CoreCivic Inc

NYSE:CXW

Earnings Call Transcript 2022-Q2

[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 Q2 2022 Earnings Call. All lines have been placed on mute to avoid any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions] Thank you.

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 of 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. On today’s call, we will discuss our financial results for the second quarter of 2022, developments with our government partners, and provide you with other general business updates.

During today’s call, our remarks, including our answers to your questions will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our second quarter 2022 earnings release issued after market yesterday and in our Securities and Exchange Commission’s filings, including the 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 file on our Investors page at corecivic.com.

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

[Damon Hininger, President and Chief Executive Officer]

Thank you, Cameron. Good morning, and thank you for joining us today for our second quarter 2022 earnings call. On today’s call, I will provide you with details of our second quarter financial performance, discuss with you our latest operational developments, update you on capital allocation strategy and discuss the latest developments with our government partners including the pending $130 million sale of our McRae facility to the state of Georgia.

I will then turn the call over to our CFO, Dave Garfinkle, who will review our second quarter financial results and full year 2022 guidance in greater detail and we’ll update you on our ongoing capital structure initiatives. Before proceeding with the agenda, I would like to take a moment to address a tragedy that occurred at our Davis Correctional Facility in Holdenville, Oklahoma.

This past weekend, CoreCivic Correctional Officer, Alan Hershberger lost his life in the line of duty succumbing to an injury from an unprovoked attack by an inmate. Officer Hershberger joined CoreCivic in October of 2021 after a career in the military. He served the United States Navy, the Army National Guard in Army Reserves. Originally from Smithville, Missouri, Officer Hershberger started with us at our Leavenworth Detention Center in Kansas. He was very well liked and respected by all those who knew him and worked alongside him throughout our company.

Our hearts are with his family and friends, as well as the entire team at Davis, where they’re providing support services – where we are providing support services to assist our people as they cope with his loss. In the past couple of days, numerous correctional leaders from across the country have personally reached out to me to offer their support and condolences. They understand the gravity of the calling and sacrifice that the dedicated men and women in our profession make each and every day to keep our communities, co-workers, and those in our care safe.

On behalf of the CoreCivic family, I am grateful for their support in unity at such a difficult time. Alan Hershberger served his community and his nation faithfully. We mourn his loss as we also gratefully acknowledge his service and dedication to public safety. Thank you for the time to speak of the loss of Officer Hershberger. I will now proceed with the rest of agenda for today’s call.

I would like to lead with an update on developments with our government partners. The most significant development in the second quarter was news of the pending sale of our 1,978 bed McRae Correctional Facility to the state of Georgia for $130 million. The asset sale is notable for a number of reasons. First, the McRae facility currently has a management contract with a Federal Bureau of Prisons that is scheduled to expire on November 30. I contract that for the last few years was clearly not going to be renewed by the BOP.

Second, the asset sale is expected to close in the third quarter, which will provide significant after-tax cash proceeds that will allow us to more quickly execute on our share purchase authorization and pay down debt. Third, this is a once again a market opportunity resulting from correctional systems seeking to modernize their facilities and not a result of prison population growth.

This is a really great deal for the state of Georgia, as it helps them take a drastic step to modernize their system. Finally, and most importantly, this asset sale reinforces the significant underlying value of our correctional and detention real estate assets, which is clearly not reflected in the valuation of our publicly traded debt and equity securities.

The sale price for McRae is nearly $66,000 per bed, which – when used to approximate the value of our nearly 71,000 company-owned correctional beds indicates a $4.7 billion value that is nearly triple the price the public markets applied to our equity. Now, while we do not expect the sale of our correctional and detention facilities to be to government entities to become a growing trend, review this as an excellent opportunity to recycle capital and create value due to the dislocation of the pricing of our public securities and our assets true market values.

Let me now briefly discuss ongoing developments with our federal partners. Beginning first with our federal customers within Department of Justice, the BOP and United States Marshals Service. The BOP has experienced significant declines in 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. As mentioned earlier, our last remaining proof-of-contract with a BOP is at our McRae facility in Georgia, again, which expires in November 2022, representing less than 2% of our total revenue. Following the expiration of our contract in McRae, we only expect to generate revenue from the BOP through the provision of residential reentry facility contracts.

As for the United States Marshals Service, their prisoner populations have remained relatively consistent in recent years. So their need for capacity around the country remains unchanged. The United States Marshals Service continues to be impacted by the executive order signed by President Biden and issued in January 2021 that directed the attorney general to not renew Department of Justice contracts directly with privately operated criminal detention facilities.

