CoreCivic, Inc. (CXW) Q4 2022 Earnings Report, Transcript and Summary

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 the Company was founded. Back in 1983, the core theme that prisons in more than 40 states were in crisis due to overcrowded conditions, challenging infrastructure, and the correctional services provided therein. The conditions in many cases were deemed by the courts to be unconstitutional. To the Company's founders, T. Don Hutto and Tom Beasley saw the need for the private sector to bring solutions to the pressing issues facing these correctional systems. From day one, the Company's purpose has been rooted in service to our nation's criminal justice system. Mr. Hutto was also to go on to help establish a standard of correctional care still upheld by the American Correctional Association and its members today. The American Correctional Association is the leading organization that champions the cause of corrections and correctional effectiveness, and has been in existence since 1870. These standards were rooted in course ethics operational approach since day one. During 2022, 15 of the facilities we manage were newly accredited or reaccredited by the ACA with an average score of 99.5%, making our portfolio average 99.5%. Our partnerships with local state and federal governments have helped to dramatically improve conditions for all incarcerated individuals, which is clearly something that we should also celebrate. The correction profession is not an easy field of work. It takes commitment, focus and a dedication to helping people even in what can be very difficult circumstances. Through our four decades of dedicated service, CoreCivic has continued to be relied upon again and again as a solution to the needs of our government partners and the individuals in our care. We have earned a reputation as a trusted partner because the entire CoreCivic team shows up every day to help improve the lives of incarcerated individuals and keep our community safe. I am deeply proud the dedication of our team over the last 40 years, and I am truly humbled for the opportunity to work alongside them. I'll now provide an overview of our fourth quarter financial results and our 2023 financial guidance. In the fourth quarter, we generated revenue of $471.4 million which was a decline of only 0.1% compared to the prior year quarter, despite the non-renewal of a contract with the United States Merchant Service at a level of detention center in 2021, and the non-renewal of the contract with Marion County, Indiana at the Marion County Jail effective January 31, 2022. Collectively, these two facilities accounted for a $13.1 million or 2.7% reduction in revenue in the fourth quarter of this year versus the prior year quarter. In the fourth quarter of this past year, we generated normalized funds from operation or FFO of $49.1 million or $0.42 per share compared to $57.8 million or $0.48 dollars per share in the fourth quarter of 2021. Now, the decline was driven by our non-renewal of the two contracts that I just mentioned, the transition of populations at our La Palma Correctional Center pursuant to a new contract with the CSO of Arizona, the expiration of our contract with the Federal Bureau of Prisons or BOP at our previously owned McRae Correctional Center in November of 2022 and a challenging labor market. Dave will provide more detail regarding the financial impact of these items. But I would add that, while we have spent considerable amounts of incentives to recruit and retain valuable frontline staff, these investments are positioning us to take advantage of increased demand from our government partners that we believe will occur once Oxy restrictions impose by our government partners during COVID pandemic are fully relaxed. We are also poised to enter into new contracts and accept additional residential populations from our government partners that are unable to manage their existing population levels, because of staffing challenges in their own facilities. We believe these needs could manifest into new contracts in the near-term. While our year-over-year financial results declined, we did experience a sequential improvement in financial results. There were three primary drivers of our improved results in the fourth quarter. Before the end of the year, we completed the transition of contracts at our La Palma Correctional Center. As a reminder, in April of this past year, we commenced transitioning populations at La Palma facility in Arizona from ICE populations to Arizona State populations, pursuant to a new contract we are awarded by the Arizona Department of Corrections, Rehabilitation and Reentry late in 2021. While we didn't achieve normalized utilization until the five days of the past year, our average utilization of facility in the fourth quarter was 66% compared to only 50% during the third quarter of 2022, while La Palma facility currently supports the mission of the State of Arizona by caring for approximately 2,500 inmates. We also experienced an increase in average utilization by our current partners, particularly from immigration and customs enforcement or ICE. Our third quarter earnings call in early November of last year we mentioned that ICE populations in our facilities increased 26% in the month of October. We attributed that increase to the start of the federal government's fiscal year, which meant the agency had more budget certainty with new appropriations to start the year and pandemic-related oxy restrictions were gradually being lifted. While the increase in utilization was noteworthy and had a modestly and positive impact on the fourth quarter, utilization levels were still below their pre-pandemic levels and a cure occurred despite a reduction in utilization in the final days of December as I prepared for the termination of Title 