Good morning. My name is Amy 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 2022 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, Amy. 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 today’s call, we will discuss our financial results for the third quarter of 2022, developments with our government partners, and provide you with other general business updates. 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 2022 earnings release issued after market yesterday and in our SEC 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.

Thank you, Cameron. Good morning and thank you for joining us today for our third quarter 2022 earnings call. On today’s call, I will provide you with details of our third quarter financial performance, discuss with you our latest operational developments, update you on our capital allocation strategy and discuss the latest developments with our government partners, including the recent $130 million sale of our McRae facility to the state of Georgia. I will then turn the call over to our CFO, Dave Garfinkle, who will review our third quarter financial results and full year 2022 guidance in greater detail and we’ll update you on our ongoing capital structure initiatives. Before I give an update on our government partners, let me briefly pan out and give a big-picture view of the past 2 years, but also a peak into 2023 and beyond. As you know, like the rest of the world, we have had to deal with the challenges of COVID-19 and the pandemic. Being a 24/7 operation for nearly 40 years, I am proud of the team having strong systems, processes, and leadership in place to deal with the challenges that the pandemic brought us. It was a challenging journey, for sure, and some difficult decisions were made along the way. I am grateful in how the team navigated through this challenge and it thankfully appears to be more easily managed going forward as the severity of COVID has diminished. Second, I would note the change in sentiment from the [Technical Difficulty] in the last 2 years and how it could have possibly influenced our access to capital needed for growth and maintenance. The quick but proactive work to change our corporate status, but also expand existing and establish new major relations by our team and supported by our…

Thank you, Damon and good morning everyone. In the third quarter of 2022, we reported net income of $0.58 per share or $0.08 of adjusted earnings per share, $0.29 of normalized FFO per share and AFFO per share of $0.25. Adjusted and normalized per share amounts exclude a gain on sale of real estate assets of $83.8 million, asset impairments of $3.5 million and expenses associated with debt repayments and refinancing transactions of $0.8 million. The gain on sale of real estate assets includes a gain of $77.5 million on the previously disclosed sale of the 1,978-bed McRae Correctional Center for a gross sales price of $130 million, which was completed on August 9. The decline in normalized FFO per share of $0.19 compared to the prior year quarter included an EBITDA decline of $11.8 million or $0.08 a share due to the earnings disruption at our 3,060-bed La Palma Correctional Center, the second largest facility in our portfolio, as we continue to transition to populations from the State of Arizona pursuant to a new management contract that commenced in April for up to 2,706 inmates. We previously had a contract with ICE at this facility. And during the prior year quarter through the beginning of this year, we cared for an average daily population of approximately 1,800 ICE detainees at the La Palma facility, which declined to zero by the end of September. Last quarter, we temporarily suspended the intake process for Arizona to ensure our pace of hiring would meet staffing needs to manage the full capacity under the new contract. After revamping and expanding our hiring efforts, we resumed intake during the third quarter, and as of last night, cared for 1,896 inmates from Arizona and now expect the ramp to be complete by the end of…

Thank you. [Operator Instructions] Our first question comes from the line of Joe Gomes with NOBLE Capital. Your line is open.

Good morning, Damon and David. Thanks for taking the question.

Good morning, Joe.

Good morning, Joe.

The first one is kind of a multipart question here, but you talked about your hiring in advance of some population increases you think are going to occur. Just wondering, A, what kind of gives you the confidence in that, the population increases will occur. Also, you mentioned, Damon, some staffing shortages of other people, other government agencies. I was wondering if you might be able to give us a little more color on that and how you think CoreCivic can take advantage of that.

Absolutely. Thank you so much, Joe, for those questions. So for the first part of your question, your first question, I should say, give you a little more color there. So as of now, probably the best example I can give you is what I gave a little bit of color on relative to ICE in my prepared remarks. So we had assumed and now we’re starting to see play out a little bit a couple of things happening with ICE. One, they are into a new fiscal year. So they have got now kind of a full funding – a full-funded budget relative to getting their capacity nationwide at 34,000. So as you know, in the previous year, they were funded at that level, but a lot of money was diverted out of that budget for other expenses related to COVID. So we think that probably impacted their total contracted amount nationwide. And again, at the end of the year, at the end of the fiscal year, they were at about 26,000. So that would be number one. The new fiscal year kind of fully funded budget and can get maybe back to a more historical level at 34,000. The second thing somewhat related is we are starting to see steps. It’s not completely universal yet. It depends on kind of conditions on the ground in certain locations, but we are starting to see a little bit of pulling back or restrictions that were put in place around COVID because of social distancing requirements within our facilities. And we are starting to see that then in – or we had some caps in certain locations for ICE that being relaxed a little bit. So as I mentioned in my prepared remarks, with the start of the new fiscal year…

