Good day and welcome to the GEO Group Third Quarter 2023 Earnings Conference Call. All participants will be in a listen-only mode. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to 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 third quarter 2023 earnings results. With us today are George Zoley, Executive Chairman of the Board; Jose Gordo, Chief Executive Officer; Brian Evans, Chief Financial Officer; Wayne Calabrese, Chief Operating Officer; and James Black, President of GEO Secure Services. This morning, we will discuss our third quarter results as well as 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 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?

Thank you, Pablo, and good morning to everyone. Thank you for joining us on our third quarter 2023 earnings call. I’m joined today by our senior management team to review our third quarter financial results, discuss our financial guidance for the balance of the year and our continued focus on debt reduction and provide an update on the trends for each of our business segments. This morning, we reported third quarter revenues of approximately $603 million. GAAP net income of approximately $24.5 million and adjusted EBITDA of approximately $119 million. Our diversified business units continued to deliver steady operational and financial performance. During the third quarter, our Secure Services business unit renewed several important contracts. At the federal level, we renewed two direct contracts with the U.S. Marshals Service. One was at our company-owned 1,900-bed Rio Grande Processing Center in Texas for a five-year term and the second was at our company leased 770-bed Western Region Detention Facility in San Diego for a two-year term. We also renewed three contracts with ICE for respective one year terms that include our company-owned 700-bed Broward Transitional Center in Florida, our company-owned 1,904-bed South Texas ICE Processing Center, and our company-owned 1,314-bed Montgomery Processing Center in Texas. Populations across our ICE processing centers have continued to steadily increase. Since the beginning of July, we’ve experienced approximately a 30% increase, particularly in our central and western regions. At the state level, we recently renewed our management-only contract in the state of Florida for the 2,000-bed Blackwater River Correctional and Rehabilitation Facility for a two-year term. During the third quarter, our GEO Reentry Services division also renewed seven existing contracts for our residential entry centers and six existing contracts for our nonresidential day reporting centers. Our third quarter results reflect an increase in our GTI…

Thank you, George. Good morning, everyone. Today, we reported GAAP net income of approximately $24.5 million on quarterly revenues of approximately $603 million. We reported quarterly adjusted EBITDA of approximately $119 million. Third quarter 2023 results reflect higher transportation revenues due to our recent emergency contract to provide air support services for ICE and higher international revenues from the activation of our new healthcare contract in Victoria, Australia. Additionally, in the third quarter 2023, we experienced a year-over-year increase of 14% in revenues from our residential reentry centers as populations and our reentry segment have continued to improve post pandemic. Similarly, quarterly revenues from our nonresidential day reporting centers increased by almost 10% year-over-year during the third quarter 2023. These revenue increases were offset by lower revenue from our Electronic Monitoring and Supervision Services segment during the third quarter 2023. Our third quarter results also reflect an increase of approximately $13 million in net interest expense compared to the third quarter of 2022 due to higher interest rates and the debt restructuring we completed in August of 2022. Moving to our guidance for the balance of the year. Our previous guidance for the fourth quarter of 2023 assumed a moderate increase in ISAP participants during the quarter. While the ISAP participant count has remained relatively stable over the last three months, we have not experienced the moderate increase that was contemplated in our previous guidance. As George mentioned, we believe that ICE continues to face budgetary pressures and the timing of the passage of appropriations bills in Congress remains uncertain. As a result of these factors, we have updated our guidance assumptions and now assume for budget purposes that the ISAP participant count will be flat to slightly down for the balance of the year. This morning, we provided updated…

Thank you, Brian. Good morning, everyone. It is my pleasure to provide an update on GEO Secure Services. During the third quarter of 2023, our Secure Services facilities successfully underwent 52 audits, including internal audits, government reviews, third-party accreditations and Prison Rape Elimination Act or PREA certifications. Six of our Secure Services facilities received accreditation from the American Correctional Association with an average score of 99.2%, and another six of our facilities received PREA certification. Our GTI Transportation division and our GEOAmey UK joint venture completed approximately 4.3 million miles driven in the United States and overseas during the third quarter. Moving to the current trends for our government agency partners. At the federal level, populations at our contract the U.S. Marshals Detention Facilities continue to be stable. Our U.S. Marshals Facilities around the country support the agency as it carries out its mission of providing custodial services for pretrial detainees facing federal criminal proceedings. We believe that all these important facilities provide needed bed space and services near federal court houses where there is generally a lack of suitable alternative detention capacity for the U.S. Marshals Service. During the third quarter, we renewed our contracts with the U.S. Marshals Service for our company-owned 1,900-bed Rio Grande processing center for a five-year term and our company leased 770-bed Western Region Detention Facility for a two-year term. Moving to our ICE processing centers. During the third quarter, we renewed three contracts for respective one year terms at our company-owned 700-bed Broward Transitional Center, our 1,904-bed South Texas ICE Processing Center and our 1,314-bed Montgomery ICE Processing Center. Across our ICE processing centers, we have experienced a 30% increase in population since the beginning of July. As George noted, the federal government is currently funded under a short-term continuing resolution that runs…