42, which obviously did not occur, which I'll discuss in greater detail shortly. The third driver of our improved fourth quarter performance was a continuation of modest improvements in the employment market, a trend we began to detect in the middle of 2022. That trend has allowed us to reduce reliance on registry nursing and various forms of incentive compensation. These costs still remain elevated from their pre-pandemic levels, but with salaries and benefits representing approximately two-thirds of the operating expenses even modest improvements in the employment market can result in meaningful cost savings. As for our newly issued 2023 financial guidance, we are forecasting for year FFO per share in the range of $1.35 to $1.50, and adjusted funds from operations or AFFO per share in the range of $1.29 to $1.45. Our guidance is reflective of our completed transition at La Palma facility although the cost structure has yet to normalize, as we work to fully staff the facility through local employees, and the expectation of utilization by our federal partners to remain below pre-pandemic levels due to the continued application of Title 42. Our guidance also reflects continued efforts to increase staff to position ourselves for increasing accuracy. Dave will provide greater details about our fourth quarter financial results as well as the financial impact of the more significant assumptions included in our full year 2023 financial guidance following the remainder of my comments. Since I brought the topic of Title 42, I begin our discussion of developments with our government partners with Immigration and Customs Enforcement. ICE is our largest federal partner and it is within the Department of Homeland Security. Of any of our government partners, their operations and capacity utilization needs were and continued to be the most significant impacted by COVID-19. Notably, ICE implemented Oxy restrictions at ICE facilities nationwide to improve the ability for resident populations to social distance. These Oxy restrictions remain in place during the fourth quarter of this past year. In the spring of 2020, the Trump administration enacted Title 42 to close the nation's borders and ports of entry to asylum seeking individuals. Title 42 has remained in place since that time and has also had a significant impact or reduces ICE's demand for detention capacity. As I mentioned earlier, utilization by our federal partners particularly ICE across multiple facilities were up nearly 26% in the month of October alone. Nationwide, ICE was changing more than 30,000 individuals by mid November of 2020 to a notable increase while still being meaningfully below their pre-pandemic levels, as well as the number of beds for which they are funded. We believe the increased utilization was a result of ICE slowly beginning to relax their pre-pandemic Oxy restrictions. This increase also coincided with the federal government's fiscal year began on October 1, 2022. In November, a federal court case overturned the continued use of Title 42 and a date of December 21, 2022 was set as a date Title 42 would be terminated. In anticipation of a significant increase in the need of detention capacity, ICE began releasing individuals from custody to free up additional capacity. By late December, ICE had released over 10,000 individuals from custody. Surely before December 21, there was a successful challenge to the federal courts ruling, which is now waiting to be heard by the Supreme Court in March. Title 42 is now expected to remain in place until the court proceedings are finalized, which likely will not occur until later this year. Also in December, Congress passed an omnibus spending bill that funded 34,000 detention beds for the fiscal year ending September 30, 2023. I says yet to increase this detention utilization close to its funding level and we expect their utilization to remain well below pre-pandemic levels at least until the legal challenges to Title 42 are completed. As mentioned previously, we continue to increase staffing levels in order to be well positioned to accept additional residential populations at pandemic related Oxy restrictions are removed and the legal proceedings for each conclusion. We also continue to pursue opportunities to provide ICE with non0residential alternatives to detention or ATD programs. We remain engaged with ICE as we believe that we can provide unique solutions to provide additional ATD programs. We also know we can provide case management services similar to the type of case management services we already provide in our community segment. The elevated rates of apprehensions along the southwest border continues to create challenges, which are expected to increase the governments demand for both residential detention capacity and nonresidential ATDs should these arise we believe we are well positioned to deliver solutions to ICE. Now for an update of our other two federal partners, which are within Department of Justice, which is the Federal Bureau of Prisons or BOP and the United States Marshal Service. The BOP has experienced significant declines in their populations in the last decade. In response to this long term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners. Last August, we completed a sale of our 1,978 beds McRae Correctional Facility to the State of Georgia for $130 million. Our last remaining for the contract with the BOP was at recruiting facility and represented less than 2% of our total revenue. We leased the McRae Facility from the State of Georgia from the sale day through November of 2022, so we could fulfill our contractual obligations to the BOP through the expiration of the contract. Following the expiration of the contract at McRae at the end of November 2022, we only expect to generate revenue for the BOP through the