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The GEO Group, Inc. (GEO)

Q2 2022 Earnings Call· Tue, Aug 2, 2022

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Transcript

Operator

Operator

Good morning and welcome to the GEO Group Second Quarter 2022 Earnings Conference Call. [Operator Instructions] Please note that this event is being recorded. I now would like to turn the conference over to Mr. Pablo Paez, Executive Vice President of Corporate Relations. Please go ahead.

Pablo Paez

Analyst

Thank you, operator. Good morning, everyone and thank you for joining us for today’s discussion of the GEO Group’s second quarter 2022 earnings results. With us today are George Zoley, Executive Chairman of the Board; Jose Gordo, Chief Executive Officer; Brian Evans, Chief Financial Officer; James Black, President of GEO Secure Services; and Ann Schlarb, President of GEO Care. This morning, we will discuss our second quarter results and our outlook. We will conclude the call with a question-and-answer session. This conference call is also being webcast live on our Investor website at investors.geogroup.com. Today, we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and the supplemental disclosure we issued this morning. Additionally, much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the safe harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q and 8-K reports. With that, please allow me to turn this call over to our Executive Chairman, George Zoley. George?

George Zoley

Analyst

Thanks, Pablo and good morning to everyone. Thank you for joining us on our second quarter 2022 earnings call. I am pleased to be joined today by our senior management to review our financial results for the second quarter, the trends for our business segments, our increased guidance for 2022 and our recent announcement of proposed transactions to address our debt maturities and strengthen our capital structure. Our quarterly operating financial results continue to deliver better than expected performance, which we believe is underpinned by the strength of our diversified business units. As a result of our investment in business strategy over several years, we have been able to develop industry leading solutions and programs across a diversified spectrum of government services. And we believe the unparalleled diversification and scope of our services have set GEO apart in our industry and has allowed us to achieve quality growth. This continued growth led us to achieve some of the best quarterly financial results in our company’s history during the second quarter of 2022. Our quarterly revenues increased by 4% year-over-year to $588 million, which follows revenue declines over the last 2 years due to the COVID pandemic and policy changes that impacted several of our federal contracts. Our quarterly net income attributable to GEO increased by 28% year-over-year to approximately $54 million. For the trailing 12 months ending on June 30, our net income attributable to GEO was $77 million. Our adjusted EBITDA increased 12% year-over-year to more than $132 million in the second quarter of this year. This quarterly run-rate of adjusted EBITDA is the highest in our company’s history and for the trailing 12 months ending in June 30. Our adjusted EBITDA totaled almost $500 million for the first time ever. We expect our diversified business units to continue…

Brian Evans

Analyst

Thank you, George. Good morning, everyone. For the second quarter of 2022, we reported GAAP net income attributable to GEO of approximately $54 million. Adjusting for a gain on real estate assets, we reported adjusted net income of $0.42 per diluted share on revenues of approximately $588 million for the second quarter of 2022. We reported second quarter 2022 AFFO of $0.69 per diluted share and our adjusted EBITDA increased by 12% to more than $132 million, which represents the highest quarterly run-rate in our history. Our quarterly financial results have exceeded our expectations over the trailing 12 months ended on June 30, 2022. And during this period, our adjusted EBITDA reached almost $500 million for the first time surpassing any other 12-month period in our company’s history. This strong financial performance has been underpinned by the continued growth in our Electronic Monitoring and Supervision segment, increases in compensated mandates in our non-residential reentry business, and improvements in occupancy rates in our owned and leased facilities. Our better-than-expected performance has allowed us to significantly increase our unrestricted cash on hand to approximately $588 million as of the quarter ended on June 30 2022 and reduce our net recourse debt. Since the beginning of 2020, we have reduced our net recourse debt by approximately $375 million, including approximately $130 million during the first half of 2022. Our strong financial performance also allowed us to proactively engage with our creditors to address our debt maturities, which led to the commencement of the proposed transactions we announced a couple of weeks ago. As previously announced on July 18, 2022, we entered into a transaction support agreement with certain lenders under our existing credit agreements as well as certain holders of our 2023, 2024 and 2026 notes. Since July 18, several additional creditors have…