Nothing to add on the confirmation other than we’ve seen, as David said, 25%, 26% increase in ICE populations so far this month. 1 month does not a trend make, but it’s certainly a good sign and kind of makes logical sense given the turn of the fiscal year, the federal government, so October 1 was the beginning of the new fiscal year. So refreshing that budget helps as well as the strong demand that continues on the Southwest border. The other thing I’d add to the populations, particularly state populations, I’d say, where there could be opportunities to take additional populations because of states having challenges with their staffing levels is our ability to provide those incentives. They were expensive. I mentioned $5.6 million of incentives that we paid to our employees, higher Q3 ‘22 over Q3 ‘21. Our government partners really don’t have that kind of flexibility. They have to go to the legislature to get more funds. We can be more nimble and more flexible and can provide those temporary incentives to staff up to levels to enable us to take on those populations.

Okay, thanks for that. And talking about those incentives, so looking through the supplemental information there, looking solely at the safety segment, you see expenses as a percent of revenues for the quarter were 80.9%, up from the high 70s, call it 77%, 78% in Q1 and Q2. Is that mostly a reflection of some of these incentives you talked about and some of this hiring in advance that drove up the safety segment expenses as a percent of revenues?

Yes. It’s exactly that. We said last year, we were at unsustainably low staffing levels, doing everything we can to increase staffing levels. So I’d say the prior year quarter was probably lower than it could have been, lower than it ideally would have been. There were some reasons for that. We’re still deep in COVID and some of the programs and services have been suspended temporarily that are now reinstated for the most part this year. So that contributed to it. And then, of course, the biggest impact on the margins overall is the decline in occupancy. That’s not necessarily true from last year’s quarter to this year’s quarter, but as you bring on those staffing levels get back to normalized levels, you do have this dip in margins until the occupancy levels return.

Okay. And on the alternatives detention that you spoke about, Damon, obviously electronic monitoring and ATDs has been a big driver this year for some of your competitors out there or your key competitor out there, I guess, I should say. What are you kind of you guys doing to try and garner some more of that business? What kind of investment do you need to make in that segment to hopefully capture more business there?

Yes, great question. Couple of answers there. One of which is, I mean, we have a great relationship with ICE. As you know, it’s actually our longest partner relationship-wise. We’ve had almost a 42-year relationship. So we know them really, really well. They know us really well. We know what their needs are, and we’ve been able to adjust our solutions kind of nationwide depending on changing needs they have globally based on challenges on Southwest border but also from a policy perspective. So we’ve been, actively talked to them for a couple of years. Also, we participated in the most recent procurement that led to the contract that GEO has to date, and they are well aware of our capabilities, not only just because of our relationship with them over 40 years, but also, I mean, we have demonstrated operational record with our community segment that we’ve been doing for years, not for residential reentry, but also communities programs like home confinement, case management, electronic monitoring and whatnot. So we’ve got a whole suite of services that we can provide, but also a track record where we’ve had great outcomes and great performance. But anything you’d add to that, Dave.

Nothing at this time, and it’s – other than it’s an opportunity we see, it’s a growing opportunity. It’s obviously grown for our main competitor and its attractive business. So we are focused in on it.

Okay, great. And then maybe we could just talk a little bit on the stock buyback. Maybe you can kind of give us in the third quarter kind of a cadence there. Were you buying throughout the quarter or is it more front-end loaded? And then you took advantage of the bond market to pay down some of the – repurchase some of the debt there? And why no forecast in the fourth quarter for additional stock buybacks?