In 2022, we have no direct contracts with United States Marshals Service at our set for expiration, and now have only two total remaining direct contracts with United States Marshals Service that are set to expire in later years. We did however recently renew an indirect contract with United States Marshals Service at our 2,672 bed Tallahatchie County Correctional Facility.

The contract was set to expire on June 30, but the local government authority responsible for the contract exercise a two-year renewal option on the contract. We continue to work closely with United States Marshals Service to ensure their 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 of any of our government partners, their operations and capacity utilization needs were most significantly impacted by COVID-19. Nationwide, ICE detainee populations remain well below the historic level since the spring of 2020 and that trend remains unchanged in the second 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 the annual budget appropriation process. Although, the agency has nonetheless experienced budget challenges because of COVID-related and other unplanned expenditures, which has likely impacted detention levels and actions on new contract awards.

As of the end of June of 2022, ICE sustained approximately 24,000 individuals nationwide. We also continued to pursue a formal procurement for a new case management non-residential alternative detention or ATD program specifically for young adults that was issued this January. The program is intended to provide case management services for participating low risk young adults ages 18 to 19 within a framework that provides compliance with immigration obligations until removal or other resolution of 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 the 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 detention capacity and non-residential ATDs also, should new needs arrives, we believe we are well-positioned to deliver solutions to ICE.

Moving now to the results in the second quarter of 2022. We generated revenue of $456.7 million, which was a decline of only 1.7%, compared to the prior year quarter, despite the non-renewal of contracts with the United States Marshals Service 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 five facilities in our Property segment during the second quarter of 2021. Collectively, these eight facilities accounted for $29 million reduction in revenue in the second quarter of 2022 versus the prior year quarter.

In the second quarter of 2022, we generated normalized funds from operations, or FFO of $40.7 million or $0.34 per share compared to $56 million or $0.46 per share in the second 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 five non-core properties and two underutilized residential reentry centers since the second quarter of 2021 and a challenging labor market. Dave will provide more detail regarding the financial impact of these transactions.

In April of this year, we commence transitioning populations at our La Palma Correctional Center in Arizona from immigrations and custom enforcement, or ICE populations to Arizona state – inmate populations pursuant to a new contract we were awarded by the Arizona Department of Corrections, Rehabilitation and Reentry late last year.

We expect the transfer process to be completed in the first quarter of 2023, which is the a quarter later than we previously contemplated as I’ll discuss later. Upon achieving normalized utilization based on the contract we expect to generate approximately $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 ICE detainees at facility, facility net operating income decreased nearly $11 million during the second quarter of 2022 compared with the second quarter of 2021.

The La Palma facility currently supports the mission of ICE by caring for approximately 600 detainees and is already now caring for approximately 1,000 inmates from the state of Arizona. As a result, we continue to actively collaborate with both the Arizona Department of Corrections, Rehabilitation and Reentry, and ICE to ensure we continue to successfully transition their resident populations from ICE detainees to inmates from the state Arizona. However, it is important to note that COVID-related occupancy restrictions mandated by ICE are currently still in place and prevent us from retaining the same level of ICE detainees we care for at La Palma at other facilities we own in the region.

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 $1.25 to $1.32 and adjusted funds from operations, or AFFO per share in the range of $1.19 to $1.26. The mid-point of these metric represent reduction of $0.24 per share and $0.23 per share respectively, compared with the full year 2022 financial guidance we issued in May of this year.

Our updated guidance no longer reflects an anticipated termination 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 on May 23. On May 20, a federal judge issued a temporary restraining order blocking the termination of Title 42 ruling that the administration violated administrative law when it announced that it planned to cease Title 42.

That ruling is now under appeal under decision – under appeal with a decision unlikely before fourth quarter of this year or first quarter of next year. The termination of Title 42 was widely expected result in an increase in the number of undocumented people permitted to the United States to claim asylum. And therefore, we anticipate an increase in a number of people apprehended and detained by ICE, which continues to be our largest government customer. Our financial guides now reflects Title 42 being left in place through the remainder of the year and ICE utilization remaining well below historical norms.

Our 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 this year pursuant to a new management contract, we currently expect detainee populations from ICE to be below our previous estimates.

We have also temporarily slowed the pace of new intake of inmates from the state of Arizona in order to bring on additional staff at the facility. Within the last few weeks, we have now hired all of the necessary staff need to complete the ramp we have forecasted for the remainder of this year.

These new employees are either scheduled for or already in our academy to resume our ramp in early September and fully complete the ramp of the second compound. Our updated guidance also reflects the pending $130 million sale of our 1,978-bed McRae Correctional Facility to the state of Georgia, an agreement reached during the second quarter and the laws of that facility’s existing contract with the Federal Bureau of Prisons.