provision of reentry -- residential retreat facility contracts. The sale of our McRae Facility was a great opportunity to sell an asset at a value far exceeding the valuation of our publicly traded debt and equity securities and accelerate our capital allocation strategy of reducing debt and executing on our share repurchase authorization. While we do not expect the sale of our correctional or detention facilities to government entities to become a growing trend, we view this as an excellent opportunity to finalize our diversification away from prison contracts with the BOP, recycle capital, and create value due to the dislocation of the prices of our public securities and our assets true market values. The McRae Facility was converted to a facility owned and operated by the State of Georgia upon the termination of our lease with the State of Georgia in November of 2022. As for the U.S. Marshals, their prison populations have remained very consistent in recent years. So their need for capacity around the country remains unchanged, and significant due to their reliance on contracted detention capacity. The Marshals were impacted by the executive order signed by President Biden and issued in January of 2021 that directed the Attorney General to not renew Department of Justice contracts directly with privately-operated criminal detention facilities. In 2022, we had no direct contracts with the Marshals that were set for exploration. And now, we have only two remaining direct contracts with the Marshals. One of those contracts is that our 4,128 beds Central Arizona Florence Correctional Complex in Arizona and has contract expiration in September of 2023. Both facilities provide significant path into the Marshals that we believe would be very challenging to replace, but we likely will not have resolution on potential contract extensions until we are closer to the existing contracts expiration dates. We continue to work closely with the Marshals to ensure the capacity needs are being met in order to support their critical public safety mission. At the sea level, we continue to hear the improved market is the most substantial and ongoing challenge correctional systems are facing. We have certainly faced the same challenges, but we are able to meaningfully increase staffing across the Company during 2022, and these efforts will extend into 2023. There are multiple states that are dealing with such significant staffing challenges that they have had to reduce facility capacities and shutter housing units as a result. We are in conversations with a number of states to help to address their challenges in the near to long-term, and we look forward to providing you updates, as these discussions evolve. I will close-up my comments by highlighting the great accomplishments we had in 2022 that continued to strengthen our balance sheet. On the capital structure side, we began the year with entering into a new bank credit facility. This process involves bringing together several new banks that are supportive of our company's mission and allowed us to expand the majority of the facility through May of 2026 and we reduced our exposure to variable rate debt to just under $100 million. Throughout 2022, we've reduced our total debt by $287 million, and just last week, we repaid the remaining $154 million on our 4.625% senior unsecured notes, which were scheduled to mature in May of 2023. Since announcing our updated capital allocation strategy in the summer of 2020, we have cut our overall debt in half or by over $1 billion. We now have no debt maturities until April of 2026, which will provide us with a great deal of flexibility in how we deploy our free cash flow. We remain committed to our targeted total leverage ratio or a net debt to adjusted EBITDA range of 2.25 times to 2.75 times. We have made meaningful progress in reducing our overall leverage due to the strong cash flow the Company generates and we expect all leverage to continue to decline over time. Understanding that recently our EBITDA has been negatively impacted by the short-term transition of contracts and all the policies in Arizona and ongoing pandemic related to Oxy restrictions with our federal partners. Mathematically increase the leverage, the debt levels have declined. As these headwinds near completion, we expect our leverage to naturally decline. We continue to execute our stock repurchase program of $225 million stock repurchase authorization authorized by the Board of Directors last year. During 2022, we repurchase 6.6 million shares of our common stock at an aggregate purchase price of 74.5 million or approximately 5% of our total shares outstanding. In January of this year, we repurchased an additional $10 million of our common stock, so we have 140.5 million remaining on our share repurchase authorization. This would allow us to repurchase an additional 12% of our outstanding shares based on the recent trading price of our equity. Our capital allocation strategy has enabled us to remain flexible and in future quarters is expected to include a combination of share repurchases and debt repayments, taking into consideration factors such as the price of our securities, liquidity, progress towards achieving our targeted leverage ratio, and potential returns on other opportunities to deploy capital. We continue to believe our capital allocation strategy has been prudent for the position of the Company to generate long-term value through a stable capital structure and continue to cause effect on the meet the needs of our government customers with less reliance on outside sources of capital. I'll now turn the call over to Dave to provide a more detailed look at our financial results in the fourth quarter, discuss in detail our full year 2023 financial guidance, and provide additional financial updates. Dave?

