Good day and thank you for standing by. Welcome to the Q3 2023 CoreCivic, Inc. Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a Q&A session. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, David Gutierrez of Dresner Corporate Services. Please go ahead.

Thanks, 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 third quarter of 2023, developments with our government partners, and provide you with other general business updates. During today's call, our remarks, including our answers to your questions, will include forward-looking statements pursuant to the safe harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors including those identified in our third quarter 2023 earnings release issued aftermarket 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, management will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in the corresponding earnings release and included in the company’s quarterly supplemental financial data report posted on the Investors page of the company's website at corecivic.com. With that, it is my pleasure to turn the call over to our President and CEO, Damon Hininger.

Thank you, David. Good morning, and thank you for joining us today for our third quarter 2023 earnings call. On today's call, I will provide you with details of our third quarter financial performance and our updated 2023 full year financial guidance, which reflects another increase in our core earnings metrics from last year's quarter's guidance. I will also discuss with you our latest operational developments, update you on our capital allocation strategy, and discuss the latest developments with our government partners. Following my remarks, I will turn the call over to our CFO, David Garfinkle, who will review our financial results and our updated financial guidance in greater detail. He will also provide a more detailed update on our ongoing capital structure initiatives, including details of our new bank credit facility attained just after quarter end. I'll now provide a brief overview of our third quarter financial results and our updated 2023 financial guidance. In the third quarter, we generated revenue of $483.7 million which was a 4% increase compared with the prior year quarter. This increase is in spite of the expiration of our final prison contract with the Federal Bureau of Prisons at our previously owned McRae Correctional Facility in November of 2022 and the expiration of our lease agreement with the Oklahoma Department of Corrections at our North Fork Correctional Facility on June 30, 2023. Excluding these two expirations, our total revenue increased 7%, demonstrating strong occupancy and revenue growth from our core Safety and Community portfolios. We generated normalized funds from operations or FFO of $40.5 million or $0.35 per share compared with $33.9 million or $0.29 per share in the third quarter of 2022, representing a per share increase of 21%. The increase in FFO was driven by the higher federal and state populations,…

Thank you, Damon, and good morning, everyone. In the third quarter of 2023, we reported GAAP net income of $0.12 per share compared with $0.58 per share in the prior year quarter. Among other special items, net income in the prior year quarter included gains on sales of real estate assets of $83.8 million or $0.53 per share, including a $77.5 million gain on the sale of our McRae Correctional Facility. Adjusting for special items, Adjusted EPS during the third quarter of 2023 was $0.14 compared with $0.08 per share in the prior year quarter, an increase of $0.06 per share or 75%. Normalized FFO per share was $0.35 during the third quarter of 2023 compared with $0.29 in the prior year quarter, an increase of $0.06 per share were 21%. The increase in adjusted EPS and normalized FFO per share primarily resulted from higher federal and state populations combined with a reduction in interest expense. These increases were partially offset by the expiration of our final prison contract with the Federal Bureau of Prisons in November 2022 and our previously owned and operated McRae Correctional Facility and the expiration of our lease with the Oklahoma Department of Corrections June 30, 2023, and our North Fork Correctional Facility. These two expirations accounted for a reduction of $0.03 per share from the prior year quarter. During the second quarter, we began to an increase in the number of residents detained by ICE as a result of the expiration of Title 42 on May 11, 2023, a policy that denied entry at the U.S. border to asylum seekers and anyone crossing the border without proper documentation or authority in an effort to contain the spread of COVID-19. This trend continued during the third quarter as ICE detention populations increased nationwide by 18%.…

Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions] Our first question comes from Joe Gomes with NOBLE Capital.

Really nice, solid sequential growth in secured services revenues. Some of that's from population increases. I think some of that's some increases in per diem. Could you kind of pars out relative contribution for that revenue increase between the population increases and per diem increases?

I don't have that information at my fingertips, Joe. But certainly, populations, particularly on the federal side were driving the increases if you're comparing to the prior year quarter. But certainly, we did see per diem increases, some pretty healthy per diem increases from state government partners that became effective July 1st as our state government fiscal years begin July 1st, and that's typically when we do receive, per diem increases. So it was a good year. We reported on that last quarter when we had mentioned a lot of our state partners recognizing the need to help fund wage increases for our staff. So, most of the increases, I'd say, it was really attributable to population increases though.