Thank you, James. I’m pleased to provide an operational update on our GEO Care business units starting with our Reentry Services division. During the third quarter, our Reentry Services facilities successfully underwent 38 audits, including internal audits, government reviews, third-party accreditations and PREA certifications. Two of our residential reentry centers received accreditation from the American Correctional Association, both receiving perfect scores of 100%, and three of our residential reentry centers received PREA certification. We also renewed seven residential reentry contracts, including four contracts with the Federal Bureau of Prisons as well as six non-residential day reporting center contracts. Our 35 residential reentry centers provide transitional housing and rehabilitation programs for individuals reentering their communities across 14 states. Our nonresidential and day reporting centers provide high quality community-based services, including cognitive behavioral treatment for up to approximately 9,000 parolees and probationers at approximately 90 locations across 10 states. All key outcome metrics showed improvement during the third quarter, attesting to our evidence-based practices and their track record for lowering the rate of recidivism. Moving to our GEO Continuum of Care and In-Prison Programs division, during the third quarter, we delivered enhanced in-custody, rehabilitation, and post release support to an average daily population of approximately 2,600 individuals at 31 in-prison programs sites in 7 states and approximately 21,000 individuals at 13 Continuum of Care sites in 8 states. Our in-custody rehabilitation services include academic programs that are focused on helping those in our care attain high school equivalency diplomas. We have made a significant investment to equip all of our classrooms with smart boards to aid in the delivery of academic instruction at all of our facilities. We have also focused on developing vocational programs that not only lead to certification when completed, but are also based on market job placement needs.…

Thanks, Wayne. In closing, our diversified business units delivered steady financial and operational performance during the third quarter of 2023. We remain focused on reducing our overall net debt and on positioning our company to refinance portions of our debt in order to reduce our interest costs and gain the flexibility to potentially return capital to shareholders in the future. We continue to believe that we have several potential upside opportunities including further increases in populations at our ICE processing centers and/or increased number of participants enrolled in ISAP; the activation of our idle Secure Services facilities where we have a total of approximately 9,000 available beds, either under GEO management or under lease to local, state or federal agencies; new managed only contract wins by our reentry, electronic monitoring, secured transportation or international divisions and the selective sale of non-core assets. We also expect to continue to selectively pursue new areas of growth, both with our current government agency clients as well as with new clients and/or in-service lines that are adjacent to or complementary with our existing business. In seeking these future growth opportunities, we plan to leverage our successful track record and the talent of our employees, who we believe are the best in our industry. As we have expressed in the past, we believe that our valuable assets underpin a compelling valuation case for our company. We own approximately 45,000 beds at secured facilities that we believe are generally more modern and better located than many of the existing public facilities in those geographic markets. We believe that the aggregate replacement value of these company owned beds alone based on estimated current construction costs and sales of comparable facilities is equal to or in excess of our current enterprise value. And this valuation is before taking into account the significant operating cash flows and real estate values of our other diversified segments where we have substantial assets and market presence. Based on a conservative valuation of these various components, we believe that our current stock price has significant upside potential. We have consistently delivered as an essential government services provider at the federal and state levels through both Republican and Democratic presidential administrations for almost 40 years. We remain steadfast in our commitment to being a consummately professional organization that our clients can trust with complex, resource intensive and critical projects and that prioritizes the well-being of those entrusted to our care. We are proud of our over 18,000 employees worldwide who carry out our mission on a daily basis with great purpose and professionalism, and we stand ready to continue to meet the future demands of our clients as they may continue to evolve. That completes our remarks, and we would be glad to take questions.

[Operator Instructions] The first question today comes from Joe Gomes with Noble Capital.