James Black

Analyst

Thank you, Brian. Good morning, everyone. It is my pleasure to provide an update on GEO Secure Services. During the second quarter of 2022, our employees and facilities achieved several important milestones. Our facility successfully underwent 46 audits, including internal audits, government reviews, third-party accreditations and certifications under the Prison Rape Elimination Act. 8 of our Secure Services facilities are scheduled to receive accreditation from the American Correctional Association this month, with an average score of 99.4% and 2 of those facilities achieved a perfect accreditation score of 100%. Additionally, 2 of our Secure Services facilities recently received U.S. Department of Justice certification under the Prison Rape Elimination Act, with both facilities exceeding standards in several areas. Our GTI Transportation division safely completed approximately 4.3 million miles driven in the United States and overseas during the second quarter of 2022. Every quarter, our Secure Services facilities achieved several operational milestones in the delivery of our services and we are grateful for the continued dedication of our employees in their commitment to operational excellence. Turning now to trends impacting our government agency partners, starting at the federal level, we currently have 1 remaining company-owned Secure Services facility under contract with the Federal Bureau of Prisons. As we previously disclosed, we expect our BOP contract for the 1,800-bed North Lake correctional facility in Michigan to not be renewed at the end of September 2022. We have enjoyed a decade’s long partnership with the BOP and our facilities have provided high quality support services. However, over the last 10 years, the BOP populations have declined and this trend was accelerated by the COVID pandemic. Following the deactivation of our North Lake correctional facility, we will have 6 idled Secure Services facilities that were previously under contract with the BOP. We are focused on…

Ann Schlarb

Analyst

Thank you, James and good morning everyone. I am pleased to provide an update on our GEO Care business unit, which includes our reentry services and electronic monitoring and supervision segments, as well as our GEO Continuum of Care programs. Each of our GEO Care divisions had an active operational quarter. Our residential reentry services facilities experienced a sequential increase in occupancy rates. However, residential reentry populations continue to be below historical levels. Our residential reentry facilities have been impacted significantly by the COVID pandemic as government agencies have prioritized placement of individuals into non-residential alternatives, including furloughs, home confinement, day reporting and electronic monitoring programs. However, we are encouraged that residential reentry census levels have begun to increase. And despite this challenging environment, we continue to successfully renew our existing contracts. During the second quarter of 2022, we renewed 16 residential reentry contracts, including 5 contracts with the Federal Bureau of Prisons. Additionally, 4 of our residential reentry centers are scheduled to receive accreditation from the American Correctional Association this month. And we are very proud that all 4 centers received perfect accreditation scores of 100% and 2 of our residential reentry centers recently received U.S. Department of Justice certification under the Prison Rape Elimination Act both exceeding standards in several areas. The impact of the COVID pandemic has conversely resulted in the increased use of our non-residential programs and services, which have continued to deliver strong growth. Compensated mandates for our non-residential reentry business increased by 26% and year-over-year, with quarterly revenues increasing to more than $23 million. Our Electronic Monitoring and Supervision segment also continued to deliver strong revenue growth during the second quarter of 2022. Our BI subsidiary provides a full suite of electronic monitoring and supervision solutions, products and technologies on behalf of federal, state…