Once the sale is completed, we will lease the facility from the Georgia Building Authority until expiration of the BOP contract on November 30. This rent expense, of course, was not previously included in our May guides. Dave will provide greater details about our second quarter financial results, as well as the financial impact of the more significant assumptions included in our updated full year guidance, following the remainder of my comments.

So finally, during the second quarter, we had a multiple important milestone to continue to strengthen our balance sheet. First, we entered into a new bank credit facility to extend this maturity by three additional years. We opted to significantly reduce the size of our – reduce the size at $350 million versus the previous $1 billion facility.

Since we no longer require such a [indiscernible] facility as a tax for C-corporation, since we’re no longer under the restructure. The new facility provides us with the flexibility to quickly repay the outstanding $124 million balance on our Term Loan B. The Term Loan B was not scheduled to mature until December of 2024, but as high variable interest rate and security features made it a high priority for repayment with our significant cash on hand.

During the quarter, we also repurchased an additional $3.6 million of our outstanding senior unsecured notes, which are scheduled to mature in May of 2023 and have a remaining balance of only $170 million. Following the maturity of those notes, our next bond maturity isn’t until April of 2026 and we have less than $100 million in variable rate debt.

We remain committed to our targeted total leverage ratio or net debt to adjusted EBITDA range of 2.25 times to 2.75 times. We have full progress in reducing our overall leverage due to the strong cash flows the company generates, and we expect our leverage to continue to decline over time. Understanding that recently our EBITDA has been negatively impacted by the short-term transition of contracts at our La Palma facility in Arizona, mathematically increasing leverage, though, debt levels have declined.

So as this transition near completion, we expect our leverage to naturally decline. And in a very clear sign of our view of the business, we are also very pleased to begin executing on our share purchase authorization during the quarter. Yesterday, our Board of Directors authorized an increase in our share purchase program of up to an additional $75 million in shares of our common stock. As a result of the increased authorization, the aggregate authorization under our share repurchase program increased from the original authorization of up to $150 million in shares of our common stock to $225 million in shares of our common stock.

Since May 16, we have repurchased 4.3 million shares of our common stock at an aggregate purchase price of $52.1 million. So the additional authorization approved yesterday provides us with a remaining purchase authorization of nearly $173 million.

Our capital allocation strategy has been prudent 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.

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

[David Garfinkle, Chief Financial Officer]

Thank you, Damon, and good morning, everyone. In the second quarter of 2022, we reported net income of $0.09 per share for $0.13 of adjusted earnings per share, $0.34 of normalized FFO per share, and AFFO per share of $0.33. Adjusted and normalized per share amounts exclude a gain on sale of real estate assets of $1.1 million, expenses associated with debt repayments and refinancing transactions of $6.8 million, and shareholder litigation expense of $1.9 million.

The shareholder litigation pertains to derivative lawsuits that raised similar allegations to those associated with the shareholder litigation we settled last year, which had been stayed pending resolution of the original shareholder litigation. During the second quarter of 2022, we reached a settlement with the plaintiffs in the derivative lawsuits, including attorney’s fees and expenses.

The decline in adjusted EPS, a normalized FFO per share of $0.12 compared with the prior year quarter, primarily resulted from an EBITDA decline of $10.8 million or $0.06 per share due to the earnings disruption at our 3,060-bed La Palma Correctional Center, the second largest facility in our portfolio, as we continue to transition from ICE populations to populations from the state of Arizona, pursuant to a new management contract that commenced in April for up to 2,706 inmates.

Contract termination since the end of the second quarter of last year at our West Tennessee, Leavenworth, and the managed only Marion County Jail contributed to an EBITDA reduction of $4.5 million or $0.03 per share from the prior year quarter. Per share results decreased a $0.01 as a result of the sale of seven properties, five of which were non-core properties in our Properties segment sold during the second quarter of last year and two were underutilized Community segment facilities sold in the first quarter of this year, that generated $4.4 million of EBITDA in the second quarter of 2021, with the remaining per share reduction from the prior year mostly due to higher salaries and inflation.

Occupancy in our Safety and Community facilities continues to reflect the impact of COVID-19 and decreased the 69.5% in the second quarter of 2022 from 71.6% in the prior quarter, although this declined from the prior year was attributable to the contract terminations at the West Tennessee facility on September 30, 2021, and our Leavenworth facility on December 31, 2021, and due to the ongoing transition of populations at La Palma.

Occupancy declined from 70.6% in the first quarter of 2022, largely due to the transition at La Palma, where populations declined by 253 residents compared with the first quarter driven by faster declines in ICE detainees. Our overall ICE detainee populations remain well below historical levels, as the Southwest border has effectively remained 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 under a policy known as Title 42.