So, I wanted to start out on the Secure Services segment. You guys mentioned how the ICE population there are up significantly since the beginning of July, but the segment revenues actually declined year-over-year. I was just wondering is that because the majority of the population increases went into facilities that had yet to meet their guaranteed minimums or was there -- just trying to think off the top of my head whether it was another facility that would happen to have been contract lost or terminated last year that drove the revenues for that segment down?

No, I think it’s a combination of first, there was the North Lake facility, I think that discontinued in September of last year, so that was in there as a BOP facility. That was probably worth about $9 million to $10 million a year or per quarter in revenue that went away. So, that’s not in this quarter and it was in last quarter.

And you also mentioned that I think the latest that I’ve seen the ICE populations are exceeding 39,000. Are you continuing to see a similar type of increase in your guys’ population? I think at the end of September there it was about 35,000 in the ICE population?

We continue to provide approximately one-third of the capacity that’s being used in the ICE processing centers. And the majority of our facilities that have the minimum guarantees have had an increase in above those minimum guarantees.

That’s good news. Great. And on the alternatives to detention, you guys mentioned in your prepared remarks about the house proposal, potentially everyone being monitored. Obviously, that’s not -- hasn’t been put into law yet, but what type of capacity increases would you guys need to see? Could you handle something that large? I think the last thing I saw was like 5 million people that are here that are not U.S. citizens that could potentially be in that type of a program, or would you have to see that type of a program split amongst the number of people?

Joe, it’s Wayne Calabrese. I think we’re well positioned, well resourced and well capable of gearing up as required whether government would move to put place all of the 5 million or so who may be in the non-detained docket into one or more programs remains to be seen, but they wouldn’t all be in one program certainly. So, there are a lot of different facets to the alternative to detention programs. And as I said, we’re well positioned and resourced. We have offices all over the country and would be able to gear up to cover that if that became the requirement of the contract.

And then, you talked about some of the idle facilities. I don’t know how much of discussions you are currently in with ICE about restarting maybe some of the idle facilities. Maybe you can give a little more color on that?

Well, ICE periodically reviews the capacity of existing facilities as well as idled facilities. So they know what we have. They know where we’re currently operating and where we’re capable of reactivating facilities. So, we stay in touch with them and they do the same with us.

And then, one last one for me and I’ll get back in queue. Last couple of quarters, I think there’s been a little bit of discussion, there’s been some legal cases about illegal immigration and ICE. Anything that has come on from any of those proposed or the current legal cases that have changed that could potentially negatively impact GEO?

No, I don’t I think so. I’m not sure what legal cases you’re referring to. What I have in my mind is what maybe I read in the last couple of days that there’s legal challenges to the current parole program and the desire by some individuals to further restrict it. Meaning, it’s not as many people could come through the country, maybe some people would be put in to the ICE processing centers for a review of their cases.

The next question comes from Brian Violino with Wedbush Securities. Please go ahead.

So, clearly, funding is a major factor as it relates to ISAP. But looking out further ahead and appreciate you’re not going to give the 2024 guidance. But can ISAP participants grow even if funding gets pushed out further, doesn’t come to fruition? I know on the last call, you mentioned there were some potential policy changes that could grow ISAP. Just kind of curious your thoughts because we did the ISAP numbers a lot higher a year ago when funding levels were the same, at least from a congressional standpoint?

Well, I think we’ve said in prior calls that, ICE as well as other divisions within the Department of Homeland Security have certain level of budgetary flexibility and they move money around. And yes, we did have a much higher population count in ISAP program under the existing budgetary level. So, it really becomes a decision as to where to put the priorities for the agency and redirect funding towards those priorities. So, that could happen, but it’s really an internal decision by the agency or with the oversight and instructions by the White House.

And I’m not sure if I missed it, but I guess if you could just clarify, within your guidance that you gave today, the updated guidance, what’s the underlying assumption for ICE detention levels? I think your last guidance assumed kind of steady occupancy rates, but obviously with them climbing here, just curious what your underlying assumption is for the fourth quarter for ICE occupancy?

Pretty consistent quarter-over-quarter, we haven’t assumed any facility reactivation or a significant step up in the existing population level.

And then last one for me. If I look at the Secure Services segment, it looks like the net operating margins trended down a little bit quarter-over-quarter. Just wondering if there’s any sort of specific kind of one time things in the expenses there and I guess just general thoughts on where you think margins for that segment will trend in the near-term.

