Good morning. My name is [Latif] 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 Fourth Quarter 2022 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 begin your conference.

Thank you, Operator. 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 fourth 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 fourth quarter 2022 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.

Thank you, Cameron. Good morning everyone and thank you for joining us today for our fourth 2022 earnings call. On today's call, I will provide you with details on our fourth quarter financial performance and our newly issued 2023 full year financial guidance. I will also discuss with you our latest operational developments, update you on our capital allocation strategy, and it's got the latest developments with our government partners, including the completion of the transition of contracts at our La Palma facility from a federal mission to a new contract with the State of Arizona. Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will review our fourth quarter 2022 financial results and our newly issued full year 2023 guidance in greater detail. He will also provide a more detailed update on our ongoing capital structure initiatives. Before I get started, I would like to take a moment and highlight a significant milestone for the Company. On January 28h, we celebrated CoreCivic's 40th anniversary. It brings me deep pride to know that I got to celebrate this milestone alongside a team of some of the most dedicated people in the field of corrections and reentry services. Over the years we have expanded both in the number of government contracts and our capabilities through our partnerships with federal, state and local governments. As a result, our workforce has significantly grown and the scope of services we provide as meaningfully expanded. Most excitingly, our reentry services has evolved to reflect a more robust rehabilitative approach to programming to further support the individuals in our care as they prepare to return home to their communities. While 40 years of continuous 24/7 operations is the achievement we're celebrating is important to call attention to the original reason…

Thank you, Damon, and good morning everyone. In the fourth quarter of 2022, we reported net income of $0.21 per share, or $0.22 of adjusted earnings per share. Normalized FFO per share $0.42, and AFFO per share of $0.38. The adjusted normalized per share results are $0.09 above average analyst's estimates primarily due to lower operating expenses stemming from moderated staffing incentives AFFO credit as further described later. Adjusted and normalized per share amounts exclude a gain on sale of real estate assets, asset impairments and expenses associated with debt repayments as detailed on the reconciliations to non-GAAP metrics included in the press release. The decline in normalized FFO per share of $0.06 per share compared with the prior year quarter included an EBITDA decline of $9.1 million or $0.06 per share due to the earnings disruption in our 3,060 beds 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 the 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 over 1,800 ICE detainees at the La Palma facility, which were fully transitioned out by the end of September. The intake process for Arizona residents was substantially complete by the end of December, and we currently care for approximately 2,500 inmates from Arizona at this facility. Although occupancy at the La Palma facility during the fourth quarter of 2022 surpassed the occupancy level in the fourth quarter of 2021, we incurred substantial transition expenses in the fourth quarter, which we expect will normalize around the middle of 2023. Fourth quarter results…

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

Good morning, Damon and David, congrats on the quarter. I wanted to start out may be diving a little bit more into the so called guaranteed minimum contracts with ICE. I know you had mentioned previously you've been in discussions with them on some of the facilities that you have that do not have those types of contracts, just maybe get an idea of the progress on those. Is there a kind of a timeframe in your mind, if you don't receive, let's call it relief? What do you do with those facilities? And I don't know, if you can you kind of give us a ballpark figure, if you were to receive some relief, what could that mean on the financials end?

Yes, thank you for that question. We really didn't talk about it in our script, but I guess I will say here in the near-term and keep me [indiscernible] day for last probably 90 to 120 days, we've had some pretty meaningful discussions with ICE about how they see the world after Title 42, and obviously, the need from public perspective. You know that part of the story, but also we have a couple of facilities that to your point, maybe doesn't have a fixed monthly payment or other provisions in the contract. And interestingly, they've been pretty receptive on these conversations. So, we've had some pretty good renegotiation of contracts either with that provision changed or tweaked or maybe some improvement on the pricing or maybe a combination of both. So, don't necessarily want to parse it out and go kind of facility by facility, but I will say that we've been pretty encouraged by the conversation. And we can we think that behavior is pretty indicative of, as they look out in the next 6, 12 months, and the likely pulling back of those Title 42 that they're going to need those beds and need that capacity. But anything you'd add to that, Dave?