And then kind of following along with that, since the end of September, it's been reported that ICE populations have increased another almost 15%. Are you seeing a similar increase since the end of third quarter in your population? And given, I think, in your commentary, you said that a fair number of the facilities are now above their minimum, guarantees. Is it reasonable to assume that we'll start to see maybe a little faster increase in revenue, as these populations, if it's sustained, these populations have increased?

Yes. Joe, thank you so much. I'm going to tag team a little bit with this question with Dave, primarily on the last piece. But, on the first piece, yes, just give you a little bit of trajectory of our numbers. So at the end of July, our total system ICE population was about 80 to 100. That went to about 8,900 at the end of August. End of September, we've got to 10,300. And then as of yesterday, we were 11,800. So it just gives you a sense of kind of the trend in the populations within our system. And then I think part of your question was, kind of the national numbers. So I think you and the other analysts reported that there really hasn't been a recent report on ICE populations nationwide till, I think, since late September, early October. But I have seen, and I think you saw this too, I have seen it reported in the press here in the last week that, 39,000 was the number nationally for ICE detention population, I can't confirm that. Again, that was reported in the press, but wouldn't be surprised if that's the number. But on the last piece relative to guarantees, I'll let you touch on that, Dave.

Yes. During the third quarter, there were, for facilities where we were below the guarantees, there's about 600, residents below the guarantees. So most of our facilities surpassed the guaranteed levels during Q3. If you go back to pre-pandemic, they were almost always above the guarantee, so that's not surprising that they're getting back to those levels. So, we reported in the second quarter, that's really when we started to see increases in detention populations, because of the termination of May 11th. But still during the second quarter more of our facilities had not reached those guaranteed levels. So as of the end of third quarter, most of them have. We still have a few that have not, but, they do bounce around and some can go above and back below. But I'd say for the most part going forward, most of our facilities will be recognizing incremental revenue to the extent we see increases in populations.

And also this has been reported and just kind of get your guys' commentary or thoughts on it. On the alternative detention, one of the proposals from the house, as you mentioned, could be monitoring in some shape or form of everybody that's here that's not a citizen, some 5 million to 6 million people. As we all know, your competitor has the ISAP contract today, which as that level is nowhere near that. If the house proposal were to come to fruition, is this something that you guys could handle a significant portion of that? Or is it something that you would have to really ramp up hard on in order to start to help support that type of proposal?

Short answer is yes. We've been working in preparation for potential needs with this type of solution. And bottom-line, it's been pretty fluid, to be honest with you. So we've obviously seen what the house proposed. We're obviously talking to ICE on a regular basis. I talked about the RFI a little bit in my script. And it's pretty clear to us that ICE and leadership within the organization and also within DHS are looking at creating solutions kind of above and beyond what they do today with the ISAP program that's in its current form that's currently performed by BI. So we're absolutely very capable. We've got a lot of expertise in our community vision and our recovery monitoring solutions that are out of Dallas that we've had for multiple years. And we've been doing a lot of research, a lot of planning for, again, what potentially that would be needed from ICE to serve this population that are currently not entertained. But anything, I guess, you'd want to add to that, Dave?

I think you're referring to the release and reporting management or FII that was issued earlier this year. We did respond to that. It actually at three different parts, the monitoring technology, participation coordination services, and community services, I think Damon had mentioned in his prepared remarks. And it's the participant coordination services where they mentioned, 5.7 million people on the non-detained docket. So, it's really early in the process. I think they're gathering information from the marketplace, and I'm sure based on the feedback that they get from all RFI's, they could move forward with RFP. As you mentioned, Joe, it still does require funding. So a lot of moving parts still at this point, on what the final outcome looks like. But, we've been gearing up for several years now to compare to handle, an RFP like what they issued in the RFI.

Absolutely. That's the bottom-line. We're getting ourselves prepared and definitely got the capabilities.

And then, one last one for me, and I'll get back in queue. It was a nice, win with the Hinds County contract, more to come on that in the more opportunities in the pipeline?