Jose Gordo

Analyst

Thank you, Ann. We are pleased with our continued strong financial performance and the operational milestones achieved by our diversified business units. Our management team remains focused on achieving operational excellence across all of our service lines. We have recognized the staffing shortages and wage inflation are posing a difficult challenge for companies across diverse industries and we have worked closely with our government agency partners to tackle this challenge. As we have continued to deliver robust quarterly results over the last 2 years, we have also been focused on maximizing our allocation of capital towards reducing net recourse debt. We have been able to reduce net recourse debt by approximately $375 million since the beginning of 2020. Based on our current performance and expectations, we believe we will be able to significantly further reduce our net leverage over the next 2 to 3 years. We are pleased to have commenced several proposed transactions to stagger our debt maturities over a longer period of time. These proposed transactions which are conditioned upon receipt of certain percentages of creditor participation or consent, were the result of months of discussions and negotiations with several of our creditor groups. We believe that the proposed transactions are in the best interest of all of our stakeholders. They provide the best path forward for our company and they will strengthen our capital structure. Importantly, we are optimistic that the proposed transactions can potentially unlock additional equity value for our shareholders. After attaining our objective of net recourse debt reduction, we plan to evaluate the allocation of a portion of free cash flow to fund quality growth opportunities and potentially return capital to our shareholders in the future. We believe that our continued strong financial performance, which is underpinned by our diversified business units, sets GEO apart in our industry. Our cash flows are supported by valuable company-owned real estate assets and diversified contracts, entailing essential government services, ranging from secure residential care to community based and technology solutions. We believe that the unique diversification of our services will continue to allow us to pursue quality growth opportunities that would otherwise not be available to companies in our industry. That completes our remarks. And we are glad to take questions.

Operator

Operator

Thank you. [Operator Instructions] First question comes from Joe Gomes, Noble Capital. Please go ahead.

Joe Gomes

Analyst

Thank you. Good morning and congrats on the nice quarter.

Jose Gordo

Analyst

Thank you.

Joe Gomes

Analyst

But I wanted to ask on BI you said there was I think 300,000 people under the ISAP program. How does that compare to the number that was under this program at the beginning of the year? And are you still seeing growth in that program here into the third quarter? Where do you think that ends at year end?

Ann Schlarb

Analyst

Hello. This is Ann and thank you for your question. And yes, we’ve seen significant growth through this year and it’s continued to accelerate. We are never totally certain what it might look like going forward, because ICE makes all the decisions about who comes in to our programs. However, we do believe that it will continue at about where it is for the time being and that’s what we are looking at for the forecast is maintaining it around the 300,000 level.

Brian Evans

Analyst

I think we started the year about 160,000 to 170,000.

Ann Schlarb

Analyst

Yes, alright.

Joe Gomes

Analyst

Okay, thank you for that insight. On ICE, you mentioned that for the fifth quarter – government fiscal year ending in September, there is funding for 34,000, they are in negotiations right now on the budget for the fiscal year beginning October 1 kind of what is your insight as to if you have any as to where the negotiations are going? Is it going to be flat funding for beds decreased funding for beds? I mean, if you were to look at that, where do you think that ends up?

Jose Gordo

Analyst

Well, in both the House and the Senate versions, there is a reduction in beds from 34,000 to approximately 25,000. 25,000 is approximately the current number of contracted beds to my understanding. And there is three reasons why there has been a reduction in the number of beds, actually used or people in those beds, that is residents. The first reason is COVID, which has caused the CDC to issue guidelines in concert with ICE to permit only 75% occupancy of the facilities. So we are not at full occupancies where it significantly reduced occupancy because of COVID. Secondarily, there has been a change in administration policy regarding immigration enforcement and the priorities within that enforcement program. And third, there has been a reduction in public facilities that have supported ICE populations. States like New York, New Jersey, Maryland and Illinois have passed legal restrictions in effect prohibiting ICE facilities within those states. As a consequence, the public sector portion of ICE detention facilities has significantly decreased. And presently, by our own estimates, we believe that 90% of the detention capacity at ICE processing centers is provided by the private sector. That is 90%. As we look to what happens in October, we really don’t know, it’s – we don’t know if there will be a compromise on the number of beds at the existing levels or higher levels or will there be another continuing resolution, which would preserve the funding and the bed capacities at the 34,000 bed level. So we are waiting to see the outcome.