Yes. Joe, it’s Dave. I will take that one. I would say our pace was probably heavier earlier in the quarter as we knew we had the $130 million of sales proceeds coming from McRae. So, that kind of impacted the timing of share repurchases early in the quarter. With respect to Q4, as I mentioned in my script, we are not forecasting any repurchases in Q4. I am not saying that, that doesn’t mean we won’t be opportunistic. And if we see opportunities, disruption in the price, something like that, we could execute on it. Our repurchase program is not really formulaic, but it is colored by our leverage. And we closed the quarter due in the trailing 12 months at 3.0x. We are mindful of our target of 2.25x to 2.75x and we will be disciplined. The challenge here in the short-term, as Damon mentioned previously in his script, we have got this short-term earnings decline because of La Palma. And now we see occupancy going up. So, if we continue to see those trends improving, particularly with ICE occupancy levels, we could gear that program back up and accelerate repurchases. But until we see really evidence of that and see leverage going down, I would be a little bit more conservative. The challenge we have also, we have got – it’s a trailing 12 months past four quarters. So, our debt does continue to go down, but the leverage is impacted more by the declines in EBITDA. So, as we get through that cycle or quarters, we see that naturally increasing and therefore leverage naturally decreasing and would then be able to ramp that share repurchase program back up.

And maybe a little color on the bond too.

Yes. So bonds, yes, thanks, Damon. So, with constraints on leverage and still plenty of liquidity and a very volatile bond market, we thought it made sense to utilize our cash to pay off not just the 4% and 8% bonds. Those bonds mature in May of next year. As I mentioned, we expect to pay them off early 2023 anyway. So, if we can get them at par or below par, why not just take them out now, avoid the interest expense that we would incur between now and when we redeem those notes. Same kind of thought process in the quarters. Yes, that’s more market-driven, though, I would say. It’s a higher rate. That is an expensive tranche of debt, $675 million at 8% in a quarter. So, while we had plenty of liquidity. And again, that governor on leverage, we think it just makes total sense to save on interest expense and chip away at that maturity because it is a chunky maturity. It’s not until 2026, but nonetheless it’s a little bit of a chunky maturity. So, something will moderate going forward. I don’t know if we will continue to buy back the pace we did in the second quarter, but it’s a good use of our cash while we are constrained on the leverage side.

Great. Thanks. Thanks for the color on that. I will step aside and let someone ask a couple of questions.

Thanks so much.

Thank you. [Operator Instructions] And our next question comes from the line of M. Marin with Zacks. Your line is open.

Thank you. So, I have a couple of questions, a different topic. So, you have announced pending divestitures of some smaller facilities contracts were either coming up or you had idled one of the facilities. How far in advance do you start conversations to renewal or extend contracts?

Yes, great question. This is Damon. And it really depends on the customer and the circumstances around the contract. So, in the case with McRae, I mean we kind of saw the kind of signs of potentially them decreasing utilization of the private sector almost a decade ago. And so we really got in a room and looked at all of our contracts we had with the BOP, looked at kind of expiration dates for those respective contracts and determined kind of the best course of action of those facilities once those contracts did expire. And nothing changed during that period of time from the BOP’s perspective that they were going to change course or potentially renew one or multiple of those contracts. So, in the case of McRae, it was probably a couple of years ago that we started actively thinking through what the alternatives for McRae. Kind of obvious point, but we thought the most likely kind of scenario would be somehow a solution for the State of Georgia. And so start putting on paper some – various proposals to the State of Georgia and hope it ended up with a really, really good transaction for us and a great solution for the State of Georgia. So, again, it depends on the circumstance. If we have got another contract coming up and the customer is clearly saying, we want to renew this contract, maybe expand it or change the scope of services to programs. Then again, that may be a year or 2 years out, we start thinking through kind of what that all looks like and certain negotiation process for that contract. But anything you would add to that, Dave?

None other than last year, when the executive order was issued when we had our Leavenworth contract and contract with the U.S. Marshals of West Tennessee, those conversations began immediately. They probably wouldn’t have – probably wouldn’t have been – except for the executive order would have been a routine extension of those contracts with a lot of advanced discussion. But because of the executive order, I think those conversations began a little bit earlier in earnest for both parties. For us, we want to try to ensure we could retain the contracts. And on the U.S. Marshals side, trying to figure out what capacity was available if they couldn’t use our facilities. So, those were probably a little bit unusual because of the executive order.

Okay. Thanks. And we have also seen you come up with a solution in one facility where you sort of created a hybrid model with two distinct populations. Is that something you might be able to replicate at other venues?

Actually I didn’t follow your question there. What facility are you referring to?

So, you were able to – forgive me, I will have to go back and find exactly this facility I am referring to, but you were able to take in one population to take up some of the idle beds that you had in that facility. And I will look for it and come back in queue.