Yes. Thank you for the question, Joe. I would tell you, probably in the last 90, 120 days, we've been seeing a lot of interest, I've noted in my script, not just with counties, but also with the state. So we've got a lot of lines in the water, talking to different partners, both existing and potentially new partners. So kind of stay tuned on that front. And again, going back to the Hinds County, that's a new partner for us. Looking forward to working with them. And I guess, I'll just remind to all of our investors, especially some of our new investors, I mean, many of our agreements over the last 40 years start with a pretty small contract, where we show our capabilities, we develop a solution for them. They see kind of how the program goes. We want to often be able to demonstrate very positive outcomes. And then it's an opportunity where we could potentially grow the partnership based on that performance. So we're excited about starting this with Hinds County and, pitch a couple other counties that are looking for some solutions. And again, on the state side, seeing a lot of activity. We talked about Idaho in last quarter. I said in my script, we've been given the intent to award with Montana for capacity at our Saguaro facility now out in Arizona. And we've got active discussions with a couple other states. So, yes, stay tuned. We've seen a lot of interest and activity, both with federal, state, and local partners.

Our next question comes from Kirk Ludtke with Imperial Capital.

The RFI that you mentioned, which I guess could be an RFP at some point, would that be in parallel with ISAP or would that somehow replace ISAP?

It's hard to say at the moment. Again, I think ICE, as Dave alluded to, with this RFI, I think they're trying to figure out, one, what the mission would be, what the outcomes they're looking for a program like this. And so when they put this out the market, they're looking from us and others to see what the capabilities are. And not only just our technical expertise and staffing, the leadership, and locations where we can perform, but also maybe anything innovative that we can bring that helps them mostly with the mission of that program. So, the short answer is, I think it's too early to tell, but it's clearly there. They're doing a lot of homework on their side. They're getting a lot of feedback and information from the market on capabilities and innovative solutions. And again, we think we've brought a lot to the table that gives them some things to kind of consider and ponder as they think about what the program looks like going forward? If I get anything you want to add to that, Dave?

Not really. I mean, timing is not definitive either. I think they'll take the RFI information back. If it turns into an RFP, it's probably middle part of next year to late 2024. So, more of a '25 opportunity.

I guess, I will also say, and add to this delta, Dave, I guess I'll also say, I mean, the size that they're looking potentially for this program, I think gives us a feeling that they're probably looking at multiple, contractors provide that. I think the need and the ability to scale, my guess would be, as I'd probably look at it, okay, we'll probably need to look at multiple participants in this program to help support the overall need of the program itself.

There's more than I guess, monitoring could be defined a lot of different ways, but it requires quite a bit of infrastructure I would think to do this. Like other than you and your primary competitor, who would be qualified to do this?

Well, we're not privy to who's what submitted, who submitted on the RFI? So I don't know if I can give you a very good answer on that front. But I'd say it's probably kind of the range of, not only organizations like this, publicly traded companies, there may be some out there that are maybe in the defense industry world that maybe have some technology or capabilities that are similar to this requirement or these requirements, I should say. And I'm sure there's probably either some privately held or nonprofit also that are participating. So, probably all those probably show some interest.

There's a lot of different services too that could be included. So, it certainly makes sense that it could be multiple vendors providing the ultimate services.

And then, one other topic mentioned that you're in discussions with a number of states. Can you share how many beds are in play?

It'd probably be hard to give a definitive number, but it's meaningful. I mean, we've got -- again, we've talked about, Montana. We talked about Idaho, those were a couple of 100 beds each, the Hinds County couple of 100 beds. So I'd say that's probably a good estimate. Probably, when we start a conversation bed with a new partner, it's usually in the range of 200 to 400 beds. Again, we feel like that's good way to kind of get the relationship started get some time together, show some positive outcomes, and then based on kind of their long-term goals, see if we can grow the partnership.

Our next question comes from M. Marin with Zacks.

So you have really moved along in this debt reduction strategy, capital allocation policies and just generally strengthening the balance sheet. When you first announced, this strategy, I think one component was to include asset sales in order to increase the cash you had to repay debt, and you were able to sell a good number of assets. So now when you look through your real estate portfolio and you see some of the perhaps older facilities or those that are underutilized. Are there any specific assets that you look at now that you think might be right for divestiture at this point?