Joe Gomes

Analyst

And how does that if it was to drop from 34,000 to 25,000, how does that impact GEO in the contracts that have the minimum guarantees, if it impacts them at all?

Jose Gordo

Analyst

Yes, from what we know, right now, it doesn’t seem to be have any impact that we are aware of. We are – we haven’t lost any ICE contracts and we are – and we are – our facilities are occupied as far significantly lower occupancy levels than historical averages. So, if the funding was at just 25,000, for example, we wouldn’t expect any impact to our current contracts.

Joe Gomes

Analyst

Okay, thanks for that. And switching gears a little bit here on the debt restructuring. So you need approvals and you mentioned, when the initial release came out some of the approval rates, I know you provided an update today like for the term loan, it was gone from 56% to 70%, but the ‘23 notes only went from 41 to 42. Is there something that you are hearing on pushback as to why that has not increased above the goal rate of 50%?

Brian Evans

Analyst

This is Brian. No, I think they are just – it’s two different processes with the term loan. There is fewer institutions and there are larger holders. And so we have been able to work that side of the ledger more quickly on the 2023 notes. There is more outreach, it’s – the holders are smaller. We are going through that process, I would say that we have reached out to most of the other larger institutional holders that would easily compromise or get us over the 50%. We have indications from some of them nothing in writing yet, but we have indications of either that they will consent or that they will participate in some way that puts us closer to 46% to 47%. And we are going to continue that outreach and we expect to get over the 50% threshold. And I think on the term loan side, there is no, again, no guarantees, but we have reached out to many of the institutions there. And we have indications based on our discussions of additional support from those creditors as well, that will probably put us somewhere between 75% and 80% participation level. Those are subject to change. But – so, we are having very positive discussions with both creditor groups, and we expect to, close within the 20 days or end the process within the 20 days, as we have discussed, subject to SEC…

Joe Gomes

Analyst

Great. Thanks for that. Right. Two kind of numbers types of questions here tried, one on the interest, increased interest expense, you mentioned the total $27 million to $30 million between the third and fourth quarters. Can you kind of break that out as to what percent of that you think will be in this or what amount will be in the third quarter versus what amount will be in the fourth quarter? And then when you look at your financials on the EPS calculations, maybe if you could just briefly walk us through how you get the $0.37, I know it’s something to do with the as converted share amount to get the $0.37, even though it’s a higher net income number than the $0.42 adjusted calculation?

George Zoley

Analyst

Well, let me start with the interest expense. So, I think our forecast assumes a close of mid-August to September 1. So, you are looking at really only about one month of additional interest expense, a month and a half or so. So, a third to half a quarter in the third quarter. And then the fourth quarter is a full run rate of the additional interest expense that we would expect coming out of the box. And that also includes our assumptions on what the underlying rates will be during the fourth quarter. On the – I am not sure I followed your question on the net income, the interest expense is tax deductible, so the net impact to income is post-tax. Was there something else to your question?

Joe Gomes

Analyst

Yes. I am sorry. There wasn’t – I wasn’t clear enough. So, if you go through your – if you are looking at your net income statement. Net income attributable to GEO is $53.7 million, which gives you net income of $0.37 a share. But when you look at adjusted net income, its – hold on one second here, I think it’s $50 million something, it’s $50.9 million, which is $0.42 a share. And that has something to do with the EPS calculation. I was just wondering if whether we can do this offline if necessary, as to how you get to that calculation?

George Zoley

Analyst

Joe, I know what you are talking about. That’s related to the convert, the convertible. And that’s always been there. I think it’s just as the as the income is changing, that amount is changing, or that difference is changing. But there is a reconciliation, or there will be in the 10-Q. And I think it’s even in the Jose has pointed out. It’s even in the press release that you can look at that reconciles that. But that’s related to the convert and it will be reconciled in the 10-Q. But I can also walk you through that separately if you need to, if you want to.

