The GEO Group, Inc. (GEO) Q2 2022 Earnings Report, Transcript and Summary

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.

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?

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 to deliver strong financial performance for the balance of the year and we have increased our financial guidance for the year. We expect our full year 2022 net income attributable to GEO to be in a range of $158 million to $166 million and our full year 2022 adjusted EBITDA to be in the range of approximately $515 million to $530 million. Looking at our current trends for each of our segments, our Secure Services owned and leased at active facilities experienced a year-over-year increase in compensated occupancy rates of 3 percentage points ending the second quarter of this year at 87% of capacity. Our Secure Services owned and leased segment is comprised primarily of facilities under contract with our 3 federal government agency partners, the Federal Bureau of Prisons, the U.S. Marshals Service and the U.S. Immigrations and Customs Enforcement. As of the second quarter this year, we only have one company owned correctional facility under direct contract with the Federal Bureau of Prisons located in Michigan. Our North Lake correctional facility in Michigan generates approximately $38 million in annualized revenues. And as we have previously disclosed, this contract is scheduled to expire at the end of September of this year. Our U.S. Marshals Service facilities are generally located near federal courthouses and provide needed detention bed space and services for pre-trial federal defendants. Occupancy rates across our U.S. Marshals Service facilities have continued to be stable. Turning to our ICE facilities, while we saw a year-over-year increase in occupancy rates during the second quarter of 2022, detainee populations continue to remain below historic levels. Population levels at certain ICE facilities have been impacted by outstanding federal court orders related to COVID pandemic, which continued to restrict ICE’s ability to utilize full operational capacity of these facilities. In addition, COVID-related restrictions under Title 42, which were first enacted in March of 2020, continue to place – to be in place today at the Southwest border. The administration had announced that these Title 42 restrictions would be lifted in May of this year, but that decision was stopped by the Federal Court and remains in litigation. While the timing and impact of lifting the Title 42 restrictions remain difficult to predict, we believe GEO continues to be well positioned to help deliver diversified services and solutions to assist the U.S. Department of Homeland Security in the future. Our updated guidance for 2022 continues to assume only gradual improvements in utilization rates across our ICE facilities. While ICE detainee populations remain below historical levels, we have conversely seen continued increases in the Department of Homeland Security’s Alternatives to Detention program called the Intensive Supervision and Appearance Program, or ISAP. Our BI subsidiary provides a full suite of monitoring and technology services under the ISAP contract to ensure compliance for individuals undergoing the Immigration Review process. As the publicly available data shows, the number of individuals enrolled in ISAP continues to increase and the program currently has approximately 300,000 participants. Moving to our managed-only business, our occupancy rates remained stable at 97% of capacity during the second quarter of 2022. Our managed-only business is primarily comprised of state level correctional facilities and our focus in this segment has been on mitigating the challenges COVID pandemic, which among other factors has contributed to a difficult labor market. We are pleased to have worked closely with our government agency partners to address the staffing and wage challenges faced in state correctional facilities across the country. As a result of these efforts, we have been able to provide wage increases for our employees across several states. With respect to our reentry services facilities, while occupancy rates remain below historic levels, we did experience a sequential increase of 4 percentage points in occupancy rates and ended the second quarter at 49% of capacity. As a reminder, new intakes at residential reentry centers slowed down during the COVID pandemic as governmental agencies opted for non-residential alternatives, including furloughs, home confinement and day reporting programs. Despite these challenges, we successfully renewed 16 residential entry contracts during the second quarter of 2022. Additionally, our non-risk residential reentry business continued to grow in the second quarter of this year, with compensated mandates increasing by approximately 26% year-over-year. And our Electronic Monitoring and Supervision segment continued to deliver strong growth in the second quarter of this year as well. Our continued strong performance has allowed us to significantly reduce our net recourse debt and deleverage our balance sheet. 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 this year. As we continue to focus on reducing our net recourse debt, we are pleased to have recently announced several proposed transactions to comprehensively address the substantial majority of our outstanding debt maturities. The proposed transactions will stagger our debt maturities between 2023 and 2028, therefore significantly reducing the total recourse debt that is due between 2023 and 2024 from approximately $2 billion to approximately $600 million. The staggering of our debt maturities over a longer period of time will allow us to continue to allocate a significant amount of excess cash flows toward further reducing our net recourse debt. Based on our current projections, we expect to reduce our net recourse debt by approximately $200 million in 2022 ending the year at just under $2 billion in net recourse debt and total net leverage of approximately 3.8x. EBITDA. Assuming consistent performance across our business over the next 2 years, we would expect to be able to reduce net recourse debt by at least $200 million to $250 million annually. Based on this level of debt reduction, our goal would be to decrease net leverage to below 3.5x by the end of 2023 and to below 3x by the end of 2024. The proposed transactions to address our debt maturities are expected to close in the next 30 to 90 days and require approval from 70% of our term loan lenders and a majority of the holders of our ‘23, ‘24 and ‘26 senior notes. Brian will discuss the current levels of participation and consent in more detail in his presentation. We believe these proposed transactions will place GEO in a materially stronger financial position. We look forward to using the substantial majority of our free cash flows to significantly deleverage our balance sheet for the foreseeable future. We also plan to continue to undertake comprehensive review of potential sales of company owned assets and businesses, which we expect to enhance our debt reduction efforts. We are optimistic that the successful completion of these comprehensive proposed transactions in our continued focus on reducing net recourse debt will have the potential to unlock additional equity value for our shareholders. After attaining our objective of net recourse debt reduction and deleveraging, we plan to evaluate the allocation portion of free cash flow to fund quality growth opportunities and potentially return capital to our shareholders in the future. At this time, I will turn the call over to Brian Evans to address our proposed transactions in more detail and review our financial results and updated guidance.

