talked you through a little bit about the idea of maybe leasing or buying the facilities. Again, if the Republicans control the Senate, there is going to, obviously, have to be some discussion and probably, agreement that, that is in the best interest of government. So we think that one is going to be kind of a difficult one. As it relates to, I see your question, I think probably what you potentially would see is maybe through the funding cycle. So as you go into the new funding cycle for, this would be, I guess, fiscal year 2022, which would happen during the kind of spring and summer of next year. Obviously, that level of funding could go up or go down, and that could be somewhat linked to maybe a policy directive or the buyer with a new administration. Again, if history is in an indication under multiple congresses being controlled by either Democrats or Republicans and other 3 different presidential administrations over the last 15 years, funding for ICE has either been flat, so year-over-year on par with the previous year or has increased. But anything you want to add to that, David?

Just if Joe Biden were to become the next president, I think there is a lot on his plate to deal with. Certainly, COVID-19 is going to be mission #1 to help get that under control. But when you think of all the other initiatives that are on his plate, health care, tax reform, climate change, trade negotiations, it's probably a while before you would expect the focus to become on private prisons. It's just such a complex area to solve because we provide such an essential governmental service there that I just can't believe that, that would be one that they want to tackle out of the box.

Yes. I always thought that the bigger -- well, two things really. One is that the bigger picture question would be more important, comprehensive immigration reform, then specifically targeting the private prisons. And also that with President Trump out and a shot at true comprehensive immigration reform, the private prisons would become less of a target.

Yes. That might be, again, kind of going through the list of kind of legislated priorities. I think if it is -- Biden becomes President, and he's got -- and the Congress is controlled by Democrats on the House side and Republicans on the Senate side, there could be an opening, but they've kind of ticked off. There are so many other priorities, but also challenges, notably with the pandemic. And he's obviously got to think through what's my priority list over the next couple of years, especially with the midterms coming up in '22.

And the only thing I'd add to that is it's a little uncertain what's going to happen to the trends of immigration. Right now, populations are really down because of COVID-19. There has not been a fundamental shift in the number of people trying to cross the border. Those numbers are still large numbers, but they're just turning them away to help prevent the spread of COVID-19. I would expect, although it's just an opinion, you would suspect that a softer immigration policy or perceived softer immigration policy from the Biden administration compared with the Trump administration might result in increase in the number of people trying to enter the United States. It's going to be a good economy. The benefits that are potentially provided to asylum seekers and people on documents to people trying to enter the country could create somewhat of a surge. And I'd point to -- Joe Biden was the Vice President under the Obama administration, and during that administration, they did turn to the private sector to help resolve the humanitarian crisis that they saw in 2014. So hopefully, memories are long and can recall the solutions that we have provided.

Yes. That's kind of the bottom line. Obviously, there's a lot of scenarios you can go through with this question, which is a really good question, an important question. But the thing we can control is to provide safe, humane, high-quality solutions to ICE and Marshals Service. And we think we have answered that call over and over and over again with turnover that we've seen in leadership, both in the House Senate and the White House. So the thing we can control is continue to raise the bar on our quality, continue to advocate for transparent operations and on-site monitors and completely raising bar on standards and policies and protocols. And we feel like if we keep doing that, which we've got a good record based on our renewal rates on our contracts, we'll continue to be a very attractive option for the government.

Understood. And just last question. So I appreciate the capital needs and the capital concerns behind the view of potential stock -- corporate-level stock buybacks. But I'm wondering at what level -- it's both a question and a sort of suggestion, at what level does the stock become attractive for management to step up and buy? And I guess the suggestion there is that purchases by management at these levels would certainly send the right -- would be the right signaling to the market about the value in the stock.

Yes. So message received. I've got, I think, about 300,000 shares. And then I've got, I think, probably equal amount of options I've bought over the years. So I've -- vast majority of my personal net worth is in CoreCivic stock. So obviously, I'm highly motivated, incentivized accordingly. So -- but I understand your point.

And I'd add -- this is Dave. I have not -- so we used to issue options up until, I think, it was 2013, something like that, and now we've issued restricted shares since then. I have never sold a share of stock since then. We have share owner guidelines that we require our management team to hold -- I own 3x the requirements.

I think I'm same way.

So certainly, well invested. And as a fellow shareholder are certainly frustrated with the performance of the stock.

We call purchases at these levels averaging down.

Okay. Understood.

Right.

Thank you.

This will conclude today's question-and-answer session and today's conference. We thank you for your participation. You may now disconnect.