On April 1, 2022, the CDC issued a public health determination, terminating Title 42 in that effective date of May 23, 2022. However, on April 25, a federal judge issued a temporary restraining order blocking the termination of Title 42, which the judge affirmed on May 20. That ruling is under appealed by the administration.

Whenever Title 42 is terminated, such action may result in an increase in the number of undocumented people permitted to enter the United States claiming asylum and could result in an increase in the number of people apprehended and detained by ICE. With depressed occupancy levels, we are in a position to significantly grow earnings, whenever the impact of COVID-19 restrictions subsides.

Operating margins were 22.2% in the second quarter of 2022 compared with 26.8% in the prior quarter and 22.5% in the first quarter of 2022. The decrease in our operating margin primarily reflects incremental expenses resulting from increases in wage rates, including 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 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 have been able to achieve as governments acknowledged the need to fund additional staffing costs.

Operating margins were also impacted by the transition of inmate populations at our La Palma Correctional Center, which negatively impacted margins by 2% compared with the prior year quarter. Longer term, we expect operating margin percentages to trend toward those we experienced pre-pandemic of approximately 25%.

Turning to the balance sheet. During May, 2022, we entered into a new $350 million bank credit facility, consisting of a $100 million Term Loan A and a revolving credit facility with a borrowing capacity of $250 million expiring in May 2026. In connection with obtaining this new bank credit facility, we paid down our previous Term Loan A by $67.5 million. Shortly after closing on the new bank credit facility, we fully repaid the outstanding balance of $124.1 million on our Term Loan B. We repaid these balances of cash on hand.

Combined with our cash balance as of June 30 of $115.6 million, we have $348.8 million of liquidity, including the capacity on our revolving credit facility, which remains undrawn. With the extension in the maturity of our bank credit facility to 2026, and the repayment of our Term Loan B, the only maturity before 2026 is the $170.1 million outstanding balance of 4.625% unsecured notes, which we expect to repay with cash on hand in early 2023.

The new Term Loan A comprising 7% of our total outstanding debt is now our only variable rate debt outstanding. With these debt repayments, we have significantly reduced our exposure to rising interest rates and we have no need to access the capital markets in the near-term. Having achieved these significant milestones and having repaid $530 million of net debt since the beginning of 2021 through the first quarter of 2022, reducing leverage to 2.7 times from 4 times when we announced our conversion from REIT to a taxable C-corporation in May 2022, our Board of Directors approved $150 million share repurchase plan.

Since May 16, we have repurchased 4.3 million shares of stock at a cost of $52.1 million. Yesterday, our Board increased the authorization by $75 million to a total of $225 million. Although, the stock repurchases contributed to an increase in leverage to 3.1 times using the trailing 12 months through June 30, 2022, we remain focused on managing to our leverage target of 2.25 times to 2.75 times.

Last month, we entered into a Purchase & Sale Agreement to sell our 1,978-bed McRae Correctional Facility to the Georgia Building Authority for $130 million, which we expect to be completed later in the third quarter. We have a management contract with the Bureau of Prisons at this facility expiring November 30, 2022, which we do not expect to be renewed. We also sold two additional properties in a parcel of land last month that generated net sales proceeds of approximately $15.6 million. Applying the after tax net proceeds from these sales, our pro forma leverage as of June 30, 2022 was 2.7 times.

Moving lastly to a discussion of our 2022 financial guidance. For the full year 2022, we expect to generate adjusted EPS of $0.44 to $0.50, normalized FFO per share of $1.25 to $1.32 and AFFO per share of $1.19 to $1.26. Our per share results were consistent with our internal forecast for the second quarter.

However, our guidance for the second half of the year, no longer reflects the termination of Title 42 and reflects the larger earnings disruption at our La Palma facility, the sale of our McRae facility in the continuation of a challenging labor market. Although, the CDC terminated Title 42 on April 1, 2022 with an effective date of May 23, 2022. On May 20, a federal judge ruled that the administration violated administrative law when it announced that it planned to halt its termination. Our previous guidance anticipated higher occupancy levels from ICE from the potential termination of Title 42, which is no longer contemplated in our current guidance resulting in a reduction to our previous guidance of approximately $0.10 per share.

The larger earnings disruption at La Palma is due to a combination of ICE transitioning out of the facility faster, higher labor and incentive costs necessary to attract and retain staff at the facility and an extension of the intake schedule to the first quarter of 2023 from the fourth quarter of 2022 mutually agreed with Arizona during the second quarter. We are also making significant investments in our hiring processes to help ensure we have sufficient staff to meet the new schedule.

