CoreCivic Inc

NYSE:CXW

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. My name is Samira and I will be your conference operator. As a reminder, this call is being recorded. At this time, I’d like to welcome you to CoreCivic’s Q1 2022 Earnings Call. [Operator Instructions] I would now like to turn the call over to Cameron Hopewell, CoreCivic’s Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

[Cameron Hopewell, Managing Director, Investor Relations]

Thanks, Samira. Good morning, ladies and gentlemen and thank you for joining us. Participating on today’s call are Damon Hininger, President and Chief Executive Officer and David Garfinkle, Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. The call today will focus on our financial results for the first quarter of 2022 and we will provide you with other general business updates.

During today’s call, our remarks, including our answers to your questions, will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our first quarter 2022 earnings release issued after market yesterday and our Securities and Exchange Commission’s filings, including Forms 10-K, 10-Q and 8-K reports.

You are also cautioned that any forward-looking statements reflect management’s current views only and that the company undertakes no obligation to revise or update such statements in the future. On this call, we will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data that we provide on the Investors page of our website at corecivic.com.

With that, it is my pleasure to turn the call over to our President and CEO, Damon Hininger. Damon?

[Damon Hininger, President and Chief Executive Officer]

Thank you, Cameron. Good morning, everyone and thank you for joining us today for our first quarter 2022 earnings conference call. Going to our agenda for the call, we will provide you details of our first quarter financial performance, recent developments related to the COVID-19 pandemic, discuss business development opportunities and the latest developments with our government partners. We will also provide you with an update on our capital allocation strategy, and I will discuss our updated full year 2022 financial guidance. I will then turn the call over to our CFO, Dave Garfinkle, who will review our first quarter financial results and full year 2022 guidance in greater detail and will update you on our ongoing capital structure initiatives.

In the first quarter of 2022, we generated revenue of $453 million, which was consistent with the prior year quarter, despite the non-renewal of contracts with the United States Marshals Service, or USMS, at our Leavenworth Detention Center and our West Tennessee Detention facility in 2021. The non-renewal of our contract with Marion County, Indiana at the managed-only Marion County Jail effective January 31, 2022 and the sale of 5 facilities in our Property segment during the second quarter of 2021. Collectively, these 8 facilities accounted for $28 million reduction in revenue in the first quarter of 2022 versus the prior year quarter.

In the first quarter of 2022, we generated normalized funds from operations, or FFO of $41.5 million or $0.34 per share compared with $53 million or $0.44 per share in the first quarter of 2021. Now, the decline was driven by the non-renewal of the three contracts that I just mentioned, the transition of populations at our La Palma Correctional Center pursuant to a new contract with the state of Arizona, the sale of 5 non-core properties since the first quarter of 2021 and an increase in interest expense due to our issuance of $675 million of unsecured senior notes during 2021. Dave will provide more detail regarding the financial impact of these transactions.

In early January of this year, we were awarded a new contract with the state of Arizona to care for up to 2,706 adult male residents at our La Palma Correctional Center for the Arizona Department of Corrections, Rehabilitation and Reentry. The new contract has an initial term of 5 years and includes an option to extend the term for an additional 5 years. This new contract represents the largest contract awarded to the private sector by any state corrections agency in over a decade.

We began receiving individuals from the state of Arizona in early April and expect the transfer process to be completed in the fourth quarter of 2022. Upon achieving normalized utilization based on the contract we expect to generate $75 million to $85 million in annualized revenue. However, because of the preparation to receive the Arizona inmates, including a reduction in the average daily population of Immigration and Customs Enforcement, or ICE, detainees at the facility, facility net operating income decreased $2.4 million during the first quarter of 2022 compared to the first quarter of 2021.

The La Palma facility currently supports the mission of ICE by caring for approximately 900 detainees. As a result, we are actively collaborating with both Arizona Department of Corrections, Rehabilitation and Reentry, and ICE to ensure we continue to successfully transition the resident populations from ICE detainees to inmates from the state of Arizona. However, it is really important to note that COVID-related occupancy restrictions mandated by ICE are still currently in place and prevent us from retaining the same level of ICE detainees we care for at the La Palma facility by moving them to other facilities we own in the region. This is a seriously complex transition and I couldn’t be more proud of the successful efforts of our staff at the La Palma facility thus far this year.

I would now like to take some time discussing our updated full year 2022 financial guidance. We are now forecasting full year 2022 normalized FFO per share in the range of $1.45 to $1.60 and adjusted funds from operations, or AFFO, per share in the range of $1.38 to $1.53. The midpoint of each metric represents a reduction of $0.10 per share compared with the initial full year 2022 financial guidance we issued in February of this year.

Our guidance reflects uncertainties associated with the timing of the reversal of Title 42, a public health order that has been used since March of 2020 to deny entry at the United States southern border to asylum seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of COVID-19. On April 1, the Center for Disease Control and Prevention, or CDC, terminated Title 42 and targeted a resumption of free pandemic federal immigration policies effective May 23. There have been various legal challenges and currently a federal judge has issued a temporary restraining order blocking the CDC’s termination of Title 42.

The termination of Title 42 is expected to result in an increase in number of undocumented people permitted to enter the United States to claim asylum and could result in a significant increase in a number of people apprehended and detained by ICE, which continues to be our largest government customer. The likelihood of Title 42 being terminated appears to have increased during the first quarter of this year. However, it is difficult to predict when Title 42 will ultimately be terminated. So, the range of our guidance remains quite wide and assumes a gradual increase in high utilization levels in the second half of this year. We are also forecasting a continuation of the challenging labor market, including above average wage inflation. One notable change is higher nursing-related expenses that we previously estimated due to a national nursing shortage.

Last year, we invested the largest wage increases the company has given to our CoreCivic team in over a decade and we see that trend is continuing through 2022. In just the first quarter, we saw a number of correction systems across the country provide their staff with off-cycle wage increases, in some cases with double-digit increases. We are working diligently with our government partners to ensure we can continue to provide wage increases to remain competitive in the market and have largely been successful. However, we have to respond to the local employment markets in real-time while negotiating contractual amendments as typically a multi-month process.