And the short answer is that maybe 5, 10 years ago, that wasn't necessarily a thought, for each individual asset, especially ones that are underutilized. But we really think about that for every asset that we've got in the portfolio that are partially or underutilized or currently vacant. And then with that, we do a market assessment on potentially, what would the market bear relative to transaction. So nothing, near-term to really kind of point to or indicate that we're close on a transaction. But I guess the short answer is any facility that we've got kind of underutilized, especially if it's been long-term, we're considering that. But I guess, anything you could add to that, Dave?

Yes. In the short-term, I guess there are some residential reentry centers, both in our property segment as well as in our community segment. They're not large assets. They're several million dollars per asset. The larger prison facilities, those are longer conversations. Obviously, more complex with larger dollars associated with the government coming up with the dollars to purchase those facilities. So those are much longer conversations. I wouldn't say -- I'd never say never, but, those are lower likelihood. But I'd say, certainly, in the community and properties portfolio, we've got residential reentry centers. We could sell, one or more of those assets. But again, those would not be significant proceeds.

Our next question comes from the line of Brian Violino with Wedbush Securities.

Just wanted to clarify in the guidance, you mentioned sustained higher federal and state populations being an underlying assumption, does that -- for ICE, I guess, for ICE specifically, does that assume that they're sustained at the higher levels, like the average level seen in 3Q? Or are you assuming an incremental increase in the average ICE occupancy in the fourth quarter?

I would say, modest. I mean, the average population during Q3, we would say, the -- guidance would be slightly higher than the average in Q3. So, higher toward the end of the Q3 was, as you looked at sequential months throughout Q3, they continued to increase. And as Damon mentioned, they continued to increase post September 30th as well into the fourth quarter. So our guidance reflects -- it's a range, but it does reflect an increase in the average daily population from Q3.

And then, in the past, you talked about the NOI margin in the Safety and Community segment turning back towards pre-pandemic levels of around 25% over time. I think it was around 21% this quarter. I guess, could you just walk through sort of the time line, trending back towards that level? What kind of occupancy expense trends would need to happen to get there?

Yes. I'd say, pre-pandemic occupancy was around 80%. So to get back to 25%, pre-pandemic margins, we'd have to get toward that occupancy level. We're not projecting that. I mean, we haven't or obviously, don't have 2024 guidance out yet. We'll issue that in February when we release our fourth quarter results, but I wouldn't expect us to be getting to 80% occupancy throughout 2024 either. But certainly, incremental steps, as you know, sequential, if we see sequential growth, we could see an increase in that margin percentage, perhaps not as high as the 25% by the end of '24. I wouldn't rule it out, but probably not likely we'll get to 25% margins by the end of '24. But again, we can speak more to that when we release our 2024 guidance in February. So in the short-term, I'd say modest increases perhaps in that margin is assuming we continue to see increases in occupancy like I just mentioned. And we do continue to see, again, sequential quarters beginning probably with the second quarter of 2022, and improvement in the hiring market. And then a last point I'd probably say is, our La Palma facility, we continue to have a lot of temporary staff there. Every day that goes by, we're hiring more and more permanent staff, but we are experiencing elevated operating expense levels at the La Palma facility while we have the temporary staff there. So that will continue to normalize over time and also contribute to an increase in our margins.

And one more quick one if I could. When Title 42 was first talked about going away back in May, there was some talk about Title 8 coming back into play and that repeat offenders could be referred to the DOJ and be detained under the U.S. Marshals. It sounds like Marshals population has been pretty stable, but have you seen any sort of uptick in these cases now that Title 42 has been gone for a few months?

We have not. And I know that was discussed and reported, quite a bit during the summer. But at the moment, to your point, yes, Marshal populations, both in our system and kind of the national numbers, have been pretty stable.

Our next question comes from Jordan Hymowitz with Philadelphia Financial Management of San Francisco.

Our first question is, what was your occupancy in the month of October?

I don't have that, at my fingertips, I would guess it was slightly higher than the 72% we reported for the third quarter.

Second question is, is it fair to assume that since there's been no proposal, if there's nothing in your numbers or in any way going forward that you're projecting for the potential large expansion of the electronic monitoring business, but you're really not in there?

Yes. So since that, yes, exactly right. So it hasn't, been finalized from a funding perspective. And obviously, I think that'll all be tied into potentially in the supplemental or the larger funding bill for the rest of fiscal year. So my guess is that probably ICE is doing two things. One, again, they're probably surveying the market on capabilities based on what their needs were would be with the mission. But second, what kind of direction they get from a funding, from Congress. So it's a little, I think at the moment, it's probably a little bit we can see on our side while they get again, their plan together and also see what funding to get, support wise from Congress.