The larger earnings disruption at La Palma results on a reduction to our previous guidance of approximately $0.10 per share. Our 2022 forecast reflects a decrease in EBITDA at La Palma of approximately $25 million from pre-pandemic levels and an even larger decrease from 2021. The facility transition is expected to be complete in the first quarter of 2023, at which time we remain confident facility EBITDA will return to pre-pandemic levels providing meaningful growth to our 2023 financial results compared with 2022.

Finally, upon completion of the sale of our McRae Correctional Facility, which was not contemplated in our previous forecast, we will incur rent expense through the expiration date of our contract with the BOP on November 30, 2022, resulting in a reduction to our previous guidance of $0.02 per share. These three items, two of which we expect to be temporary account for reduction in our previous guidance of approximately $0.22 per share.

The EBITDA guidance in our press release enables you to calculate our annual effective income tax rate of 27% to 29% and provides you with our estimate of total depreciation and interest expense. We expect 2022 G&A expenses to be 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 unchanged from our previous guidance.

We also expect to incur $16 million to $18 million for facility renovations, including $4 million to $5 million at La Palma for the new Arizona contract. With depressed occupancy levels in the transition of La Palma expected to stabilize in early 2023, we are in a position to significantly grow earnings without the need to construct new capacity or deploy new capital.

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

[Operator]

Thank you. [Operator Instructions] And we’ll take our first question from Joe Gomes with NOBLE Capital. Please go ahead.

[Joe Gomes, NOBLE Capital]

Good morning, our condolences, and thanks for taking my questions.

[Damon Hininger, President and Chief Executive Officer]

Yes, sir. Thank you very much. Thank you.

[Joe Gomes, NOBLE Capital]

Well, I just want to talk a little bit, pardon of me about ICE populations, they had been creeping up modestly in the first quarter, and I think in the fourth quarter last year also, if we kind of take out what’s happening at La Palma, are you seeing any type of increase in ICE populations and other facilities? Is it staying flat? Is it decreasing? You could just give us a little more insight onto the ICE populations?

[Damon Hininger, President and Chief Executive Officer]

Absolutely. Yes. Joe, this is Damon and thank you again for your comments earlier. So yes, putting aside La Palma, I’d say it’s been relatively stable. I mean, we always have some ups and downs with ICE populations just because of their mission and the kind of huge numbers that we see kind of fluctuate from intakes from day-to-day. But and look, I guess a little bit to your question also kind of look in the rest of the year. I mean, obviously you heard what we said about kind of policy and potential impacts that it would have on population. So, we have assumed that none that’s going to change for the rest of the year.

But we also do know that I guess a little more globally too with ICE populations. I mean, they have, as it been public reported, they do have a reprogram request for about $360 million for rest of this fiscal year that you’re trying to get approved through Congress. And then obviously will watch closely what happens next fiscal year, which will begin on October 1. My guess would be is that they probably start the fiscal year with the continued resolution, which has been pretty similar kind of action that you see in previous years. But anything you’d add to that, Dave?

[David Garfinkle, Chief Financial Officer]

Yes. Just excluding La Palma, and I guess South Texas facility, they were down a couple hundred from last year’s second quarter and basically flat with the first quarter. So they’ve been pretty consistent excluding the transition at La Palma.

[Joe Gomes, NOBLE Capital]

Okay, thanks. Thank you for that. On the U.S. Marshals Service, I’m sure you guys have seen the GEO renewal of their direct facility. You’ve got a couple of directs, I think they come up one next year, and one after that. Are you in any discussions with the Marshals Service in terms of maybe being able to use that as precedents for the facility that comes due, I believe next year?

[Damon Hininger, President and Chief Executive Officer]

Yes. Great question. And we did note, yes, GEO’s extension there at their Western Region Facility in San Diego. So, we did follow that closely for couple of reasons, one of which is not only the contract, but also we’ve got another facility within the region that supports ICE, as you know. But yes, we’ve talked to ICE – or excuse me, we talked to Marshals Service on a regular basis. In fact, I was up meeting with them at their headquarters here. And I guess the last two to three weeks, and always talking about not only kind of just general operational issues, but also as we’re thinking about these contracts coming up for renewal, as to one in next year in 2023, and then also we’ve got the last one that would be potentially impacted would be 2025. So obviously a few years out.

So, I know they’re watching closely not only what their needs are operationally, but I know they’re working kind of in sync was by contract working with the various stakeholders of what the needs are and what the alternatives are within those regions or not. And as I think, Joe, I mean, we have facility in Florence houses on any given day, about 3,000 to 3,500 federal prisoners for the District of Arizona. So, we think it’s very compelling location wise, operationally physical plant it’s in close proximity to the Federal Courts here in Tucson, and Phoenix.