Joe Gomes

Analyst

Alright. I will take a look at the Q. Thank you. I will hand it off to somebody else.

George Zoley

Analyst

Okay.

Operator

Operator

Thank you. Our next question will come from Mitra Ramgopal of Sidoti. Please go ahead.

Mitra Ramgopal

Analyst

Yes. Hi. Good morning. Thanks for taking the questions. First, just want to touch on the labor market. A lot of companies are having difficulty in terms of recruiting and retaining labor. I am just curious, in terms of I know you are getting some help from state and government agencies and how reliant are you on that and the ability to just convince people to come to the correctional industry versus elsewhere in this environment?

George Zoley

Analyst

I think we have had excellent cooperation with our state clients where this is more of a problem at our Federal agencies. The wages are generally higher, because of Department of Labor Wage Determination for those wages. But at our state institutions, there has been pressure on wages. But that same pressure exists in the public sector as well. So, as the states have faced their own staffing shortages, they have been increasing wages. And when they do so, they typically provide the same additional level of funding for us to increase our wages. So, we have had wage increases in Georgia, Florida, Oklahoma, Arizona, New Mexico to name a few states.

Mitra Ramgopal

Analyst

Okay. Thanks. And clearly, the pandemic continues to have an impact, as you mentioned, in terms of occupancy and COVID-related costs you are experiencing. But as you look out to 2023, and again, not looking for any specifics sort of guidance related, what’s your best sense in terms of how much of sort of a tailwind you might get from behaving of the pandemic?

George Zoley

Analyst

Well, I think the biggest change would possibly occur in our ICE facilities where we would return to close or normal historical levels of occupancy. Our state facilities are even at this time during the pandemic are in excess of I believe 90% of their allowed occupancy. So, the only change would probably be ICE facilities. I think the Marshals facilities are fairly consistent with their occupancy in the 80s or 90s. So again, it would be the ICE facilities that could see an increase in their occupancy, because of the declining COVID issues.

Mitra Ramgopal

Analyst

Okay. Thanks. And again, I guess it’s still up a year or so whether we head into a recession over the next year or so. But assuming that’s the case, I was wondering if you could remind us historically, how you have fared in an environment where there is a recession?

George Zoley

Analyst

Historically, we have fared fairly well, because in a recession, there is usually more plentiful labor supply, and we are a labor intensive organization. 60% of our costs or more are attributable to labor costs. So, as the unemployment rate would be expected to increase that would provide additional labor applicants for our positions, and it would possibly improve our financial position.

Mitra Ramgopal

Analyst

Okay. Thanks. And I was wondering on the idle facilities, if you are sorting – if you are getting any interest in terms of using them or even potential asset sales?

Jose Gordo

Analyst

Yes, we have been in discussions with state as well as Federal agencies, about the potential use of our idle facilities. And we continue to show them and market them to all prospective clients.

Mitra Ramgopal

Analyst

Okay. Thanks. And then finally, just on the transactions and the plan to reduce the net recourse debt, if I read it 40% – approximately 80% of the cash flow will have to be used for debt reduction. Is that correct?

Brian Evans

Analyst

Right. So, under the terms of the new agreements, when we close 80% of excess cash flow, as calculated in accordance with the terms of the agreement, will be applied to the senior secured debt. So, against any remaining term loan from our current credit agreement it doesn’t participate and rolls over and will still mature in 2024. Some portion of that 80% will get applied to that and then the balance will be applied pro rata or offered on a pro rata basis to the Tranche 1 and Tranche 2 term lenders in the new agreement. And then the other 20% is available for the company to use to satisfy debt obligations on the unsecured notes that don’t participate in the transaction, also referred to as stub ‘23, and ‘24 notes. So, as George said, Jose said, I think I have said, we intend to and expected to use the substantial majority of our free cash flow to reduce debt. Importantly, the cash flow, excess cash flow is calculated after our maintenance CapEx and our growth CapEx. So, it doesn’t necessarily restrict our ability to make investments in the business there are some constraints within the credit agreements that didn’t exist - don’t exist today. But we still have a fair amount of flexibility to make appropriate investments as necessary to maintain the business as well as to grow the business.