Yes, I am following you now. Yes, it’s our Montana facility up in Shelby, Montana, it’s our crossroads facility. So, that was a win-win-win. And yes, we worked it out with Montana where they had an increased need for capacity and a more kind of environment that we have in our facility where we have got more programs versus being backed up in local jails. And the local jails, then we are happy to take the Marshals service that we are likely not be able to continue to stay at our facility because of the direct contracts. So, yes, that was a great solution, again, for all parties, Marshal Service, Montana and CoreCivic. And so that’s definitely a play in the playbook that we are always considering in those situations.

Okay. Good. And then last question is we haven’t really been talking a lot about COVID, because COVID vaccine boosters, but is that something that’s sort of still on your radar screen in terms of variation in cases within the facilities?

Absolutely. Yes. We are monitoring very closely still. And our team here within Brentwood, Tennessee are monitoring kind of Federal, State and local public health authorities guidance and direction. And so we are taking that into account accordingly and implementing it into our operational plan as appropriate along with kind of feedback from our government partners. And then again, kind of an obvious point, but all jurisdictions are a little different relative to kind of the virus levels and people that are impacted by the virus, and so we are monitoring that closely locally. So, again, can’t say it’s completely in the rearview mirror, but I think we all agree that the risk has diminished. Obviously, the vaccine helped dramatically and significantly both the public sector and private sector and our employees and our residents. So, we are grateful for that too.

Thank you.

Thank you for your questions.

Thank you. [Operator Instructions] And our next question comes from the line of Kirk Ludtke with Imperial Capital. Your line is open.

Hello, everyone. Thank you for the presentation and the question. A couple of topics.

Hi Kirk.

Hi. First, let’s – there is an election next week. I was curious. I think people probably would view Republican control of either the House or the Senate as a positive. But is there something – are there any state-level elections that might impact the outlook?

Yes. A lot of – good, great question. This is Damon. A lot of, yes, state level elections that we are watching closely and depending on the outcome of those various state elections could have some impact on potentially solutions that we could provide at respective states. I guess I would say this way, though the states where we operate today, either in state or maybe provide a solution for an out-of-state population, I feel very good with saying that we just have had a 40-year track record where regardless of who is the governor or who is leadership within legislature. As long as we continue to do a good job from a quality perspective and be cost effective and show good outcomes in our programs, we have had great success regardless if there is change in leadership or political affiliation within those states to continue to have really strong contracts and also great relationships with respect to [Technical Difficulty]. Anything you would add to that, Dave?

Yes. I would say, we have added into our toolbox too. So, you have seen us convert facilities that are owned and operated to facilities where we just provide the real estate. So, for political reasons or whatever the case may be, a governor prefers to employ state employees to operate a facility. We are very comfortable turning over the operations to the state government to operate. We will just become the landlord and lease the facility to the partner. So, either solution works for us. Economics can vary, it can be better, it can be worse depending on the particular economics of an individual contract. But it is a new tool in the toolbox that we have utilized in the past few years when the politics have gotten the way of the ownership and operations of a facility.

Got it. That’s very helpful. Thank you. With respect to La Palma, Eloy, I apologize if I missed this, but how many ICE detainees were at La Palma at the end of the ICE contract?

Well, give me answer Dave. I think at the beginning of the year, right after we got the contract, we were probably 2,000.

Yes. About 1,800.

About 1,800 in the facility. And then after that kind of ramped down, we worked out a ramp plan with ICE overlaying that with the ramp plan that Arizona wanted to achieve and going into the facility. So, kind of overlay those two ramp plans together. And then I think they were completely out so by mid-September, I think ICE was. So, hopefully that answer – anything to add to that?

Yes. They are mid-September, which I think was – what you are asking. They were out completely by the end of the quarter.

Got it. Okay. I am just – I am looking at the occupancy level at Eloy. It looks like you have room technically for 800 detainees there, but is there an occupancy gap at Eloy?

There was, there and all over the country with ICE. So, there was an occupancy gap. And it probably kept us where we had to lease probably 500 beds, if not more, probably 600 beds, 700 beds that were vacant. And more you want to know, we can give you a little more color on how that impacts the total capacity. Most, if not all, of our ICE facilities have male and female, and then also have different levels of custody. So, if you think about maybe six or seven different variations of population facility and then you have got to overlay that with restrictions, then you have got a lot of capacity that was not able to utilized during COVID. So, that adds also a little bit to the total amount. So, saying a different way, if that facility was just all male, one custody level, then you probably have a little higher utilization during COVID. But since we had multiple – both genders and multiple levels of security, then that does impact a little bit the capacity that’s unable to be used during COVID.