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 were also impacted by the exploration on November 30th of the final prison contract that we had with the Federal Bureau of Prisons and our McRae Correctional Facility, which contributed to a decline of $0.02 per share from the fourth quarter of 2021. These declines were partially offset by employee retention credits were entitled to under the CARES Act for retaining employees who could not perform their job duties at 100% capacity as a result of COVID-19 restrictions during 2020 and a portion of 2021. These credits were reflected in the fourth quarter of 2022 as a reduction to operating expenses, and amounted to $0.02 per share net of related expenses resulting from the credits. We produced notable improvement in sequential financial performance. Compared with the third quarter of 2022, our adjusted EPS increased $0.14 from $0.08 per share on Q3 to $0.22 per share in Q4 and normalized FFO per share increased $0.13 from $0.29 per share in Q3 to $0.42 per share in Q4. These per share increases were attributable to a reduction in expenses associated with a very tight labor market, as we were able to reduce temporary staffing incentives and registry nursing expenses we incurred during the third quarter. Although, these expenses were still higher than the fourth quarter of 2021, we are pleased with the sequential decline. As the labor market continues to improve, which will take some additional time, we expect to further reduce reliance on these expenses. The fourth quarter comparison to the third quarter includes the same $0.02 benefit from the after mentioned employee retention credits, stronger federal populations at federal several facilities and lower interest expense, likewise, margin that our safety and community facilities increased from 19.2% in the third quarter of 2022 from 24.1% during the fourth quarter of 2022. Excluding the benefit of the employee retention credits, our operating margin was 22.6% in the fourth quarter of 2022, a notable improvement from the third quarter, primarily resulting from the favorable trend and operating expenses. Longer term, we expect operating margin percentages to trend toward those we experienced pre-pandemic of approximately 25%. As higher per diem rates we have been successful in obtaining from many of our government partners are expected to translate into increasing margins as they are applied to increasing occupancy levels and as expenses continue to normalize. Despite the improvement in sequential financial performance, our financial results continue to be impacted by occupancy restrictions implemented during the COVID-19 pandemic that largely remained in place during the fourth quarter for most federal facilities. Occupancy in our safety and community facilities was 71.1% in the fourth quarter of 2022, compared to 72.5% in the prior quarter. The slight decline from the prior year was attributable to the expiration of a contract with the U.S. Marshal Service and our 1,033 beds Leavenworth Detention Center on December 31, 2021. Our overall ICE detainee populations remain well below historical levels, as the Southwest Border has effectively remained closed, too many asylum seekers and adults attempting to cross the southern border without proper documentation or authority in an effort to contain the spread of COVID-19 under a policy known as Title 42. On November 19, 2022, a federal judge ruled that the process by which the federal government began expulsions under Title 42 was a violation of the Administrative Procedure Act, requiring the federal government to process all asylum seekers under applicable law in effect prior to the implementation of Title 42. Therefore, Title 42 was set to terminate near the end of the year. However, on December 27, 2022, the Supreme Court granted a temporary stay on the cessation of Title 42, while it considers an appeal by a group of states to continue Trial 42. Oral arguments are scheduled for next month. Whenever Title 42 is terminated, such action may result in an increase in the number of undocumented people permitted to enter the United States claiming a asylum and could result in an increase in the number of people apprehended and detained by ICE. With depressed occupancy levels, we will be positioned to significantly grow earnings whenever the impact of COVID-19 and Title 42 restrictions subside. Turning next to the balance sheet. As of December 31, we had $149 million of cash on hand and an additional $233 million of borrowing capacity on our revolving credit facility, providing us with total liquidity of $382 million. During 2022, we have reduced our debt balance by $287.4 million or $137.2 million net of the change in cash. During the fourth quarter of 2022, we purchased $12.8 million of our 4.58% senior notes in open market purchases, reducing the outstanding balance of these notes to $153.8 million. These notes were scheduled to mature May 01, 2023. In keeping with our debt reduction strategy, we repaid in full the outstanding