Mitra Ramgopal

Analyst

Thanks for taking the questions and congrats on a nice quarter.

Jose Gordo

Analyst

Thank you.

Operator

Operator

Thank you. Our next call comes from Kirk Ludtke of Imperial Capital. Please go ahead, sir.

Kirk Ludtke

Analyst

Hello guys.

Jose Gordo

Analyst

Good afternoon.

Kirk Ludtke

Analyst

Just a couple of follow-ups on the guidance. One, the $200 million to $250 million of net debt reduction that you are looking for in both 2023 and 2024, is that all from free cash flow, or have you included proceeds from some asset sales?

Brian Evans

Analyst

No, that would be our expectation based on our cash flows as we described maintaining sort of current levels of performance. Assuming no new contracts, or reactivations of vital facilities, and assuming our current contracts remain in place, pretty much I would say the status quo.

Kirk Ludtke

Analyst

Got it. Including the three, Marshal, direct Marshal contracts?

Brian Evans

Analyst

That’s correct.

Kirk Ludtke

Analyst

Okay. Thank you. And then with respect to monitoring, you mentioned that you expect the population at least under the ISAP program to remain at current levels? How much lead time do they give you before they before they would ramp up to another level?

Brian Evans

Analyst

Well, there is constant dialogue. But in the current program, it’s been changing, it changes every day, and it’s a constant. Back and forth, there are dozens of sites where our staff work with – in partnership with the government. And there is people that are added to the program and people that are removed from the program. So, it’s a very volatile and dynamic program, but it’s been increasing over the last, 1.5 years or so.

Kirk Ludtke

Analyst

Got it. I was just curious if maybe you would need to arrange for some additional equipment if they wanted to take the number higher. So, that would be maybe a limiting factor to that going higher.

Ann Schlarb

Analyst

Not at all, the way it works. This is Ann. If there is, for example, organic growth, new offices, that type of thing, we get contract modifications, and so many days to get a new site going. We work every day with the shipments that are going to the border and the technology that’s needed. We also have a nice diverse continuum of technology. So, we can meet their needs one way or the other. So, we have a lot of solutions available to them under the current contract, and the inventory available to take care of that. So, we are able to handle the growth that they bring up.

Jose Gordo

Analyst

And I think just to add to that, Ann and her team has done a really good job. Entering into the long lead items and making sure that they have got supply for those that continue to ramp up production as necessary. So, we are fully able to support whatever direction the government continues to move.

Kirk Ludtke

Analyst

Got it. Great. Thank you. You mentioned the young adults program. I was curious if it is monitoring, catching on at the state level or in any other parts of the business.

Ann Schlarb

Analyst

So, to clarify, the young adults program that we mentioned, would be a Federal program and another ATP program. So, with that, what was your question? I am sorry.

Kirk Ludtke

Analyst

I am just curious if maybe the states are looking at monitoring if you are seeing – if you are having any success, growing away from ISAP?

Jose Gordo

Analyst

Well, the EM business like, we have literally 1000s of customers at the state and local level, I think we do business in every state through the EM program. And there continues to be expansion in the number of customers, the size of the contract in the industry. But clearly this contract is unique. And it stands apart from the size of the other typical state and local contracts.

Kirk Ludtke

Analyst

Got it. Thank you. And I do appreciate the compliance that you relate. And I missed the percentage who attended all the court hearings. Could you repeat that?