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 become party to these transaction support agreement, thereby committing to support the proposed transactions. These proposed transactions will stagger our debt maturities over a longer period of time, significantly reducing our near-term debt maturities. Under our current debt maturities, we would have had to address approximately $2 billion in outstanding debt between 2023 and 2024 and approximately $580 million in outstanding debt in 2026. Under the proposed transactions and based on commitments as of July 18 and minimum participation requirements, our revised debt maturities are expected to be approximately $170 million in 2023, approximately $430 million in 2024, approximately $340 million in 2026, approximately $900 million to $960 million in 2027, and approximately $440 million in 2028. These amounts are subject to final participation levels under the proposed transactions. And importantly, these amounts do not reflect a significant debt reduction we intend to continue to pursue going forward. We expect to reduce our net recourse debt by a total of approximately $200 million in 2022, which would allow us to end the year with less than $2 billion in net recourse debt and lower our net leverage to around 3.8x. Assuming our financial performance remains consistent over the next 2 years, we expect to be able to further reduce net recourse debt by at least $200 million to $250 million annually. As we continue to reduce our net recourse debt, our goal would be to decrease our net leverage to below 3.5x by the end of 2023 and to below 3x by the end of 2024. These assumptions reflect only modest improvements in our projected adjusted EBITDA run-rate in ‘23 and ‘24. If our adjusted EBITDA grows ahead of these expectations, our net recourse debt and net leverage would decline more rapidly. These projections are predicated on the closing of the proposed transactions to address our debt maturities, which is expected to take place in the next 30 to 90 days subject to review by the SEC of our registration state. The proposed transactions are conditioned upon receipt of certain creditor participation in consent, including term loan lenders holding 70% of our term loan commitments and a majority of the holders of our ‘23, ‘24 and ‘26 senior notes. As of today, holders of approximately 42% of our ‘23 senior notes, 65% of our ‘24 notes, 68% of our 2026 senior notes, and 70% of our term loans have committed pursuant to the proposed – pursuant to the transaction support agreement to support the proposed transactions. Solicitation of additional participation and consents, including with respect to our 2023 senior notes and term loans is underway. And as noted, we have received additional commitments of support towards the required thresholds since we executed the transaction support agreement. Upon closing of the proposed transactions, based on committed support as of July 18, 2022 and minimum participation requirements, we expect our interest expense to increase by approximately $27 million to $30 million pre-tax in 2022 and by an additional $37 million to $41 million pre-tax in 2023. We believe that the proposed transactions will reduce the risks that our near-term debt maturities pose to our ability to refinance our debt, pursue future growth opportunities, and enhance long-term value for our shareholders. Based on our historical and expected cash flows and assuming a reasonable future access to capital markets, we expect to be able to address the new staggered debt maturities in the ordinary course of business. To complement our debt reduction efforts, we have also been exploring opportunities to sell company-owned assets and businesses over the last 2 years. Through the end of July 2022, we have completed sales transactions involving facility assets, business segment contracts and land totaling approximately $70 million in proceeds. We expect to continue to explore additional opportunities for asset sales to meet our previously articulated goal of generating between $100 million and $150 million in proceeds. Despite the expected increase in our interest expense, our strong financial performance, which we expect to continue for the balance of the year, has allowed us to increase our financial guidance for 2022. We now expect full year 2022 net income attributable to GEO to be between $158 million and $166 million on annual revenues of approximately $2.35 billion. Adjusting for extraordinary items, we expect full year 2022 adjusted net income to be in a range of $1.28 to $1.34 per diluted share. We expect full year 2022 AFFO to be in a range of $2.40 to $2.46 per diluted share and we expect full year 2022 adjusted EBITDA to be in a range of approximately $515 million to $530 million. We have also issued financial guidance for the third and fourth quarters of 2022. For the third quarter of 2022, we expect net income attributable to GEO to be between $39 million and $42 million on quarterly revenues of $603 million to $608 million. We expect third quarter 2022 AFFO to be between $0.55 and $0.57 per diluted share and third quarter 2022 adjusted EBITDA to be between $131 million and $138 million. For the fourth quarter of 2022, we expect net income attributable to GEO to be between $27 million and $32 million on quarterly revenues of $600 million to $605 million. We expect fourth quarter 2022 AFFO to be between $0.52 and $0.56 per diluted share and fourth quarter 2022 adjusted EBITDA to be between $127 million and $135 million. Our 2022 guidance reflects the expected increase in our interest expense and the previously expected non-renewal of our contract with the BOP for our North Lake facility in Michigan effective September 30, 2022. We expect our effective tax rate for the full year 2022 to be between to be approximately 28% exclusive of any discrete items. At this time, I will turn the call over to James Black for a review of our GEO Secure Services segment.