Finally, our 2022 guidance also reflects a larger earnings disruption at our La Palma Correctional Center than previously estimated. Although as I mentioned, we successfully began the complex transition of inmate populations from the state of Arizona into the facility in April of 2022 pursuant to a new management contract, we currently expect detainee populations from ICE to decline more rapidly than previously forecasted. Dave will provide greater details about our first quarter financial results as well as some of the more significant assumptions included in our updated full year 2022 financial guidance following the remainder of my comments. We will start our operational and business development discussion with a brief update on the impact of COVID-19, our ongoing response and our expected operational adjustments as we reach the end of pandemic.

We continue to see criminal justice-related populations meaningfully below their pre-pandemic levels. The declines have been mostly due to a reduction in new intakes rather than early releases. The trends have not yet begun to meaningfully reverse, but we expect this to occur over the coming months into the next few years. During the first quarter, the state customers within our CoreCivic safety facilities maintained relatively stable utilization with our average daily state residential populations increasing by about 5% for the first quarter of 2021.

Utilization from ICE was higher in the first quarter of 2022 than in the prior year quarter, which offset the reduction in utilization due to the non-renewal of the United States Marshals Service contracts at our Leavenworth and West Tennessee facilities. Collectively, our Safety segment’s facility utilization was 71.7% in the quarter, an increase of 40 basis points compared to the prior year quarter. Occupancy in the Community segment increased to 55% from 51.6% in the prior year period.

As courtroom operations normalize, we anticipate increased need and utilization to continue in both segments. This trend, along with the anticipated termination of Title 42, is motivating us to raise staffing levels in anticipation of higher capacity utilization as we move through the year. Pertaining directly to COVID-19, after January through the rest of the first quarter, there was a continued decline in positive cases across the country and the rate of hospitalization has substantially declined. The rate of positive cases in our facilities, have remained relatively low across both residents and employees. We believe the rate of vaccinations of our facility staff and resident populations and the well-established safety protocols we put in place continue to help mitigate the transmission of COVID-19.

Leading health experts appear to be – appear to have mixed opinions on how close we are to reaching the end of the pandemic phase of COVID-19. However, the nation appears to be moving in a positive direction. We remain focused on following our safety protocols and working closely with our government partners should additional operational policy changes be required. Our most substantial challenge in today’s operating environment continues to be attracting and retaining qualified employees.

Nationwide, the civilian labor force participation rates remains below pre-pandemic levels, which have presented staffing challenges for many employers over the last 2 years. Although we have seen the workforce participation rate increase at an accelerated pace over the last few months, we still anticipate multiple quarters of being – this being our most significant challenge. However, we have been nimble in our response to staffing challenges. We have responded to the challenge by aggressively developing new and creative hiring retention strategies.

And as a national employer in the private sector, we have a lot of tools in the toolbox that we are deploying in this environment. These include increasing wages, housing solutions, sign-on and retention bonuses and multiple other incentives and programs that will allow us to effectively compete in each local market. We have worked with many states to increase starting wages for our correctional officers by well over double-digit percentages. We have seen these efforts to be effective in many markets, but we know there is more work to be done.

We expect wage inflation to remain elevated in 2022 and we are working closely with our government partners to be able to continue to invest in our employees and facility operations as high inflation persist. It is important to note that our government partners have been very collaborative in this area by supporting our request for per diem increases that reflect above average wage inflation in the current market.

I will move next to discuss some recent federal and state level business development updates, beginning first with our federal customers within Department of Justice, the Federal Bureau of Prisons or BOP, and the U.S. Marshals. The BOP has experienced significant declines in their inmate populations in the last decade which is a trend that is not expected to reverse. In response to this long-term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners.

Our last remaining prison contract with the BOP is our McRae facility in Georgia, which expires in November of this year, representing less than 2% of our total revenue. We continue to believe that contract will not be renewed and have already begun marketing the facility as a potential solution to other government partners. We are proud to continue supporting the BOP’s mission through the provision of services at multiple REIT residential reentry facilities in our Community segment, which will represent the exclusive source of revenue from the BOP following the anticipated non-renewal of McRae.

As for the U.S. Marshals, their prison populations have remained relatively consistent in recent years, so their need for capacity around the country remains unchanged. The USMS continues to navigate the impact of the executive order signed by President Biden and issued in January of 2021 that directed the Attorney General to not renew Department of Justice contracts directly with the privately operated criminal detention facilities.

In 2022, we have no direct contracts with the USMS that are set for expiration and now we have only two remaining contracts directly with the United States Marshals Service that are set to expire in later years. We continue to work closely with the USMS to ensure the capacity needs are being met in order to support their critical public safety mission. ICE is our third federal partner and is within the Department of Homeland Security. They continued to be the government partner with the most significant impact from COVID-19 on their capacity utilization. Nationwide, ICE detainee populations remain well below the historical levels since the spring of 2022 and that trend remained unchanged in the first quarter of 2022. As a result, our facility utilization levels continue to remain materially below historical averages. Current utilization levels are also well below the number of beds funded through their annual budget appropriation process.

At the end of March of 2022, ICE detained approximately 20,000 individuals nationwide, while they are funded for approximately 34,000 detainees. The largest driver of their lower utilization levels has been the enactment of Title 42 since March of 2020, which I touched on earlier. There have been administrative changes and court decisions that have occurred since the original enactment Title 42, which have enabled company miners and many family units to enter and remain in the United States. However, these changes had essentially no impact on the demand for our services by ICE, because we only provide detention capacity for individual adult populations.

On April 1, 2022, the CDC terminated Title 42 and planned for the resumption of regular migration policy at our southern border on May 23 of this year. The CDC’s directive to terminate Title 42 remains blocked by a temporary restraining order issued by a federal judge just last week. The new hearing on Title 42 is currently scheduled for next week on May 13. While we cannot predict the outcome of legal challenges or the ultimate timing of when Title 42 is terminated, it is clear that Title 42 is a pandemic-specific policy that will not be carried on post-pandemic. Its termination is expected to result in an increase in a number of undocumented people permitted to enter the United States to asylum and will likely result in a significant increase in the demand of detention capacity.