Ann Schlarb

Analyst

Yes. It was 99.6 – do I have that right, gentlemen. And that means all the hearings that they have to attend, and there are several different types of hearings, I am sorry, it’s 99.3 attended all their immigration court hearings. So, that could be from their masters hearings, to their individual hearings, to their hearings of final decision. And that’s while they are in the ISAP program. So, while we are working with them, to make sure that they are attending their court hearings.

Kirk Ludtke

Analyst

Well. That’s impressive. And then lastly, and I will hand it off with respect to the exchange, you mentioned I think that you are at 46% to 47%, on the ‘23s, at least with respect to people consenting. Do you – are you sharing what percentage of the bonds have agreed to exchange?

George Zoley

Analyst

Well, that was to some degree accounted for in our estimate at closing of the amount of debt that would be outstanding in ‘23. Let me just go back and look at, we said 170, I think is that right. So, that that number indicates about $80 million worth of the, or I guess 260, about $90 million of the debt has either – has agreed at this point to rollover either in the cash debt option or in the all debt option. And obviously, once we close, we will update all of those numbers that are based on final participation levels.

Kirk Ludtke

Analyst

And that’s the ‘23s?

George Zoley

Analyst

On the ‘23s and then similarly on the ‘24s, I don’t have it, what pages there.

Jose Gordo

Analyst

$430 million is the number we put up for 2024…

George Zoley

Analyst

But that includes also the stub-term loan from 2024, and some banks. So, again, that will be affected by final participation levels. It could be less than that. But we will give those specific amounts and really probably put some detail as to which tranche has what amount of debt outstanding, is it term loan, is it ‘24, etcetera. So, there will be more clarity in the next – call two weeks to four weeks when we finally close the transaction.

Jose Gordo

Analyst

But we have already reached the required threshold for consent and participation in the ‘24s.

George Zoley

Analyst

In the ‘24s it is term. And we are at 40%. Just to clarify, we are at 41% or 42%, in legal firm commitments on the ‘23s and we have indications of based on discussions, preliminary discussions of another 4% or so. And then those – we have a substantial number of other investors that we are having discussions with and we believe will get us over the 50% through either consents or participation.

Kirk Ludtke

Analyst

Got it. Well, congratulations on the quarter. Good luck with the exchange.

George Zoley

Analyst

Thank you very much.

Operator

Operator

Thank you. Our next question will be from Jay McCanless of Wedbush. Please go ahead.

Jay McCanless

Analyst

Hi. Good afternoon. Thanks for taking our questions. The first question I had electronic monitoring, really good growth there plus 45% in the first quarter and nearly doubling this quarter. Is this $121 million kind of a good run rate to use going forward? Are you guys expecting further growth in this segment?

George Zoley

Analyst

So, what we have said for the balance of the year, we have assumed that the same sort of participant level or participant count that we are currently at today. So, the quarter obviously was growing throughout the quarter. So, it’s an average of less than the current participant count. For the balance of the year, we are assuming more of a maintenance level, right around this level of $300,000. It could grow some more, but we are – that’s what we are using for the forecast.

Jay McCanless

Analyst

Got it. Okay. And then our second question and thank you for the outlook in terms of the levels you want to get to for the debt. But I guess what maybe is kind of a stretch goal in terms of your net debt, where you are comfortable starting to return money to shareholders, or whether its dividends, etcetera, if you can maybe talk about what the longer term goal is, we would appreciate it.

Jose Gordo

Analyst

Sure. So, that’s going to be obviously a function of our ability to get back into the market and get more reasonable covenants that allow us to return capital to shareholders. We are going to test the markets as soon as we think that we have got to a number that’s supportable. So, if it’s 3x, we will get into the market at 3x. If it’s 3.5x, we will do it at 3x to 3.5x. But I think we are fairly comfortable and confident that once we get below 3x, we will have access to better economic rates, as well as covenants that will allow us to return capital to shareholders, either through additional dividends and/or stock buybacks.

Jay McCanless

Analyst

Okay. Great. Thanks again.

Operator

Operator

Thank you. Next question is from Jordan Sherman, Ranger Global. Please go ahead.