So, we’ll continue to monitor and obviously communicate closely with the Marshals Service. But my sense is that this is probably the next one in the line that they’ll probably put their focus in on and think about alternatives that are not there, or could not be there, I should say because the size of that quantity, but also how they think about continue to use the beds within our facility, but anything you’d answer to that Dave?

[David Garfinkle, Chief Financial Officer]

Just highlight the – maybe obvious it’s more than twice the size of the Western Region Facility, the GEO has. So it’s a great facility and it would be very difficult to replicate the capacity that we have there to continue to serve their needs.

[Joe Gomes, NOBLE Capital]

Okay. Thank you for that. On new business opportunities, you talked about the young adult program, previously and other calls, you’ve talked about a couple other states that you were looking at anything new on the new business opportunities?

[Damon Hininger, President and Chief Executive Officer]

We’ve got – let me talk about state first. We’ve got conversations going on with a couple of states. I’d say, we’ve probably got one new state in the fold that I wouldn’t be able to publicly disclose. That’s gotten in the mix, because of not only some budget issues, but also some staffing issues within their state that puts some pressure on facilities that they think they need to either ramp down relative to quantity or OXY or potentially close all together. So, yes, we’ve got probably two or three states that are still in the mix for increased utilization. And again I think two of them would be potentially new states that we are not currently doing business with.

On the federal side, like I said, I think the story on ICE is also will watch closely what happens in a new fiscal year. Not only with some of these policies that the administrations trying to pull back on, but also what their funding level is next year, as you know, that customer is unique versus all of our other customers, because they’re quantity, they use in detention capacity is driven in big part not only by policy, but also in dollars appropriated for detention capacity. So again, we’ll be watching that in the coming days and weeks as we get closer to the new fiscal year.

And like I said, right now with the Marshals Service, they have been relatively stable, putting aside Leavenworth and West Tennessee in our portfolio relative to utilization, we have seen a little bit of increase in a couple of our facilities and, they’ve expressed to us, they probably are going to be stable, maybe modestly grow here in the next, probably 24 months. So, I don’t anything you add to that, Dave?

[David Garfinkle, Chief Financial Officer]

I just, emphasize that our occupancies at 70%, so growth with existing customers, including with ICE, for example, through the reversal of Title 42 and the continued ramp up of Arizona will obviously create natural growth in 2023 as those things kind of resolve themselves.

[Damon Hininger, President and Chief Executive Officer]

One other thing I just say on ICE is that again, we talked to them on a regular basis. Know I just kind of general operational issues, but also, it’s pretty clear to us that, that they continue. And I think I mentioned this back in May, that they continue to look at not only as a former procurement with the case managers for young adults, but also capacity that we’ve got within our system, either in existing facilities on our own operation or maybe vacant facilities. So, we continue to provide them information and additional detail as appropriate as they think about as they kind of game plan what potentially their needs are going to be mission wise as they go to new fiscal year.

[Joe Gomes, NOBLE Capital]

Okay. Thank you. And on the McRae, obviously that’s a really nice sale for you guys. You do have some other facilities that are idled. Are you – you talk with any other states about some of those facilities that are idled about possibly helping them meet their needs for upgrading older facilities that they currently use?

[Damon Hininger, President and Chief Executive Officer]

Yes. Great question. So, I guess, let me, before I answer that, just let me just give you just a view right now, as we think about the balance sheet and also kind of our capital structure. I mean, we feel like we’ve really gotten a company in a great, great spot. I mean, as you know, Joe, I mean, look at our leverage it’s down to the lowest level, I think we’ve had in about a dozen years, brand new credit facility, it’s got a great group of banks to support that we’ve got obviously maturity that we did last year. So that’s a long way of say it. We feel like we’ve really positioned a company in a very stable place for the foreseeable future. And that’s all always been kind of our style. Because I think about kind of our capital needs. We think about our maintenance CapEx, as we think about growth CapEx, but also having capital for buyback program we’ve done in May. I mean, we’re really, really good. I mean, better than anyone else in the industry relative to where we sit at the moment.

So with that, there’s no pressure on us to sell a facility that we don’t think is, mashed or on par with its market value. So, we have expressed, over the years on certain facilities where we don’t think we’ve got any kind of near term business opportunities, expressive jurisdictions, I should say that, potentially these facilities would be attractive to them. So, we’ll keep talking about those opportunities. I didn’t mention this in my comments, but obviously the transaction McRae, indicates obviously the value of our underlying real estate, but it’s also a great market comp if we did have a jurisdiction with interest in the notes still that we’ve got in the portfolio, having a real live market comp obviously is helpful in that discussion too. So anything you’d add to that, Dave?