Our facilities support ICE by providing safe appropriate housing and care for individuals as the agency works through the various processes associated with an individual’s immigration case, deep rotation order or initial processing. While we have no involvement or influence on anyone’s immigration-related case, we know these matters are often quite complex and typically take days or weeks to be adjudicated once brought to a court. This results in a need for various solutions and a diverse portfolio of real estate across the country to provide housing and care for individuals while they are in ICE custody.

Our facilities serve as a critical component of the real estate infrastructure needed by ICE to help them carryout their mission. We also continue to pursue a formal procurement for a new case management non-residential alternative detention, or ATD program. Specifically for young adults that was issued in January this year. The program is intended to provide case management services for participating lower-risk young adults, ages 18 to 19, within a framework that promotes compliance with their immigration obligations until removal or other resolution to their immigration cases.

This program is designed to assist young adults who age out of custody of the Office of Refugee Resettlement, or ORR, the agency that is responsible for caring for unaccompanied minors apprehended along the Southwest border until they reach age 18. We are actively responding to this procurement, and we know these case management services are consistent with the type of case management services we provide in our Community segment. The elevated rates of apprehensions along the Southwest border continue to create challenges, which are expected to increase the government’s demand for both residential and contingent capacity and non-residential ATDs. Should needs arrive, we believe we are well positioned to deliver solutions to ICE.

Moving now to state-level developments and opportunities, as I mentioned earlier, we recently began receiving inmates from the state of Arizona under our new contract. It is important to remind you that this opportunity was not a result of population growth but instead was the result of a need to replace outdated and inefficient government-owned correctional assets that have far exceeded their useful lives. Arizona will be closing the facility originally constructed in the early 1900s and moving into our La Palma facility, which is only 14 years old. We see this same issue across the country, and we anticipate additional correctional systems will appreciate the benefits of updating their correctional infrastructure to improve safety for staff and residents, increase access to life-changing rehabilitative programming and improve health outcomes with modern facilities.

In recent months, we have seen the states of Florida, Georgia and Alabama actively considering avenues for closing outdated state-owned facilities in order to modernize their systems. State budgets across the country are strong and with many states forecasting significant budget surpluses. These robust market conditions could push states to make the bold choices necessary to address long-standing issues within their corrections infrastructure, and we believe we can help deliver on many of these solutions.

We remain actively engaged with states across the country to ensure they are educated on the solutions we can provide. Important for positioning the company to be able to deliver those solutions is the strength of our balance sheet. We remain committed to our targeted total leverage ratio or net debt to adjusted EBITDA range of 2.25x to 2.75x. Using the trailing 12 months ended March 31, 2022, our total leverage ratio was 2.7x, within our target range. We have made meaningful progress in reducing our overall leverage due to the strong and stable cash flows the company generates, and we expect our leverage to continue to decline over time. Our credit facility is scheduled to expire in April 2023, and we are actively looking to extend its maturity. Dave will provide a more detailed status update on those efforts.

We currently have no drawn balance on our revolving credit facility and only $168 million outstanding on our term loan A. So we will significantly reduce the current $1 billion size of our credit facility. As a C-Corp, we no longer need a credit facility of the current size, and we believe we are positioned to enter into a new credit facility cost effectively. As I stated earlier, we remain committed to continue to reduce leverage as well. And as mentioned earlier, we have reached our target range. The valuation of our equity remains well below its fair value, and we feel strongly that once we have a new credit facility in place, which we are a couple of weeks away from completing, we could create substantial value for our shareholders by repurchasing shares.

And to be very clear, this plan and timing is not impacted by our adjustment of guidance today. Finally, we continue to believe our capital allocation strategy is the most prudent approach for positioning the company to generate long-term value through a stable capital structure and continue to cost effectively meet the needs of our government customers with less reliance on outside sources of capital.

Before concluding, I would like to bring to your attention two reports we have recently issued that provide additional non-financial information and an increased level of transparency to the investment community. We recently published our fourth annual 2021 ESG report, which details the various life change in reentry and vocational programming are amazing and passionate team provides to our residents throughout the year.

The report also provides an overview of our recently updated human rights policy and management practice, key environmental performance metrics and our DEI accomplishments and goals, along many other important topics. Staying focused on our DEI initiatives, during the first quarter, we published our first racial equity audit report. It has been reported broadly that CoreCivic is one of the very few companies in the United States that has proactively embraced the process of having a racial equity audit conducted by a third party following a request from a shareholder 2 years ago. The audit process is quite comprehensive, and we believe it resulted in a significant amount of positive actual items for the company and our people to pursue. Both of these reports are available in the social responsibility portion of our website. So I hope you have an opportunity to review these reports.

I’ll now turn the call over to Dave to provide a more detailed look at our financial results in the first quarter of 2022, discuss in detail our updated full year 2022 financial guidance and provide additional financial updates. Dave?

[David Garfinkle, Chief Financial Officer]

Thank you, Damon, and good morning, everyone. In the first quarter of 2022, we reported net income of $0.16 per share or $0.14 of adjusted earnings per share, $0.34 of normalized FFO per share and AFFO per share of $0.37. Adjusted and normalized per share amounts exclude a gain on sale of real estate assets of $2.3 million for the sale of two underutilized residential reentry centers in Denver, generating net proceeds of $9.3 million during the quarter.

Several discrete factors contributed to the $0.10 decline in adjusted and normalized per share results compared with the prior year first quarter. The first two factors are attributable to repositioning our balance sheet for our revised capital allocation strategy. During 2021, we sold five properties that generated almost $5 million of EBITDA in the first quarter of 2021 and accounted for a per share reduction of approximately $0.02 per share from the prior year quarter.

Second, during the second and third quarters of 2021, we completed the issuance of $675 million of 8.25% senior unsecured notes using the net proceeds primarily to repay shorter-term debt with lower interest rates, resulting in a reduction of approximately $0.04 per share for higher interest expense. These two discrete items were dilutive to earnings but strengthening the balance sheet by lowering overall debt levels by $287 million and extending our weighted average maturities.