Jordan Sherman

Analyst

Thank you. Just quickly, I apologize if I missed this, what happens to the holders of the debt who don’t agree or don’t consent to the exchange?

Jose Gordo

Analyst

So, on the ‘23s, the ‘24s and the ‘26s, anyone who doesn’t participate, whether they don’t consent, or they don’t participate in the rollover, they will remain in their current agreements. And we will satisfy that debt obligation when it comes due. We will continue to pay the current interest rates on those instruments. And then when their debt comes due, we will pay it off. As we said, we – that’s one of the significant benefits of the transaction. We are reducing that maturity well from $2 billion of between ‘23 and ‘24, down to $600 million and potentially lower depending on the participant level. So, we believe that through at least related to the ‘23 and ‘24 maturities, that through cash on hand, and cash flow and liquidity that company has, we can satisfy those obligations. And then going forward, the ‘26s and those other maturities will satisfy through a combination of cash flow, cash on hand as well as refinancing as appropriate.

Jordan Sherman

Analyst

In your guidance for the rest of 2022, what participate – because this is you are expecting this to happen relatively soon. What’s your estimate of participation levels?

Jose Gordo

Analyst

It’s what we have put in the press release and the earnings call today for the different years. If numbers move around a little…

Jordan Sherman

Analyst

Whatever they – wherever they stand today, you are saying?

Jose Gordo

Analyst

Yes. What we have disclosed publicly, what our estimates are. So, for 2023, we are estimating around $170 million in outstanding stuff, ‘23 and the ‘24s etcetera.

Jordan Sherman

Analyst

Perfect. Okay. I apologize. I missed that. Secondly, can you – again, I just want to be clear I understand. Some of the moving parts that led to the earnings increase, obviously, we got the offset of the guidance increase, obviously, we got the negative from the interest rates. But what the moving parts that led to the upside?

Jose Gordo

Analyst

So, on the upside, it’s the better performance in a number of our facilities, as well as the improved performance under the ISAP contract with ICE or the BI division. And we had a facility that reactivated that was idle. So, we had the full impact of that in the quarter of the Moshannon Valley facility that was idle last year. So, a number of different things that led to that improvement.

Jordan Sherman

Analyst

Okay. So, better run rate…

Jose Gordo

Analyst

I think as you know, I am sure you are aware, we have been performing better than our guidance and our expectations for the last 1.5 years or so. And I think through the continuation of San Diego, that’s good point George pointed out. We – our guidance and our forecasts assume that the San Diego contract ended at the end of June. We have – as we discussed, extended that through September of next year, so we have a six-month impact from that in there as well.

Jordan Sherman

Analyst

Got it. The facility that’s going with the Marshal direct contract that’s going to expire at the end of September. Are those ongoing conversations with them at the moment?

Jose Gordo

Analyst

Yes. That’s the only contract. Jordan, the only contract that’s left to expire is the BOP facility in North Lake, in Michigan. That contract ends at the end of September. So, we don’t have any other Federal contracts that are subject to…

Jordan Sherman

Analyst

Any potential reuse of that facility?

George Zoley

Analyst

Yes. We are marketing that facility as we speak.

Jordan Sherman

Analyst

Okay. Prospects look – how does prospects look?

George Zoley

Analyst

Well, we have prospects, I think I said earlier at the state level as well as the Federal level.

Jordan Sherman

Analyst

Okay. So, I apologize. I missed that comment as well. Okay. Great. Thank you, guys. Obviously, great quarter. Thank you, guys.

Operator

Operator

Thank you. That concludes our question-and-answer session. Now, I will turn the call back over to George Zoley for closing remarks.

George Zoley

Analyst

Well, we thank you for having joined us on this conference call. We look forward to addressing you into the future. Thank you.

Operator

Operator

The conference has now concluded. Thank you for attending today’s presentation. You may now disconnect.