[David Garfinkle, Chief Financial Officer]

Yes. I agree that the balance sheet is in great shape, and don’t need to sell any assets. The opportunity with the Georgia Building Authority was a unique one, that was a win-win for them, because they needed additional capacity to place outdated infrastructure. It was great for us, a great sale we’ll generate net proceeds on an asset that was going to be idle at the end of November. So it was unique. And as Damon mentioned in his script, I don’t think there’s going to be a trend of additional prison facilities, nor are we seeking to sell additional prison facilities.

We do have – I would add that we do have some smaller assets. We sold three, as I mentioned in my script, two smaller facilities in an undeveloped parcel of land for about $15 million, $16 million in net proceeds will continue to pruning the portfolio and look at assets like that. Perhaps idle residential reentry facilities that can have multiple uses where we’re not seeing prospects of a customer just be better off monetizing those assets, taking proceeds and buying back stock as we continue to believe our stock is undervalued. But I don’t see really, the size sales of the McRae facility or other prison assets.

Not to say, never say never, but we don’t need to, it would be nice if we could sell an idle one to do what we were going – what we’re doing with McRae, because buying back stock with those proceeds makes a lot of sense. But I think it’s probably going to be more on the smaller size assets, pruning that community portfolio where we don’t see a long-term opportunities.

[Joe Gomes, NOBLE Capital]

Okay. One more for me, if I may. So, you mentioned the buyback a couple of times and great job here so far in what you’re doing. Did the buyback – are you restricted at all in the current environments you just reported earnings? Or is that something that, that is able to continue unabated [ph] even here with and there’s no blackout period, I guess?

[Damon Hininger, President and Chief Executive Officer]

That’s correct. Yes. I mean, there are, we do have quarterly blackout periods for earnings and you can enter into 10b5 trading plans – plan sales, basically that enable you to trade through blackout period, if you are not in possession of material non-public information at the time you enter into those 10b5 trading plans, which we did here this last quarter. So, we will likely do that again for the next quarter, but our window – trading window is will be opening once earnings are disseminated properly.

And so we’d be able to trade without a 10b5 plan in the short-term. So no other restrictions. And we do have restricted payment baskets in our – the debt that we issued last year, but were nowhere near those restriction – restricted levels. So really no, the only inhibitor would be our leverage profile, which we’ve said two and a quarter to two and three quarter’s times is the target. So that’s really going to be the governor going forward.

And with the short-term disruption in earnings, as we see the ability to get clarity around the 2023 budget, once we finish that get that clarity. I’d expect, that we’d be able to pull that leverage back down to the target level, but you could see – you could see it tick up above the two in three quarters here like it did in the second quarter, in the second quarters really, because we had visibility on the net proceeds of McRae coming in. And as I mentioned in my script pro forma for those sale proceeds, we’re back down to 2.7 times. So, we’ll look at it like that as we have visibility to get back in within the leverage target, we’ll take advantage of opportunities in the marketplace.

[Joe Gomes, NOBLE Capital]

Okay, great. Thanks for taking my questions, and I’ll pass it on.

[Damon Hininger, President and Chief Executive Officer]

Yes sir. Thank you.

[Operator]

And we’ll take our next question from Jay McCanless with Wedbush. Please go ahead.

[Jay McCanless, Wedbush]

Hey, good morning. Thanks for taking my questions. In terms of the share repurchases, what type of cadence do you have in mind? Or are you, I know you talked a second ago about the 10b5-1 plans, is it – you are going to have a pretty steady buyback cadence. And also as part of that question, where do you want expect the share account to be by the end of the year?

[Damon Hininger, President and Chief Executive Officer]

Yes. Good question. I’d say, our goal is to consistently repurchase shares. We’re a long-term buyer of shares that these prices, and as we’ve discussed for the past couple years intend to return capital to shareholders once we accomplished our leverage targets, which we have done. I wouldn’t want to put a number out there yet for 2023, until we get our budget finalized, which we kind of kicked that process off. And we get some clarity down the road on Title 42 and things like that, but I’d hate to put a number out there, but I think the buybacks that we’ve completed to date are somewhat representative what you’d expect going forward.

[Jay McCanless, Wedbush]

Okay. That sounds great. Thanks for taking our questions.

[Damon Hininger, President and Chief Executive Officer]

Thank you.

[Operator]

And we’ll 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]

Kirk, good morning

[Kirk Ludtke, Imperial Capital]

My condolences as well. And thank you for the detailed presentation. Very helpful. Sounds – with respect to the buybacks. It sounds like you’re – you plan to continue to buy shares above the target range. Is there a leverage ratio above which you would not buy shares?