Lastly, as we have previously disclosed, transitions of populations at our La Palma facility and contract terminations at our Leavenworth, West Tennessee and the managed-only Marion County Jail facilities accounted for a reduction in EBITDA of $9 million or $0.05 per share from the prior year quarter. Occupancy in our Safety and Community facilities continues to reflect the impact of COVID-19, but increased to 70.6% in the first quarter of 2022 from 69.9% in the prior year quarter, despite the contract terminations at the West Tennessee facility on September 30, 2021, and our Leavenworth facility on December 31, 2021, both of which remained idle during the first quarter of 2022.

Occupancy declined from 72.5% in the fourth quarter of 2021, largely due to the contract termination at the Leavenworth facility. The impact of COVID-19 began in the second quarter of 2020 as populations, primarily ICE, declined sequentially throughout 2020 as the Southwest border was effectively closed to asylum seekers and adults attempting to cross the southern border without proper documentation or authority in an effort to contain the spread of COVID-19.

This policy known as Title 42 has continued through today, and ICE detainee populations, therefore, remained well below historical levels. Additional but more moderated sequential declines in ICE detainee populations during 2021 and into 2022 were offset by higher state inmate populations, which increased 4.9% from the first quarter of 2021 to the first quarter of 2022 as states began to emerge from COVID-19. Pre-pandemic, our occupancy was 81.9%, translating into a decrease in our average daily population by over 8,000 residents compared with the first quarter of 2022. With depressed occupancy levels, we are in a position to significantly grow earnings whenever the impact of COVID-19 subsides.

Operating margins were 22.5% in the first quarter of 2022 compared with 25.1% in the prior year quarter and 28.4% in the fourth quarter of 2021. The decrease in our operating margin percentages primarily reflects incremental expenses resulting from increases in wage rates, including most notably during the first quarter of 2022 for registry nursing due to a shortage of nursing staff across the country. The increases in wage rates were necessary to help address depressed staffing levels and labor shortages we experienced in 2021, which have not yet recovered.

Our government partners are experiencing the same staffing challenges, which has contributed to some of the per diem increases we’ve been able to achieve. Operating margins were also impacted by the preparation for the transition of inmate populations at our La Palma Correctional Center, the second largest facility in our portfolio, pursuant to a new contract with the state of Arizona.

Relative to the fourth quarter of 2021, margins in the first quarter are seasonably lower because we incurred about 75% of our annual unemployment taxes in the first quarter when base wages reset. We also experienced higher employee benefits expenses compared with the fourth quarter. Longer-term, we expect operating margin percentages to trend toward those we experienced pre-pandemic of approximately 25%.

Turning to the balance sheet. As of March 31, we had $378 million of cash on hand, an increase of $79 million from the end of 2021. Leverage measured by net debt to EBITDA was 2.72x using the trailing 12 months, down from 3.95x when we announced our capital reallocation strategy in the third quarter of 2020. We have repositioned the balance sheet over the previous couple of years to sustainably return capital to shareholders by paying down debt and paying off near-term maturities and pressing toward – progressing toward and now within our targeted leverage of 2.25 to 2.75x even as we continue to make incremental investments in our staff. A substantial portion of our outstanding debt is at fixed interest rates, and we have an intense and ability to pay down our variable rate debt further, protecting our earnings from the rising interest rate environment and we have no need to access the capital markets in the near-term. The steps we have taken to reposition the balance sheet have also enabled us to reduce reliance on our bank credit facility.

We expect to obtain a new bank credit facility in the coming weeks reducing the size from $1 billion to about quarter to one-third of its current size. We have no borrowings on the revolver portion of the facility and $167.5 million outstanding on the term Loan A portion, which we expect to pay down upon closing of the new facility. Once the new credit facility is in place, giving us the clarity necessary to transition our capital allocation strategy to the next phase, we expect to seek authorization from our Board for a share repurchase program.

Moving lastly to a discussion of our 2022 financial guidance. For the full year 2022, we expect to generate adjusted EPS of $0.63 to $0.77, FFO per share of $1.45 to $1.60 and AFFO per share of $1.38 to $1.53. Our revenues were $2 million below the point estimate of our internal forecast for the first quarter and our per share results were $0.02 lower than our internal forecast. In addition to these differences, our guidance reflects the continuation of a challenging labor market, including above-average wage inflation and most notably, higher nursing-related expenses than previously estimated due to a shortage of nurses across the United States. Our guidance also reflects a larger disruption of earnings at our 3,060-bed La Palma Correctional Center than previously estimated, accounting for almost half of the net reduction to our per share guidance.

Although we successfully began the complex transition of inmate populations from the state of Arizona into the facility last month, pursuant to a new management contract for up to 2,706 inmates from the state of Arizona, we are projecting a faster transition of ICE detainee populations out of the facility than previously forecasted. As of last night, our populations at La Palma included 529 Arizona inmates and 799 ICE detainees. This transition is a significant undertaking, and earnings and cash flows are subject to further volatility until the occupancy of inmates from the state of Arizona reaches stabilization, not currently expected to occur until the end of the year, which has been factored into the range of our guidance.

The range of our guidance also reflects uncertainties associated with the timing of the reversal of Title 42. On April 1, 2022, the Center for Disease Control and Prevention terminated the Title 42 and began preparing for a resumption of regular migration at the southern border effective May 23, 2022. However, the reversal of Title 42 has been subject to legal challenges on April 25 a federal judge issued a temporary restraining order blocking its termination.

As Damon mentioned, the next hearing on Title 42 is next week. The termination of Title 42 is expected to result in an increase in the number of undocumented people permitted to enter the United States to claim asylum and could result in an increase in the number of people apprehended and detained by ICE, our largest customer. However, given the legal challenges, it is difficult to predict when Title 42 will be terminated and how that termination will impact utilization of our facilities.