Yes, I add couple of things. Our guidance does reflect some of those negotiations coming to fruition, but I'd also say, as we mentioned previously, our ICE populations in particular are much lower than historically, historic levels. And so, we have a lot of conversations with ICE about individual facilities when those occupancy levels are so low about the other mission, what do they want to do, they want to consolidate populations into fewer facilities. And so far, they have been reluctant to do that they want to maintain that capacity, which I think is an indication of future need. So based on that there are a good partner, we tried to work with them. And just expect that there, they'll eventually have those needs or will continue his conversations about consolidations in the fewer facilities.

Whenever they got add Joe, we've been saying this for a couple quarters that, we've been leaning forward on staffing facilities, in anticipation for increased competency and then also the, again, going back to the full Title 42. And so, we've estimated that if we were kind of staffing to what Oxy was today versus kind of lean forward, we probably would be pretty close from a guy's perspective to what the street estimates are for 2023. So, I think that's pretty notable, again, that gives us hopefully, it gives a little indication, again, from the kind of feedback that we're getting for ICEs on kind of what their needs are today's point about, the conversation of consolidating within facilities or within a facility closing the various units. We're keeping those facilities open and again leaning forward a little bit on a staffing perspective. So again, we know that obviously impacts a little bit guidance this year and then come close to what the analyst estimates are. But again, if we would kind of calibrate staffing appropriately with the current populations that we actually probably be pretty darn close to the guidance or to analyst estimates.

Thanks for that insight. Much appreciated. On the ICE occupancy restrictions, how much flexibility have you seen lately? And would those at the latest be part of the administration's May 11th and all COVID health restrictions are to be removed, would that be part -- those occupancy restriction will be part of that?

We think that's the case. Again, in this environment, we can never make any definitive statements because again there is a lot of moving parts here with the pandemic emergency being terminated on May 11th and also the ongoing kind of court activity with Title 42. So, we think that's the case. But let me, I guess, maybe back up just a tag because I know it's been a little confusing for all of us on Title 42, the court case and then also the proclamation that the pandemic emergency will be terminated on May 11th. So, let me give at least maybe a little more color on that. Again in this environment can never make any in the statements, but let me go ahead and take a shot at it. So as you just noted, administration plans allow the pandemic emergency to expire on May 11th. So again, that's been while they reported in the press. The administration has suggested that, there would also be the end of Title 42 border restrictions. It's correct that the Title 42 order said, on its faith that it will end when a pandemic emergency is. Whether that happens automatically or with another termination order from CDC isn't clear at the moment. But the administration is also in federal court litigation about its prior efforts to terminate Title 42, and it's in litigation in the Supreme Court about Title 42 as well. No way to know, obviously, but I'd be afraid to rule out efforts by the court or various border states to keep Title 42 restrictions in place longer. So I think you know, Joe, that I mean, in the spring quarter, we will hear arguments on March first, but probably won't issue decision until probably June or July. So again, plenty of uncertainty, but our goal is that, our goal is to be ready, whether Title 42 goes away in May or in June or July or possibly some later date. And again, based on the conversations we have had with ICE and some activity, we have had some contracts backs with amendments on pricing and fixed monthly payment. Again, it appears that they are continuing to kind of March forward on getting themselves prepared for the likely outcome of Title 42 being rescinded.

Okay. Thanks. Switching gears, the California facility where you have got the lease termination notice, which I think is in 2024 although currently, it's only funded I think through what the first half of this year. It sounds, when you read in your press release of all the improvements that you made, the aging of other California facilities that you might have some hope that, that decision is reversed. I mean, could you comment on that? And then also you mentioned that facility generates about $134 million in revenue annually. What kind of EBITDA does that facility produce?