I think what you’re seeing in the margins in the Secure Services and we’ve talked about this on prior calls as our facilities, which were underutilized, but were being paid for expected higher utilization levels that when those utilization levels increase, we would get back to sort of normalized financial performance at those facilities. And I think we’ve seen that occur in the last two quarters, if you will, as these populations have moved up. So, most of our facilities, as George said, are at or near their fixed payments or their minimum occupancy levels that were paid for and they’re also being used at those levels. So, if occupancy levels or utilization increases further, we should see some increase in revenue and increase in performance.

The next question comes from Brendan McCarthy with Sidoti. Please go ahead.

Firstly, on the -- I believe you mentioned there was a supplemental funding initiative from the White House recently. Is that in excess of the short-term continued resolution funding currently under place and will there be any potential benefit in Q4?

I believe that is in addition to what has been previously requested. And we don’t know exactly how many beds funding would provide for, but it would be several thousands.

And then secondly with the ISAP capacity, just wondering, just curious if you can maybe quantify, just what kind of the ramp up process might look like looking into maybe 2024 if funding levels were to increase. Are you able to quantify what the timing of a potential ramp-up to a significantly more number of participants would look like?

It’s hard to answer that question. As Wayne said, we have the ability to scale up fairly quickly and how do you do that? You’d have to add more staff at our Boulder, Colorado facility and probably at various locations around the country. We have a very large countrywide footprint of almost a 100 different locations. But the electronic devices are made in our Boulder facility and we are capable of ramping up fairly quickly. We have the supplies. And I think ICE is aware of our capabilities and like on the detention side, they stay in touch with us as to what those capabilities are relative to the different kinds of devices we have from the ankle monitors to watches, we have 150,000 phones available at the facility and there’s different programs that can be applied using those different technologies, and that can scale up to much larger populations at a discounted cost for less frequent monitoring.

I’d add, our in -country offices have a lot of personnel who are dedicated to non-electronic services such as case management, office visits, home visits, all of that can be scaled up as needed. A great deal will depend, however, on the government’s ability to scale up and repurpose folks that are working at the border. The ICE officials that work closely with them, all of that would have to be focused on the traffic that’s coming in and the processing and enrollment of persons who are coming across the border into one or more programs based on the administration’s policies and priorities, which is to get back to Brian’s comments, it’s very lumpy.

It can be lumpy.

The next question comes from Greg Gibas with Northland Securities. Please go ahead.

I wanted to I guess first just ask, if there’s any significant or maybe notable contracts up for renewal in the near-term or upcoming quarters?

Not this year, no.

And then as it relates to the delevering good progress there in terms of net debt reduction. You mentioned the two additional facilities, I think it was the New Jersey facility, the sale of that kind of accelerated the delevering. You talked about two additional facilities. And curious if you could share maybe interest levels or timing of those. Would those be like a Q4 event, or do you have any sense of when those asset sales would happen?

No, I think there’s facilities that we’ve got targeted and we have brokers active trying to place those properties, but right now we don’t have any contracts on those properties.

And I guess just lastly, as it relates to you marketing the idle facilities, which I believe count for like 9,000 beds, how do you kind of weigh -- like, when I think about you hitting these net occupancy levels and obviously increased margins, as occupancies increase after that, how do you kind of weigh reactivation of idle facilities versus just increasing those occupancy levels at existing facilities? Is that up to the customer, or is -- just curious how you’re kind of weighing those two things?

It’s really up to the customer and where their priorities are on a regional basis. We have a lot of facilities, obviously, in the southern belt states, Texas, Louisiana, et cetera. But we do have other locations in the north, in the northeast that are prime locations. And what makes it attractive for those locations is that a lot of county jails that have previously provided occupancy and services for DHS and ICE have been pulling out of the business, so to speak, because of either financial or political reasons. And therefore, our particular facilities, which are generally much more modern and it more closely meets the most recent updated ICE standards are particularly attractive, in the long haul we think will be utilized, eventually.

The next question comes from Kirk Ludtke with Imperial Capital. Please go ahead.

I just have a couple follow-ups. With respect to ISAP, how many people do you think would be monitored under the House proposal?

Well, monitor is a generous word. It can cover a lot of topics. In terms of electronic monitoring, the numbers were substantially higher a year ago. They could accommodate that again. They could be in other areas. They could, for example, ask for more folks to be in social service oversight, case management. We mentioned the Watch is a new program that’s been under pilot with ISAP. So, there are a lot of different ways that they could accommodate growth in their numbers, should that be the direction they take. But the policy remains to be set and more importantly, the budget remains to be set.