Further, the timing and magnitude of any changes resulting from the termination of Title 42 make it difficult to fully assess our staffing requirements for the balance of 2022. That said, we have elected to lean forward to increased staffing at critical locations to ensure that we are able to meet any increased demand for our services that may present, having a negative impact on the second quarter. If there are meaningful delays in the utilization of our bed inventory, these investments will create a drag on our overall results until such time as we see bed utilization increase.

The EBITDA guidance in our press release enables you to calculate our annual effective income tax rate of 25% to 29% and provides you with our estimate of total depreciation and interest expense. We expect 2022 G&A expenses to be comparable to or slightly lower than 2021. During 2022, we expect to incur $63.5 million to $66 million of maintenance capital expenditures in line with 2021 and essentially unchanged from our previous guidance.

We also expect to incur $15 million to $16 million for facility renovations, including $3 million to $4 million at La Palma for the new Arizona contract, down from $19.1 million of renovations in 2021. With depressed occupancy levels, we are in a position to significantly grow earnings without the need to construct new capacity or deploy new capital. We have a strong balance sheet, significant liquidity and continue to generate strong cash flows despite the challenging labor environment and uncertainties of when Title 42 will be lifted. Although we believe it was necessary to adjust our earnings guidance accordingly, our long-term capital allocation strategy is unaffected by these potential short-term disruptions.

I will now turn the call back to the operator, Samira, to open up the lines for questions.

[Operator]

Thank you. [Operator Instructions] We will take our first question from Joe Gomes with NOBLE Capital Markets. Please go ahead.

[Joe Gomes, NOBLE Capital Markets]

Good morning, Damon and Dave.

[Damon Hininger, President and Chief Executive Officer]

Good morning, Joe.

[Joe Gomes, NOBLE Capital Markets]

So I want to start with the wage inflation and adding on more employees here, the nurses, I’m assuming this is continuing to go and impact right now. And Damon, you mentioned that you’re giving real-time wage increases, but it takes months to negotiate with the government partners. Eventually, when you hopefully get your per diem increases, would you expect to offset all of the wage increases or just a portion of it that you’re giving today?

[Damon Hininger, President and Chief Executive Officer]

Yes, great question. The short answer is vast majority of it. It won’t be exactly dollar for dollar. On the state side, it will be on the federal side with those contracts be reimbursed with equal adjustments, but pretty darn close. But your question is a good one, and let me expand a little bit to what I said in my script, and that is we have seen really favorable engagement with our state partners to support wage increases because they have had to do the same thing within their own public facilities. And so states like here in Tennessee and in Colorado, in Arizona, and we’ve got a couple of other states we’re talking to. The discussion about the need to increase wages has been very productive and very positive and the increases that we’ve done have been pretty consistent with what public sector facilities have done themselves. And with that full reimbursement for those increased costs or wages, but it’s a little different on timing on the state contracts.

So let me give you an exact example of that. So here in Tennessee, when it became very clear that we were able to raise wages for our staff because the public sector facility are going to do that, we did that right before Christmas. And so those wages happen, I think, around December 16 because we wanted to in real time to really put a jolt in the system and try to get more people in the pipeline to get more people within our facilities. So we lean forward to go ahead and do those sour increases knowing that it would be days and weeks before we get the contracts all papered to get reimbursement. So an actual dollar amount to give you a number for that example, for the wages that we paid out that were higher level in the first quarter versus the timing of reimbursement, there was about $1 million delta. So it was about $1 million drag for earnings performance in the first quarter. So that’s all going to wash out, but at least gives you a kind of a mine visual of the timing of – even though we get clarity from the customer to reimburse this, it may take a little while for contracts to get signed and then we can start billing for reimbursement.

But let me also let me touch a little bit on the reentry side. So I want to expand a little bit because this is a phenomenon not unique to CoreCivic. Being in Nashville, we see a lot of healthcare companies and see what they report relative to earnings and also some of the headwinds they have with the labor market. And this phenomenon with nursing and the need for registry nursing during the first quarter appears to be pretty universal as we, again, kind of see what’s going on within the healthcare community. So just to get a little more detail on that, if you go back to January of 2019 from now, about 40 months, our largest 4 months or I guess our largest 4 months that had the highest number of vacancies was December of last year in January and February and March of this year. So those 4 months were the highest 4 months of the last 40 months. And so what we have to do in real time because we want to make sure that we don’t miss a beat relative to quality and the services we need to provide in our health services departments around the country, we work with our operations team and our healthcare team to go ahead and allow them to use registry nursing during that period of time when we have vacancies. What’s notable, and this is probably an obvious point, Joe. But what’s notable is that there is probably no other occupation in the United States where someone can step in or out of a job in a healthcare system.

If you’re a nurse, like an LPN or RN, and if you’re worried about your personal safety, you can step out maybe for, say, 30 days, especially if there is worry about your personal safety because of COVID. And as we all know, the Omicron variant peaked really towards the end of January. And that appears to happen now in our facilities, but also around the country and healthcare systems. So we saw this dramatic increase for the need of registry because we had such high vacancy rates during that period of time. Again, we didn’t want to miss a beat on the quality side. And so obviously, an increase of not only utilization but also in dollars that we had to pay hourly for nurses that were in the registry program. So that’s a long way of saying, and it’s – I can’t say definitive. But in the days and weeks since that kind of high point in vacancies that we had earlier this year, it is dissipating. And I’d say I can’t say definitively, but it looks like it’s pretty darn correlated with the peak and the worry around Omicron that you had maybe a lot of health care workers for whatever reason, worried about their personal safety. They stepped out of working in those settings for a period of time, and now they are starting to come back. And so we are – again, we have got work to do, and we have been doing work for a couple of years on the salary and wages front, incentives to recruit and retain medical staff. But we do think there was kind of a blip here where you had that big spike short lived with Omicron early this year that created some pressure on healthcare workers and systems around the country, both for us and around the country. But anything you would add to that, Dave?