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 marketing these facilities to other government agencies at the federal and state level and we hope to be able to reactivate lease or sell these important assets in the future. Unlike the BOP population levels at our U.S. Marshals Services facilities have remained stable over the last several years. The U.S. Marshals have custody responsibility for pre-trial detainees facing federal criminal proceedings and our facilities provided needed bed space and services near federal courthouses. We are pleased that our 770-bed San Diego facility for the U.S. Marshals was not closed following a contract extension through September 30, 2023. Additionally, we have 2 other facilities under direct contract with the U.S. Marshals with current option periods that run through February 2023 and September 2023 respectively. With respect to U.S. Immigrations and Customs Enforcement, ICE facilities continue to face operational restrictions that limit capacity due to the COVID pandemic. As a result, ICE detainee populations continue to be below historical levels. In addition to these operational limits, COVID-related restrictions remain in place at the Southwest border. These restrictions were implemented in March of 2020 under Title 42. Earlier this year, the administration announced that Title 42 restrictions would be lifted in May of this year. However, that decision was stopped by a Federal Court and remains in litigation. While the timing and eventual impact of lifting Title 42 restrictions is hard to predict, the U.S. Department of Homeland Security released a plan for the Southwest border security and preparedness in April of this year. This proposed plan would increase resources, including personnel, transportation, medical care and facilities to support border enforcement. ICE is currently funded for 34,000 detention beds under the Appropriations Act that funds in the federal government through September 30, 2022. This level of funding is consistent with funding levels that were in place during most of President Obama’s administration. The Appropriations Bill that will fund the federal government for 2023 fiscal year, which begins on October 1, 2022 are currently being considered by the U.S. House of Representatives and the U.S. Senate. While we continue to monitor the congressional appropriations process as a longstanding service provider to ICE and DHS, our focus remains on providing high-quality support services and being prepared to respond to their needs. The ICE processing centers where we provide support services offers 24/7 access to quality healthcare, access to legal counsel, culturally sensitive mails approved by registered dieticians, access to faith-based and religious opportunities, and enhanced amenities, including artificial turf soccer fields, covered pavilions, exercise equipment, multipurpose rooms, legal and leisure libraries, etcetera. Moving now to our state government agency partners, we continue to focus on addressing the challenges we are facing as a result of a difficult labor market. We have been working closely with our state government agency partners and state legislative and executive branch leaders to address the staffing and wage challenges facing state correctional facilities across the country. As a result of these efforts, we have been able to provide wage increases for our employees across several states. Additionally, we are continuing to explore other initiatives to improve the recruitment and retention of staff. With respect to recent contract activity in Arizona, we have been awarded a new 5-year contract under a competitive procurement for the continued management of the Phoenix West correctional and rehabilitation facility. We are also in discussion with the state of Arizona, which recently indicated a desire to enter into a 5-year extension of our Kingman correctional and rehabilitation facility contract, which will be effective in February of 2023. Additionally, the Arizona Department of Corrections has issued a competitive procurement for the rebid of Florence West correctional and rehabilitation facility contract, which GEO currently manages. During the second quarter of 2022, we also completed the sale of our idled Perry County correctional facility to the state of Alabama for $15 million. We are continuing to monitor opportunities at the state level, as several of our state government agency partners are considering initiatives, which could involve the use or purchase of contractor owned facilities to address challenges posed by older state prison infrastructure and correctional staff shortages. Finally, I’d like to briefly address our ongoing efforts to mitigate the impact of the COVID pandemic. While we are currently experiencing relatively low levels of COVID cases, we remain vigilant in the implementation of our mitigation strategies. The steps we have taken from the start of the pandemic are consistent with guidance issued by the Centers for Disease Control and Prevention and focus on testing, vaccination, and making face masks and cleaning supplies available. We will continue to evaluate our mitigation steps and we will make adjustments based on updated guidance by the CDC and other best practices. At this time, I will turn the call over to Dr. Ann Schlarb for a review of GEO Care.