And there’s different programs that can be activated on a less -- on a descending less intensive basis. For example, some people could be monitored every day, every hour of every day, some people weekly, some people monthly, some people biyearly. It’s all those tools are available to ICE in deciding, in addition to direct case management and support services. What level of periodic monitoring is appropriate for that particular person or group of persons.

Program can be opted.

Is this something that’s been contemplated in the past or is this a kind of a new thing?

The different programs we were just referring to that is presently available to ICE. So they know about our capabilities in performing these different levels of intensity of services and we have pricing for those different levels of services. It’s just a matter of, I guess, funding and priorities, where they want to put their money and what’s most important at that particular time.

I think the element that’s new in that house proposal and remains to be seen what will be part of the final legislation is the GPS monitoring of all cases until they are decided. So, if that were to actually be implemented, it could in theory capture most of the legal case docket. But it’s just a proposal at this time.

Got it. It’s interesting. And then just shifting gears quickly, we do appreciate the time. On the state level, have you been able to increase pricing on your state contracts? I know typically those state contracts get repriced, I believe, on July 1st. Did any of that take place for you?

Yes, we have. The last couple of years in particular, because I think I guess there’s two forces at play. Because of COVID, there was a labor shortage, and there was a need to increase labor costs. And fortunately, for the states, they got a lot of COVID funding that allowed them to do just that in part is how they use those monies. So we’ve been able to fairly consistently increase the pricing in our state contract primarily to cover the increase in labor costs and medical costs.

You were recovering monies that were already being spent?

Yes, and improving our financial position through that process.

Can you quantify the magnitude of the price increases you got for this fiscal year?

I thought about how much have we increased wages in the last two or three years, I think it’s 20%. It’s pretty significant because all prior years, I think the average increase was like the 2% CPI that we’ve seen for years and years and years, and going into the COVID years from ‘20 to now, it’s required almost a 20% increase in labor costs, and probably a similar increase in healthcare costs.

The next question comes from Jordan Hymowitz with Philadelphia Financial. Please go ahead.

First of all, I don’t know if you’re aware that actually on this call what was going on that ICE stats came out and they’re up to 36.8 beds, the highest level ever in the -- well, not ever, in the last four years or so. So, I mean, I assume that your guidance in the fourth quarter wasn’t in any way based on those higher numbers?

No. As I said earlier, our guidance is based on where we’ve been running at approximately for the third quarter.

So not only did the quarter end higher, but the fourth quarter is beginning much higher than, quote, the average?

And it’s different than prior years. In prior years, the fourth quarter is usually a lower population, because of the weather changing on the southern border and it getting colder, lots of people coming across. That’s the way it was historically for decades. This year, it seems it could be different.

And I know it’s not as much as CXW, but the incremental margin at these levels is higher than the average margin, correct?

It varies by facility depending on how the contract is priced, but it should be incrementally better.

Okay. And next, of the 9,000, roughly 12% beds that are unoccupied, should we think about if they do get occupied the earnings and margin are about average with what’s out there, in other words, but not substantially better or worse?

Well, they’re owned facilities, so they should be -- the margin should be -- the EBITDA margin should be in line with our historical average for owned facilities, which is in that 25% to 35% range. So, it would be a little higher than our average margins because our average margins include international operations and managed-only facilities that have lower margins.

And just to mention, with this new proposal for ISAP, I mean, we’re talking 5 million people that could potentially be monitored. I mean, that’s like multiples of the 100 to 200 you currently are monitoring. You don’t get all of them or half of them, but that business which has 50% margins, could be substantially higher next year, if this comes through, is that correct?

Yes, quantitatively. But as we’ve discussed, there’s different pricing levels for different programs of intensity as far as monitoring. As I said, the most intensive would be monitoring on a daily basis and throughout the day, but it could be as little as, once every month or a few months or a couple of times a year.

And final question is, could you remind me of the number of beds that were in place during the last Republican administration?

I think they got over 50,000, maybe 52,000.

I think 52 is the right number. So, again, if we head towards an election year, if the Republicans should win, the number of beds could be 30% higher.

It could be.

Okay. Thanks for taking my questions.

Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to George Zoley, Executive Chairman for The GEO Group.

Thank you for joining us on this call, and we look forward to speaking to you on the next call in February. Thank you.

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