principal balance of these notes on February 01, 2023, using cash on hand and a $35 million draw under our revolving credit facility. During the fourth quarter, we also purchased $27.4 million of our 8.25% senior notes in open market purchases, reducing the outstanding balance of these notes to $614.1 million. We now have no maturities until the 8.25% senior notes mature in 2026. Leverage measured by net debt-to-EBITDA was 3.2x using the trailing 12 months ended December 31, 2022. In order to help to ensure we progress toward our leverage target, we made no share repurchases during the fourth quarter. However, we will continue to be opportunistic in repurchasing shares without materially increasing leverage and have repurchased $10 million of shares so far in 2023. Since our Board authorized the repurchase program in May, we have repurchased over 6% of our outstanding shares or a total of 7.5 million shares at a cost of $84.5 million and have remaining authorization for over $140 million more of our shares. Going forward, we expect to continue to use our liquidity as well as cash flow from operations to repurchase a combination of our stock and bonds, taking into consideration a number of factors, including the amount authorized under our repurchase plan, liquidity, share price, progress toward achieving our targeted leverage of 2.25x to 2.75x and potential returns on other opportunities to deploy capital. Moving lastly to a discussion of our 2023 financial guidance. For the full year 2023, we expect to generate adjusted EPS of $0.50 to $0.65, normalized FFO per share of $1.35 to $1.50, and AFFO per share of $1.29 to $1.45. Our guidance contemplates the continuation of a tight albeit improving labor market, with less reliance on temporary incentives, but offset by higher staffing levels. Because of the lead time necessary to hire and train staff and because we anticipate an eventual end of occupancy restrictions, including Title 42, we continue efforts to hire staff in order to prepare for increases in occupancy, resulting in sequentially improving performance throughout the year. Although, we expect to be prepared for an increase in occupancy, our guidance does not contemplate a surge of ICE detainees in the second half of the year, but a more measured increase. Our guidance reflects an increase in EBITDA at our La Palma Correctional Center and Eloy Detention Center by a total of nearly $18 million as a result of the transition of populations during 2022 from ICE to Arizona at the La Palma facility and are expected higher average occupancy by ICE at the nearby Eloy facility in 2023. Although we are in discussions with a number of states for new opportunities, our guidance does not include any new contract awards because the timing of government actions on new contracts is always difficult to predict which would be upside to our guidance, if we are successful. Our guidance reflects the previously mentioned expiration on November 30th, of the Federal Bureau of Prisons contract that the McRae facility, which generated $6.4 million of EBITDA in 2022. Our guidance also contemplates retention of the lease with California at our California city facility through March 2024, the date indicated in a previously disposed termination notice we received in December 2022. There are a few things to remember when crosswalk in the fourth quarter of 2022 to the first quarter of 2023. Compared to the fourth quarter, Q1 is seasonally weaker because of two fewer days in the quarter and because we incur approximately 75% of our unemployment taxes during the first quarter, resulting in a collective $0.03 per share decline from Q4 to Q1. The benefit of the employee retention credits in Q4 results in an additional $0.02 decline to Q1. As Damon discussed in the final days of December, ICE reduced its utilization to create capacity in anticipation of the termination of Title 42. The decline extended through January, and although those populations have been steadily recovering, is expected to contribute to a reduction of approximately $0.02 to $0.03 per share when compared with Q4. We expect our normalized effective tax rate to be 26% to 28% and the 2023 full year EBITDA guidance in our press release provides you with our estimate of total depreciation and interest expense. We expect G&A expenses in 2023 to be comparable to 2022. During 2023, we expect to incur $61 million to $63 million of maintenance capital expenditures, roughly in line with 2022 and $3 million to $4 million of other capital investments, which is substantially lower than 2022, when we were completing several renovation projects. We remain focused on managing to our leverage target, and will sculpt stock repurchase levels to EBITDA performance. However, for reiterate, we will remain flexible and will continue to be opportunistic in repurchasing shares without materially increasing leverage. I will now turn the call back to the operator to open up the lines for questions.

[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.