And my last question is, you've expanded your debt facilities quite a bit. And if you don't want to give names, that's fine, but not that many years ago, like you couldn't find anybody at any rate to lend you money. Can you talk about the number of banks or facilities, without mentioning, that are now interested in your debt facility or interested in doing business with you?

Dave, I'll take that one. Well, that was one of the reasons we actually expanded the size of the credit facility, which we just obtain last year before expanding it in October. We have 11 banks in our bank credit facility, and we did have some additional banks come to us between the last time, we did the facility, which was April or May of last year, through now, that wanted to get into our facility. Again, they're not the big bulge bracket banks, but more regional banks. And so, it's nice to see, banks actually approaching us, interested in getting into our bank Syndicate. They look at the credit. The credit's rock solid and we can provide certain element of businesses and deposits for them. So it's good business for them as well. So, we just felt like it was, we reached out to the banks, asked them if they'd be interested in amending and extending the facility. So getting a 5-year deal was longer than the 4-year deal we got last year, and they were very receptive. They're very good banking partners. I speak with them pretty regularly. And so when they said, yes, they would be supportive of an extension, we just opened it up and expanded it by 50 million and pushed the maturity out 5 years. So, yes, different environment, I'd say, today than it was several years ago.

And in terms of that increased flexibility, is there any covenants in that that should you want give you more flexibility on buybacks than before as well?

There are no restrictions under the credit facility other than our obvious covenants when we're way inside of our total leverage covenants on how much stock we could buy back. The only restrictions we have on buying back shares is under our 8.25% unsecured notes. There's a restricted payment basket, but it is plenty and it would not be a restriction on the amount we could buy back. Our internal leverage profile of 2.25, 2.75 will be the governor on share buybacks.

Our final question comes from Greg Gibas with Northland Securities.

First, I have a follow-up on the assumptions related to the ICE population in guidance. I know you said definitely higher than where we were at the end of Q3, but, I believe it was like 11,800 of the ICE population as of yesterday that you had. Is that kind of the assumption that it holds through year-end? Or would we that increases. Just curious what you kind of implied in guidance there?

Well, if that's, you're getting at a level of precision that's probably not, our guidance is a range, so I would say it's approximately that level. But if they're up slightly, they'll be toward the high end of that that range, and if they're down slightly, they'll be toward the low end of that range. But I think given the range that we have out there, we're pretty comfortable. Here we are beginning of November, have somewhat decent visibility on the rest of November and December, and certainly know what October was. So feel that it's approximately equal to, I'd say, that number you just mentioned.

And then regarding the California facility, I think it was up March 31, 2024 about 25 million of the contributor. Any visibility on what will happen with that contract or that facility and when we might get a better picture?

Yes. It's a great question. This is Damon again. And, our team is actively working on it, and I have nothing to announce today, but I will tell you that, we've had good discussions, with multiple jurisdictions on the path going forward. So hopefully, as we get to, February, I can give you another update on that front. But, there definitely is interest by a couple of different jurisdictions.

And I guess just last one for me, more of a broad kind of question, but, really great to see that leverage reduction continue into the quarter. And as we get close to that targeted range, how are you thinking about maybe capital allocation once you hit that range, once you're at like, 2.5 or something like that, like, how would it change?

Yes. Good questions, Greg. So we expect to continue to both buy back stock and pay down debt at the same time. It's we're not applying a formula to that allocation. We'll obviously react to prospects in the business, share price, things like that. As we just mentioned, there's really no limitations under our under our debt agreements. We're obviously a conservative management team and prudent with our leverage ratio, and it is a target, 2.25, 2.75. We're not there yet. Now we've made significant progress and are just a hair above it. So, we'd expect to get there in the short-term, but we'll allocate our free cash flow both toward, debt reduction and stock buybacks.

This concludes the question-and-answer session. I would now like to turn it back to Damon Hininger for closing remarks.

All right. Thank you so very much, and thank you all for joining our call today. We appreciate giving you an opportunity to ask questions and give you all an update. I look forward to our call coming up in February of next year. Have a good day.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.