Well, I'll tag team with Dave on this one, Joe. This is Damon again. I mean, first to say, when we got the communication from the state late in 2022, they indicated, again they want to give plenty of runway for not just us in this facility, but also for the operations with CDCR and also the community. And I've had some actually direct conversations with leadership within the state where that was reaffirmed here in the last 30 days. So that gives us confidence in that facility. Even though we're not in the next fiscal year, as you know, July 1st, coming around that with that, it'll be in place through the rest of this year through March next year. So I can't say this indefinitely, but based on communications I've had directly with state officials, we feel like that's the likely case. So on a parallel path, we're working obviously with the state, but also assessing kind of a long-term opportunities and needs that could be fulfilled with that facility. So nothing to disclose today, but those conversations are ongoing on several different fronts. And it's not just with one agency, so that I'll just kind of leave it there. Second part of your question, I'll let Dave tackle that one.

It's on our supplemental disclosure report, we do disclose the margins of each of our segments and Cal City is you could sell just the amount of revenue. It's a significant component of the property segment. So its margin is very comparable to the margins that we disclose in the property segment, which is around 70%, 75%.

Thank you. Our next question comes from the line of M. Marin of Zacks. Your line is open, M.

So, I have a couple of questions. Just to dig a little deeper on what you were just saying during your prepared remarks. And again, after two recent questions on Title 42. As you noted, we've expected Title 42 to be terminated in the past. There's been litigation that has impacted that the timeline there. So how should we view Title 42 in 2023 of May 11th really is going to see the end of a lot of these COVID regulations? Is this really do you saying from what we're hearing?

This is Damon. A lot of really smart legal minds that are on cable to talk shows every night are trying to answer this question. I don't know, if I've got anything more interesting than they've been able to provide. What I just said, again, very definitive action by the administration on terminating a pandemic emergency on May 11th. So that's, again, very, very definitive at least on that piece. And I know the administration is trying to make the argument that same should obviously, impact Title 42 since they're linked. Title 42 is linked to the pandemic emergency, but it's hard to say with these kind of court actions at the lower courts and the one it's also proceeding through the Supreme Court how that impacts timing. So, what I shared earlier is our best estimate, but also to truck riders elect clarity on that front. I don't think any add to that Dave.

In terms of timing, as Damon answered the timing question in terms of the actual impact, I think if you go back to the end of December, it could be an indication when ICE took down detention capacity by about 30% in the last couple of weeks in December, that was nationwide, our populations correlated with that reduction. So while that obviously didn't happen at the end of the year, I think it does give us a playbook for what could happen when the termination of Title 42 is imminent, which I would think it would be imminent. Whether it's May, whether it's June, July or some other date, that's really, a lot of crystal ball, difficult to predict, but I will tell you, as I mentioned in my prepared remarks, our guidance does not anticipate a surge that could happen, but more of a measured increase in the second half of the year. So we wouldn't expect anything to happen early in the year, certainly nothing before May 11th. I think that would be the earliest day, something could happen. But given how many lawsuits have arisen around the timing that would just be very difficult for us to kind of pinpoint.

These points are really important when because, our guidance is conservative from the perspective of Dave just noted relative to increasing occupancy. So we've looked at what the portfolio is today. And, as always, we always set by customer by customer and build that into guidance. But we're not anticipating leases, from a guidance perspective, again, a huge surge. But on the other side, we are being served on the staffer, as I said earlier. So if we were not staffing up, as I said earlier, like we are today, in anticipation for increased needs, again, our guidance would probably be pretty close to consensus. So that at least gives you a little sense of how to look at the rest of the year that we've got the expenses built in, and not necessarily the increase in accuracy. So hopefully, we'll get more on that as we get closer to the spring and summer months.