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 and local agencies across the country. At the federal level, BI provides technology solutions, holistic case management, supervision, monitoring and compliance services under the intensive supervision appearance program called ISAP, which is a key component of the Department of Homeland Security’s Alternatives to Detention. BI has provided these services for approximately 18 years and is currently operating under a 5-year contract that is effective through July of 2025. Over the years, the ISAP program has grown steadily, and in the last 18 months, this growth has accelerated. As the publicly available data shows, the number of individuals enrolled in the program currently stands at approximately 300,000 participants. Under BI’s tenure, the ISAP program has achieved high levels of compliance for participants going through the immigration review process. For instance, the most recently available data shows that between August of 2021 and May of 2022 99.6% of ISAP participants attended required meetings with their case specialists, and 99.3% of ISAP participants attended all the required immigration court hearings. Earlier this year, ICE issued a competitive procurement for new Alternatives to Detention program, which is intended to be incremental to ISAP and would involve approximately 15,000 young adults. We have submitted our bid for this new program and we are awaiting additional direction from ICE. We believe that we are well positioned for this procurement given BI’s unparalleled capabilities, scope and experience. Turning to our GEO Continuum of Care division, our employees have continued to deliver enhanced in-custody rehabilitation, reentry programming, and post release support services to an average daily population of approximately 31,500 participants. Our GEO Continuum of Care integrates enhanced in-custody rehabilitation, including cognitive behavioral treatment, with post-release support services that address community needs of released individuals. This includes housing, food, clothing, transportation and employment assistance. During the second quarter of 2022, our post release support services allocated over $200,000 to support individuals released from GEO facilities as they returned to their community. This funding brings the total spending on post release expenses to more than $7.1 million since we began providing support grants for released individuals in 2016 to assist them with their community needs. We continue to believe that the scope and substance of our award winning GEO Continuum of Care program is unparalleled. We believe it provides a proven successful model on how the 2.2 million people in the U.S. Criminal Justice system can be better served in changing their lives. Finally, I’d like to briefly touch on our ongoing efforts to mitigate the impact of the COVID pandemic. Our GEO Care facilities and programs have implemented mitigation steps that are consistent with the guidance issued by the CDC, focusing on increased sanitation, testing, deploying face masks and entry screening measures. We will continue to evaluate these steps and make adjustments based on updated guidance by the CDC and other best practices. We are grateful for the continued dedication and commitment of our employees who have delivered high-quality programs and services to those in our care during the pandemic. At this time, I will turn the call over to Jose Gordo for closing remarks.

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.

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

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

Thank you.

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?

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.

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

Yes, alright.

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?

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.

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?

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.

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%?

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…

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?

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?

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?

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.

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

Okay.

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

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?

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.

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?

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.

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?

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.

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?

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.

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?

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.

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

Thank you.

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

Hello guys.

Good afternoon.

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?

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.

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

That’s correct.

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?

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.

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.

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.

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.

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.

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.

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?

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.

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?

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.

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?

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.

And that’s the ‘23s?

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

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

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.

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

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.

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

Thank you very much.

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

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?

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.

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.

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.

Okay. Great. Thanks again.

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

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?

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.

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?

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…

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

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.

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?

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.

Okay. So, better run rate…

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.

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?

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…

Any potential reuse of that facility?

Yes. We are marketing that facility as we speak.

Okay. Prospects look – how does prospects look?

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

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

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

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

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