Got it. Okay. Thank you. With respect to the…

Sorry. One moment for our next question.

Sorry about that Kirk.

Our next question comes from the line of Brian Violino. And your line is open.

Thanks for taking my questions.

Good morning Brian.

Good morning. Just a quick two-parter on the expenses. I guess just in general, you have been ramping up expenses on the staffing side for a few quarters now. Could you just frame for us in terms of your expectations of where occupancy levels go, where you are in that ramp up? And then sort of secondarily on the sort of bonus and incentive payments, how should we think about those if we were to go into a more recessionary environment, just the general sort of expense line going into next year and beyond? How should that be trending with bonuses and then also ramp up staffing, just trying to get a better idea of where that could go.

Yes. Thanks for the question, Brian. I am tag team with Damon on this one. I would say we are, like probably most companies, we would welcome a little bit of a recession. Obviously, don’t want it to be a deep recession, but a recession could result in an employed – better employer’s market. And so we would be able to reduce the amount of incentives that we pay our staff. We already see things like registry nursing. The rates are coming down. Our need for hiring registry nursing has come down throughout this year. We are still paying some. But I would say as the – if the economy continues to decline and particularly the labor market, the labor market loosens up a bit, that would be a positive for us because we would be able to reduce our expenses. On the occupancy trajectory, we are doing our – we are preparing our 2023 budgets right now. Not ready to put out guidance. We will do that in February as we normally do. But it would seem like occupancies would trend upward from here, particularly we get to the La Palma transition, ICE populations depending on if and when Title 42 gets reversed, that could be a positive for occupancy levels. And then, of course, the relaxation of the occupancy restrictions as we have already begun to see some would all point towards higher occupancy levels. But the magnitude is just hard to gauge at this point. I would say we would have to get back probably to that 80% to 82% occupancy level before we see our margin percentages return to pre-pandemic levels. But we have run that exercise to see that, yes, despite the fact that we have got higher wages today, we also have higher per diems today. Unfortunately, we are not getting the total revenue from those higher per diems because the volumes are still down. But once we see those occupancy levels get to pre-pandemic levels in that 80% to 82% level, we remain confident that margins would be at the same pre-pandemic percentages.

Yes, that’s perfect. The only thing I would add to Dave’s comments is kind of going back to kind of the general mood of the economy and likely falling into a recession. I mean we have – as I said in my remarks, last six months, we have made great progress on lowering vacancy rate. But I would say the really – it’s really accelerated for the last 90 days. So, pretty much the quarter. And I think if we go into next year, as Dave says, and still see a little bit of a tailwind from the labor market structure, then we can taper down those incentives as appropriate. I think you would also find interesting, our HR team has shared with us that our pipelines for 2022, so this year, have exceeded the levels. So, these are people that have applied for jobs for CoreCivic throughout the company. Our pipeline for this year, 10 months into the year, have exceeded the levels that we had in 2020 and also 2021. So, we are pretty close back to 2019 levels on pipeline, people applying for employment with the company. And again, a ton of credit for our HR team and the incentives that we have put in place along with our operations team, but also I think we are starting to see a little bit of a tailwind too with the economy softening and maybe labor softening also with that.

Great. Thanks. And one more quick one, if I could. On, your competitor recently won a legal case related to AB 32 in California. Just any comment on how that could impact your current operations and how you might think about operating in California going forward?

Great question. And the short answer is that, obviously, we are watching it very, very closely. We do have that one facility in California that is in Otay Mesa with ICE and Marshal Service. Obviously, that would – that case positively impacted that, there is the viability of that contract going forward. So, again, we watch that closely. Relative to kind of behavior going forward or kind of business opportunities are things we may do differently based on the result of that case, I would say no. Again, that was the only really kind of notable contract that we were thinking about that potentially could be impacted by that case. But anything you would add to that, Dave?

And just the Otay Mesa Detention Center, it was only a 67% occupancy during the third quarter. So, it’s nice to get AB 32 favorable ruling there where we will be able to renew. The contract expires December 24. So, at this point, it seems like that should be a renewal without any issues at this point.

Great. Thank you.

Thank you.

Thank you. End of Q&A:

Showing no further questions at this time, this concludes today’s conference call. Thank you for participating. You may now disconnect.