[David Garfinkle, Chief Financial Officer]

Yes. All of that is – you have read my train of thought. But the only thing I would add in our guidance, we continue to use registry nursing. We have got a similar level kind of baked into Q2, and it weans or diminishes as the year goes by. It’s very difficult to get reimbursements to your direct question. When you are talking about increasing salaries, that’s a little bit easier to get reimbursed than it would be for registry nursing, which is meant to be a temporary solution until you can hire the nursing staff full time. So, that’s where you see a little bit of the leakage in the EBITDA is the utilization of those premium high rates for registry nursing, which hopefully will be temporary solutions until we can get the nursing staff online full time.

[Joe Gomes, NOBLE Capital Markets]

Okay. Thanks for that clarity. And if could just switch here on the alternatives to detention, ICE has been quoted as saying they – once Title 42 disappears that, that program or those programs could go from 200,000 people participating in them to over 600,000. What is your ability to handle some of that increase if they were to come to you and say, “Hey, we want you guys to participate in some of this and to monitor some people here on the ATD side?” I mean is – could you handle 100,000? And if so, what’s kind of the cost of trying to ramp up to that type of a level for you?

[Damon Hininger, President and Chief Executive Officer]

Yes, great question. Short answer is, absolutely. We have been doing similar programs with city and county and states for many years in our Community segment. So, we know what’s needed relative to the services and technology, but also case management. Again, case management is nothing we only do in community. We also do a lot of that in the safety side, too. So, we have that competency really well defined and very, very capable. But yes, to the kind of second part of your question, absolutely, we have got the scale. I mean we are a nationwide employer. We have obviously got 17 million in square footage in real estate around the country that could be leveraged for a program like that if it did have that type of need and scale. But also from a CapEx perspective, obviously, there is some CapEx that we have invested to get ourselves prepared for these opportunities. But it’s not as great, as you know, with what you would need in a kind of property or a safety kind of opportunity where you are building a new prison at maybe $100 million CapEx need, that type of CapEx and that type of investment to get yourself prepared for those opportunities in advance is not that great. But I don’t get anything you would add to that, Dave?

[David Garfinkle, Chief Financial Officer]

No, nothing to that.

[Joe Gomes, NOBLE Capital Markets]

Okay. Thanks. And on the – you talked about the U.S. Marshal Service and part of that, as you mentioned, Damon, is the reduced number of people in the court system or the intake level has been lower, not so much as the fact that people are getting released early has been driving some of the utilization down. I mean as you look around the nation, where kind of like is your impression of where we are getting back to a normalization on the court system side so that maybe we would start to see that the intake level start to get back to a more normal level?

[Damon Hininger, President and Chief Executive Officer]

Yes, that’s a great question. Let me maybe take a tad different angle on the answer here and just to give you a little perspective. So, we watch obviously other companies and other industries that are similar. I would say healthcare is a very similar industry to ours. But I would say also the hotel companies, very similar multistate. Labor, they have got needs for high-quality service. And as you know, in the last probably quarter, I saw Marriott actually released their earnings, I think here in the last 24 hours, everybody is seeing a pretty significant increase in kind of earnings performance coming out of the pandemic. I would say for us to age your question, I think for us, we are probably another quarter or two quarters from that kind of dynamic where you see significant movement on populations. I mean we are seeing incremental populations I have noted in my script to improve on the state side. But going back to ICE, I mean we are still under COVID restrictions on occupancy. We still have a cap on occupancy within our facilities. And as I mentioned earlier, we think those are somewhat linked to the kind of timing of Title 42. So, that feels like probably Q3, maybe Q4 to where you start to see the movement because they have released some of these restrictions to kind of go back to where they were kind of pre-pandemic. So, I don’t think you add to that, Dave.

[David Garfinkle, Chief Financial Officer]

Yes. Just to emphasize, the state populations, it does feel like they are beginning to normalize and the biggest impact on the Federal side are the COVID-related occupancy restrictions, which you may know, they try to keep their occupancy more than 75%. So, you would think once Title 42 gets lifted, let’s continue to pray that the COVID-19 cases decline and we get through the pandemic, then you would expect those occupancy restrictions to be lifted, and that’s really been the biggest impact on our business. And so again, going back to pre-pandemic occupancy, if we got back to that level, that’s somewhere around $40 million to $50 million increase in EBITDA, just to get back to those levels. So, we are looking forward to a lifting of the occupancy restrictions because it does feel like we are – operations throughout the country are starting to normalize post-pandemic. And so that would be one of the last things that we see get lifted.

[Damon Hininger, President and Chief Executive Officer]

One thing I would add, though, and Joe, you and I might have talked about this recently, but we look at population data that comes from the Bureau of Justice Statistics. And one thing they noted in their recent report is that jail population. So, these are city or county facilities, jail populations year-over-year have increased by 17%. And I don’t know if that’s the highest increase ever, but we think it’s probably the highest increase year-over-year, at least probably 20 years or 30 years. So, what’s notable about that is that that’s telling us that there is individuals that have been requirement to a local level, but courts have been closed and ability for their cases to be adjudicated have been stalled because of COVID-19. We are seeing active kind of reopening of courts and normal operations to resume here in the last 90 days. So, I think those individuals that have been maybe held up in local jails just because courts have not been able to hear their cases are starting to kind of get back to normal operations. And that, I think in turn should be looked at as a leading indicator for population down the road for our system and public facilities at the state level.

[Joe Gomes, NOBLE Capital Markets]

Okay. And if I could sneak one more in here. So, on the guidance, one of the things you mentioned was the uncertainty about when Title 42 is going to be removed. I mean I guess the kind of the question is, but it’s always been a question of when it would be removed and uncertainty of when it would be removed. Was the previous guidance were you guys assuming that Title 42 would have already been removed or would be gone here sooner than what you now your current guidance is? I am just trying to get a better understanding of why the uncertainty about Title 42 being removed is having an impact on the guidance.