Okay. And again for sure, I think we all understand that nobody really knows, but you do have a sense that maybe this time, this time is the real time. So then I have one other question. And it's about a model that you had introduced in one of your facilities, about a year and a half ago, the Northeast Ohio Correctional Facility, where you were operating that under two different contracts, I think, one with the state and one with the county. As you continue to have discussions, with different entities now, and near-term discussions, are there any other facilities where you might think that it would be beneficial to introduce that same kind of dual contract model?

Yes, great question. And short answer is absolutely. I mean, we're always looking at if we've got a facility that's either underutilized or fill the vacant where are the prospects either with existing or new partners where we could either activate solely or higher or increase occupancy. So, absolutely, and, I think we've shown over the last couple of decades that not only can we manage the complexity when you have multiple customers, but also especially if they're different levels. So we've got facilities that have a federal contract, as you noted, with Northeast Ohio and also as a state partner. So, in a very different mission, one's a very short-term population, another one's a longer term population that has unique medical and mental health and program needs. So short answer is absolutely, we're always looking at those opportunities.

Thank you. Our next question comes from the line of Jay McCanless of Wedbush. Your question please, Jay.

If we think about facilities that might not be affected by Title 42, what type of trends and occupancy are you embedding in the in the guidance for fiscal '23?

Yes, great question. And I'll tag team with Dave on this a little bit, but -- so outside the immigration custom enforcement, the only other federal partner is Marshals service and we I think feel like we are pretty stable through the course of the year. We may see some increases from various contracts around the country. But there is nothing too notable to draw attention to. So really then the other opportunities on the state side and actually we are seeing pretty robust engagement from state partners either existing state partners or new state partners. As you know, with the election this past November, there is a fair amount of new governors in office around the country, and I've been encouraged to see that, Criminal Justice reform and also improving the conditions of people with the correctional systems, not only just from a housing perspective and residential perspective, but also from a programming perspective, it's a high priority for them come into office. And so we have had a few states already reached out to us that would be new states for us, answering questions relative to how we can maybe meet their needs short-term and long-term. Another thing I'll just say is that, kind of a growing trend that's been very coupling, but also a solution that we think we are uniquely positioned to provide for, and that is dealing with especially with opioids and the fentanyl crisis. I was encouraged by the President earlier this week in the State of Union talking about this being a big issue and a big priority for his administration going forward and I'm hearing the same thing from governors around the country. So we are looking actually this year to do a program in prison and also do a program that's community base that would help with addiction and these are called MAP programs or medically assisted treatment programs. And so that could be an interesting solution to help these individuals that are dealing with addiction, both the imprisonment and community based. And again, what we are hearing from governors, especially new governors that just gone forward and this is something of a real interest to them as we deal with the challenges of the addiction not only just in core system, but also in the general community. But I don't think you add to that Dave.

Yes. Just with respect to the guidance, which we don't have any of that in our guidance. So if we were to implement some MAP programs, which we are looking at a couple of pilot programs, there could be some start-up expenses and I'm not talking Nichols, it's pennies of that in startup expenses to activate a program like that. And the revenue for that would probably be back end loaded in the year. Likewise, as I mentioned in my prepared remarks, we are not contemplating any new state contracts in our guidance, though we continue to have the conversations that Damon just described. So that could be upside to the guidance if we are able to get one or more of those contracts across the finish line. But generally speaking, I would say that, Marshall's populations are relatively stable in our guidance throughout the rest of the year, and same populations have been fairly stable even towards the tail end of the pandemic here second half of 2022. So we are forecasting those to be pretty stable in the 2023 guidance as well.

Okay, great. And then my -- thank you for all that. So my second question, I think you may have addressed it earlier. But there has been some uptick in per diem rates but how should we think about additional increases for '23 at both the state and federal level?