[Damon Hininger, President and Chief Executive Officer]

Yes. I would say probably a good question, a couple of answers to that. One of which is, yes, we didn’t obviously, when we did the guidance back in early February, we didn’t know anything definitive on timing. And now obviously, that’s come with the anticipated removal at May 23rd, again, held up because of a judge that’s going to be considered through a hearing next week. So, obviously, we didn’t know that in February, but we did assume kind of a broad range of outcomes potentially at the timing of Title 42 it was all taken into account. But I would say, and I noted this a little bit in our – in my script, and that is we are leaning forward in a couple of locations in anticipation. So, obviously, that’s created a little bit of an impact from the earnings profile this year. I would say kind of to say that differently, we weren’t probably lean in as much forward in early February because we were just days of coming out of the Omicron variant and the impact that it was having on policy and public health officials on social and also making sure that facilities operate in a way to make sure they limited the spread of the pandemic. So, whereas we were in early February, taking some outcomes into account relative to the timing of Title 42, didn’t lean quite as far on staffing. But now that we have got a little more definitive kind of timeline on the timing of Title 42 potentially being lifted and likely need in certain parts of the country, we have told our operations and HR team to go ahead and turn on the pipelines to staff at higher levels. But anything you would add to that, Dave?

[David Garfinkle, Chief Financial Officer]

Yes. And so that would impact Q2 because even if Title 42 gets lifted under the current terms, which will be May 23rd, you don’t really see increases in populations, at least until the end of the second quarter and then even have to surpass the first tier fixed monthly payments for some of our Federal facilities. But we did increase actually in the back half of the year, a gradual increase in Federal population, specifically ICE detention populations. So, it was just more than offset by the increase in labor that Damon just described for leaning forward and the increase in labor for the premium that we pay for registry nursing.

[Joe Gomes, NOBLE Capital Markets]

Great. Really appreciate all the insight guys. Thank you.

[Damon Hininger, President and Chief Executive Officer]

Thank you, Joe.

[Operator]

[Operator Instructions] And we will take our next question from Kirk Ludtke with Imperial Capital. Please go ahead.

[Kirk Ludtke, Imperial Capital]

Hello everyone.

[Damon Hininger, President and Chief Executive Officer]

Good morning Kirk.

[David Garfinkle, Chief Financial Officer]

Good morning.

[Kirk Ludtke, Imperial Capital]

Thank you for the presentation, very helpful. Couple of follow-ups, with respect to alternatives to detention, do you see a scenario where monitoring cannibalizes your ICE population?

[Damon Hininger, President and Chief Executive Officer]

No, sir. Yes, that’s been a tool in a toolbox rise. Going back, I guess when the start of the program was probably about 15 years ago. But I see it as a kind of complementary tool to the need for detention capacity. There is always going to be a need, I think for monitoring programs like that and for capacity that we have in places, primarily on the southwest border. And I would say as a provider for solutions for ICE for almost 40 years, the configuration within our facilities may change a little bit, maybe for females, maybe for males. As you know, we have done family solutions two different times in Texas. But the need for thoughtful humane environments for detention for different needs based on policy over the years, I think it will always be a very important tool or the policy leaders and leadership within ICE. But I don’t know if you would add to that, Dave.

[David Garfinkle, Chief Financial Officer]

No, I don’t have anything to add anything. Thanks.

[Kirk Ludtke, Imperial Capital]

Great. Thank you. And you mentioned that you expect to recover the vast majority of the wage increases that you are providing from your customers. Is there a potential for you to recover those wage increases retroactively?

[Damon Hininger, President and Chief Executive Officer]

In some cases. So, let me just a reminder how it works because it’s pretty different at the Federal and State level. So, the Federal level, if the Department of Labor issues a new, what they call wage termination, and it takes, say, correctional officers in a certain region of the country on an hourly rate up 10% year-over-year, we were required by contract to immediately incorporate it in the contract and deliver that increase to our employees. But also we are allowed under contract on the exact same day to get fully reversed for dollar for dollar. So, those happen instantaneously. So, that’s all well defined, and it’s been part of our contracts for almost 40 years. So, that side is pretty straightforward. On the state side, it’s a little bit of the timing of the increases that the state does. And again, we try to work closely with them to do it in parallel, because we know one increases over the other on timing from a timing perspective. It’s going to impact the other from a labor perspective. So, we try to somewhat coincide any increases we are doing with them, but also having a conversation on a parallel side on making sure we get reimbursed for it. So, in some cases, it may be reimbursement relatively quickly after do increases. And it could be – we do a contract amendment to get reimbursed and it is retroactive. But it’s a little bit kind of case-by-case by state-by-state. But anything to add to that?

[David Garfinkle, Chief Financial Officer]

No. It does vary by contract by state. So, typically, a state will provide a wage increase – sorry, per diem adjustment as a certain date. And they have typically been July 1, which is coincided with their budget years. But just this past year, we have seen more off-cycle per diem increases than I have ever seen going back to my 20-year history with the company. So, it’s been an unusual environment for our customers as well. They are seeing the same challenges in their staff, and they are making adjustments other than the typical July 1st period of time. But again, one other thing to add, July 1 is typically when we have per diem increases that are just based on CPI. As you know, CPI has been as high as it’s been in decades. So, it should be a good year for per diem increases. As Damon mentioned, states are flushed with cash. They are in good financial situations so that should make the appropriations process easier. Again, it’s never easy because they are always trying to balance their budget with competing budget priorities, but we are optimistic in the second half of the year.

[Damon Hininger, President and Chief Executive Officer]

Dave raised a good point earlier. I really want to amplify on that is, yes, this is probably the biggest off-cycle increases we have seen on per diem adjustments and salary increases on our state contracts probably ever, if not in the last 20 years. And so typically, when we are talking to a state about the need to make an adjusted salaries is usually, well, let’s go ahead and kind of bake that into the budget process in the spring and make effective July 1st. But again, it’s been a great discussion with the state partners today, in many cases, we need to act quickly. And we are – again, this is a message that we are delivering exactly the same way as Department of Corrections leadership is saying to their governor. So, that is really, really notable that we have been able to really successful in getting not only salary increases, but also quickly get reimbursed from our state partners.

[Kirk Ludtke, Imperial Capital]

Great. Thank you. And I suspect that it varies by customer, but is the pass-through already reflected in the guidance?