Yes. Good question. As I alluded to earlier, the question around making capacity at facilities where we have got high contracts again we have had some pretty good engagement with our partner on that front again with maybe changes to the fixed multi-payment, but also the per diem rate. So, that I think potentially -- we've -- as Dave alluded to earlier, we have built some of that into the guidance for this year. The state side, as you know, is always, there is a flurry of activity in the spring. So most, if not all, state legislators, let's say, are back in session, we're actively engaging with all the appropriate stakeholders and states where we currently operate and looking at not only the needs that we've got for my staff and perspective and to get some salary increases, but also maybe per diem adjustment. So too early to tell, but I will tell you, we are encouraged by the amount of engagement support that we're feeling from our state partners. We had a record year last year on a per diem increases with our state partners. So I feel like I don't know if I can say this year is going to be the same, but it does feel very encouraging. Other thing I'd just say, just generally, a lot of economic information out there relative to recession and labor markets and how it's impacting employers and various industries. We are somewhat encouraged that state budgets may not be impacted dramatically, like they were a decade ago with the great recession. So, state budgets, if they get dramatically impacted then that potentially puts some pressure on pricing. At the moment, we're not feeling that or seeing that, again with states I think relatively speaking, I know, it's not exactly the same case in every 50 state, every state in the country. But I'd say relatively speaking, I think most things feel pretty good about their economic environment, their revenues, and have built up some pretty nice rainy day funds in the last couple of years.

And that actually dovetails into my last question. How should we think about net operating margins turning through 2023 given the strength that you guys put up in the fiscal fourth quarter '22?

This is Dave. I'd say, we did have the employee retention credits in the fourth quarter that inflated the fourth quarter margins a bit. I gave the margins excluding those credits would be 22.6%. That's probably the number to compare going forward from Q4 '22. I'd say fairly stable as it's a leveraged model, though, as occupancy goes up, margins go up, we are optimistic, we'll get back to our pre-pandemic margins of around 25%. And don't expect that to be in '23 though, as we don't forecast or occupancies get into pre-pandemic levels in '23. But I would say stable, right around the number in Q4, certainly during the first two quarters of 2023, with a possibility of them increasing higher in Q3 and Q4, as we would expect occupancy levels to sequential increase.

Thank you. Our next question comes from the line of Ben Briggs of StoneX Financial. Your question please, Ben.

You've answered most of mine on the scripted portion or in the previous Q&A, but I do have a couple left. So, as it relates to the La Palma Facility, I know that still kind of ramping and costs haven't really normalized there. When do you guys anticipate that facility being fully staffed and having its cost structure reach a normalized level?

To your question about staffing probably normalizes here first maybe second quarter. I mean keeping on with your day, but probably midyear. Again, we've been encouraged by the labor market, globally kind of turned into our favorite in the last six to eight months and Arizona is no exception to that. But I guess maybe to the second part of your question.

And I'd say, the ramp, we're in really good shape, so it's substantially completed as of now. So, I think as we mentioned in our prepared remarks, we have about 2,500 people there today. The staffing is really been supplemented with staff from other parts of our systems. So, that's really what's driving the incremental expenses at the La Palma Facility. We've got travel expenses. We've got shift premiums for people to work away from their home facilities and work in Arizona. Registry nursing continues to be a challenge and in Arizona. So those are the types of expenses that we continue to incur. And don't expect those to really go away until the middle part of the year. But as far as the ramp goes, we're in really good shape and staffing, we're in good shape. It's just we're incurring outside expenses because we don't have the permanent local staff there.

And then the next one was, I just want to make sure that I've got my math right here. So, I know you guys paid down and you and you discussed in the scripting portion. You paid down four and five eights notes due in 2023. We're about $154 million of those outstanding when you paid them down. And you said that you did that your cash and revolver draw? That was a $35 million revolver draw and $119 million of cash. Do I have that right?

That'd be correct, yes.

Okay, great. Just wanted to want to make sure that I was getting math there right, that's going to be it for me. Congratulations on the quarter. And thank you for taking the question.

Sure, thank you.

Thank you. Our next question comes from the line of Kirk Ludtke of Imperial Capital. Your line is open, Kirk.