[Damon Hininger, President and Chief Executive Officer]

Well, I said, it’s a little choppy, because again, going back to my Tennessee example, we have had a couple of increases earlier this year. We are anticipating a few more later this year. So, the timing of the increase versus the time of reimbursement, I think there is probably almost all of them. There is going to be a little bit of a lag, some little more notable than others. So, I think probably keep me honest here, David, it’s probably later this year, early next year, we are going to get kind of a clean kind of view of, okay, revenues are aligned with the reimbursement that we have got in salary increases. But there is going to be a few quarters probably this quarter and next quarter where, again, we are going to have a little higher expenses, not get full or reimbursed that will wash out here probably later this year.

[David Garfinkle, Chief Financial Officer]

Yes. And again, going back to my point on the registered nursing, that’s probably not something we get reimbursed for because it’s not baked into our salaries. It’s temporary solutions to use registry nursing. So, the main factors contributing to the reduction in our guidance was an increase in registry nursing as well as faster ramp down of the ICE populations at our La Palma facility. As I mentioned, that was about half. There were other puts and takes. But of the – I think it was $0.10 on each end, the La Palma decline was about half. Registry nursing was certainly the lion’s share of the balance. Those two together are well over $0.10.

[Kirk Ludtke, Imperial Capital]

Great. Thank you. And then one last one, it sounds like you may be adding headcount this year? If so, can you give us a sense for how many people and the cadence? And then I will get back in the queue. Thank you.

[Damon Hininger, President and Chief Executive Officer]

I don’t have that at my fingertips, but maybe offline, we could share a little more color on that.

[David Garfinkle, Chief Financial Officer]

But that – I mean we have assumed, again, in our guidance, a ramping up of the staffing levels. So, that is all factored in. Again, it’s a wide guidance, I appreciate that, but – because we have had to make some significant assumptions on labor costs and Title 42 and other things. But that should be baked into our guidance with an increasing staffing level throughout the balance of the year. That’s good.

[Kirk Ludtke, Imperial Capital]

Got it. Yes, there is a lot of variables, more variables than usual in this year, I would say.

[Damon Hininger, President and Chief Executive Officer]

Yes, you said it. Yes, you said it.

[Kirk Ludtke, Imperial Capital]

Thank you.

[David Garfinkle, Chief Financial Officer]

Thank you, Kirk.

[Operator]

And we will take our next question from Ben Briggs with StoneX Financial. Please go ahead.

[Ben Briggs, StoneX Financial]

Hi. Good afternoon guys and thank you for the call and taking questions. So, a couple from me. Again, I want to touch on this on the labor issue, but I know you have been asked about a few times. I just want to make sure I have it right so that I understand it. So, are you guys paying – you mentioned that you are paying some signing and retention bonuses. And I imagine you are probably seeing a little bit of a wage pressure at the corporate level also. Is that impacting your operating margins, or are you reimbursed for those signing and retention bonuses as well?

[David Garfinkle, Chief Financial Officer]

No, that’s a good point. Those would not be reimbursed for the most part either. Again, sometimes the negotiation comes down to not dollar-for-dollar. We are not proving out every expense item in our P&L to our customers. So, it’s not – it’s more of an art than a science. But generally speaking, you are right. I mean we are getting a CPI increase and that’s not necessarily going to cover special incentives that we may put in place until we can stabilize the workforce. So, that’s another good example. Like the registry nursing where we are paying a premium for registry nursing that’s temporary, hopefully. The incentives we are putting in place for a signing bonus and things like that, including at the corporate level, I think we have done a good job managing overall G&A expenses. So, they are not actually going up even much at all from the prior year. When you look at the facility level, signing bonuses, special gift bonuses or shift premiums, things like that, you are right, that’s impacting the margins in a negative way. The good thing about those, though, is they can be temporary. So, you are providing those until you can stabilize your workforce. So, when you ultimately fill those positions, those things can fall away. So, it’s not a permanent part of your cost structure.

[Ben Briggs, StoneX Financial]

Right. Okay. Thank you for that. That’s very helpful. Next thing is, so you have mentioned that you have got two remaining direct U.S. Marshal Service contracts, neither one of which expire in 2022. I don’t think I saw it in your disclosures. When do those direct U.S. Marshal Service contract expires?

[Damon Hininger, President and Chief Executive Officer]

Yes, sir. So, they will be in our supplemental, which may go up – is out today. And so it will be the two facilities, is one in Arizona, May of ‘23...

[David Garfinkle, Chief Financial Officer]

September.

[Damon Hininger, President and Chief Executive Officer]

September ‘23, excuse me, and then in 2025 Nevada.

[Ben Briggs, StoneX Financial]

Okay. Nevada, ‘25. That’s very helpful. And then I think the last one for me is going to be, I know that you guys discussed kind of plans for addressing the revolver and extending that maturity and then also addressing this term loan A this is due in April of 2023 with balance sheet cash and you have plenty of balance sheet at $378 million of cash on the balance sheet versus like a $50 million to $90 million run rate pre-pandemic. There is also the four and five eights notes due 2023, the unsecured notes that there is about $174 million out. Those come due within a couple of weeks of that term loan A. I wanted to know, are you planning on addressing that with balance sheet cash at the time as well, or do you have other plans for that?

[David Garfinkle, Chief Financial Officer]

Yes. Short answer is yes. So, the credit facility, we feel really good about today, as we mentioned in the script. That should be put in place in the very near-term. The ‘23 notes that you described, they have a make-whole associated with them until February of ‘23. So, we would expect to use cash on hand to pay off those notes as soon as we can without a make-whole.

[Ben Briggs, StoneX Financial]

Okay. That’s very helpful and that’s it for me. I will turn it back off.

[Damon Hininger, President and Chief Executive Officer]

Thank you.

[David Garfinkle, Chief Financial Officer]

Thanks so much.

[Operator]

And that concludes today’s question-and-answer session.

[Damon Hininger, President and Chief Executive Officer]

Thank you very much. We appreciate you joining our call today and look forward to talking to you in the coming months. Thanks everyone.

[Operator]

And this concludes today’s call. Thank you for your participation. You may now disconnect.