Good morning. Congratulations on the quarter. I just had a couple of follow ups here. I think the fourth quarter if you annualized adjusted EBITDA, you get to mid 300 million like 250 million of EBITDA. So the guidance is below what the annual number would apply. What are the -- and almost everything we've talked about directionally year-over-year is a tailwind, right, La Palma population pricing, what are the -- other than McRae, what are the headwinds in the guidance?

Yes, this is Dave and approaching to that question. I guess the only thing I would say and I'll tag team again with day but you know, just talking about staffing. So again, as we kind of continue on ramping up staff in anticipation of increased needs, throughout the portfolio note to be with ICE that is going to be going to be significant as I try to provide a little bit of clarity on that. If we were not ramping up staffing so late last year and going into this year, I mean, I think we would easily be within range of the consensus for this year without that increased labor costs. Do you have anything to add to that Dave?

Yes, I mean, it's definitely labor that's thriving, and again, we're not where we want to be yet. So we are increasing staffing levels throughout 2023. That's included in our guidance, and that's a bit of a drag even though we continue to incur the shift incentives and retention, referral relocation bonuses and registered nursing. We hope those normalized, so there we did see the decline from Q3 to Q4. In Q4, I'd say, we did have the employee retention credits. So that's you got to take that out of and a run rate basis for 2023. Since that's not going to be recording in '23.

And it might be good to know I don't know if we've talked about this in a while, but for us to hire an employee from the time they are hired to the time they actually don't work on a post in a facility. I mean, it could almost be probably two to three months. And so part of the -- again, anticipation is we want to make sure we get them through the training academies as appropriate. All of our contracts have very comprehensive background screening process and those could take weeks, not days. So, that's part of it just we want to make sure that, if there is demand manifesting during the spring, summer, fall that we have got to staff and I have to wait three months to meet that demand.

Got it. That's helpful. Is the pricing mechanism such that you only get one shot? It's in the spring when the budget set and then you have to wait a whole year to get another?

Typically, typically, I mean, most of our state contracts are tied to the fiscal year, which majority states are in July 1st to June 30th. And so, yes, are making of the case within the legislature and then ultimately what we negotiated with the Department of Corrections, it's usually in the spring. But we do have had, I mean, in the last couple of years, we have had some, what I call, all cycle adjustments. Notably, conditions have changed within the facilities where they have a unique need of services and programs, and we can go shoot that in real time. And then also the labor market, which has been fluid. The good news about our state business is that many of our states, if not all of them operate their own facilities. So they know if there can build some challenges, in their facilities we are likely going to feel the same changes and so that we could do maybe some adjustments can off cycle. But anything you would add to that?

I wouldn't mind you asking, Kirk, because I was going to say that from a prior question. Last year, there were a couple of off cycle per diem rates they were received because we were providing off cycle wage increases. Here we are getting towards the middle of February. I don't see that happening in the first half of this year. So, we haven't baked that into higher per diem into the first half of the year. We would time them with the middle part of the year, as the state budgets get through their budgets and implement their new budgets effective July 1st. And I guess I'd say one other thing, Kirk, on the annualization in Q4 going back to employee retention credits, if we net costs associated with those credits that's probably a $10.4 million annual amount that you had to back out of '23 if you're just taking Q4 and multiplying it by 4.

Interesting. Okay. That's a pretty big number then. Got it, I appreciate it. And then just to clarify, so I'm guessing that, the guidance assumes the renewal of Central Arizona?

Absolutely, yes.

Got it. And then lastly, I don't everyone want to ask you to comment on rumors. But there has been some press coverage of a potential deal between the Biden Administration and Mexico, which I'm not sure how to interpret. But is that something that you can elaborate on or comment on?

Unfortunately, we cannot.

Okay, got it. That's it for me. I really appreciate it. Thank you.

Thank you. That does conclude today's conference call. Thank you for participating. Please disconnect your lines at this time.