[Damon Hininger, President and Chief Executive Officer]

Well, yes, let me tag team Dave on this. I mean, we, so you, as we set our range is two and a quarter to two and three quarters. So that would be kind of our range that we’re always looking at, to keep this, pick it off, we’re buying back shares. We will take into account as Dave alluded to earlier. I mean, we will take an account. I mean, we are obviously seeing a disruption of earnings from La Palma with the new Arizona contract. So, we will take that into account. So, if we have a quarter where we’re a little above and, but we know that, Arizona kind of normalize want that always is kind of full ramp we’ll take that into account. So anything you’d add to that, Dave?

[David Garfinkle, Chief Financial Officer]

Yes, that’s, exactly right. That’s what I was trying to say. You probably said it better than I did.

[Kirk Ludtke, Imperial Capital]

Okay. Thank you. It sounds like you’ve ramped staffing, really company wide. Where does your staffing stand relative to where it would need to be if Title 42 is lifted?

[Damon Hininger, President and Chief Executive Officer]

Good question. And keep me honest Dave, I mean, I’m thinking about facilities, primarily on Southwest border that have ICE contracts. We stay actually pretty well at those facilities. I’m just thinking from kind of San Diego down to Laredo, Texas. I think we’re overall pretty good. I think there’s one or two facilities where we still have, just speaking on full blast to recruit employees into the enterprise. But I think we’re relatively good. I mean, we do have a transition. We talk about La Palma going from ICE to Arizona. We do think that’ll have an impact on facilities in Arizona, like Eloy and also our Florence facilities that have ICE contracts. And so there will be some transition of staff La Palma to those locations. So that helps us a little bit from a staffing perspective, but I’d say relatively speaking, we’re probably in pretty good shape, but anything you add that Dave?

[David Garfinkle, Chief Financial Officer]

Yes, we have a lot of – right now, we have a lot of people augmenting staff kind of traveling and some expenses come with that. So, we try to minimize that to the extent possible, but that does enable us, it’s a good thing. Large company like ourselves with many correctional facilities enables us to deploy – redeploy staff where we might have too many staff, one facility to help out at a staff that’s short.

But I’d say generally speaking, as we go through the rest of the year, any staff that we bring on I think would come with additional populations, and therefore I wouldn’t expect a meaningful deterioration. There could be some, but I wouldn’t expect a meaningful deterioration in margins or EBITDA levels for additional staff, because we would be bringing them on in conjunction with bringing in additional inmate populations. I think, part of the second quarter we were doing that. And I think we’re staff – we would, we’d be staff for adequate, the inmate populations we have today, but any additional staff would, I’d expect come with additional residents.

[Damon Hininger, President and Chief Executive Officer]

That’s a good point.

[Kirk Ludtke, Imperial Capital]

Got it. Thank you. That’s helpful. And then with respect to the ICE population at La Palma, it sounds as though the occupancy limitations have prevented a lot of those detainees from being moved to your ICE facilities nearby.

[Damon Hininger, President and Chief Executive Officer]

Yes, that’s correct. Yep. And – I’m sorry.

[Kirk Ludtke, Imperial Capital]

But if it eventually those occupancy limitations go away and that part of the idea there is still intact is just its delayed as well. Is, I mean, could you elaborate maybe on how many – how that might work and how many detainees you might be able to claw back?

[Damon Hininger, President and Chief Executive Officer]

Yes, that’s a great question. So again, keep me honest with you Dave, but I think about and the way ICE is doing this, they’re doing it kind of by location, not necessarily kind of globally as a policy, but they’re looking at kind of the, kind of COVID activity and rates of infection by certain locations. And then that informs their thinking on what type of OXY cap they want within the facility that we’ve got in that location.

So, I’d say generally, I mean, we have some facilities that are all higher than others, but I’d say generally those caps have been kind of at 75% of total capacity. So yes, you’re exactly right. We do expect just like the rest of the world that, COVID will continue to kind of subside in some of these protections that were put in place will continue to kind be pulled back a little bit, and then we’ll see OXY approve, throughout the ICE portfolio, but anything to add to that?

[David Garfinkle, Chief Financial Officer]

No, that’s covers it.

[Kirk Ludtke, Imperial Capital]

So maybe – thank you. That’s helpful. So there were 900 ICE detainees at La Palma at one point…

[David Garfinkle, Chief Financial Officer]

One point, there were 1,800 before we started the transition.

[Damon Hininger, President and Chief Executive Officer]

Yes, 1,800 and today we’re about 600.

[Kirk Ludtke, Imperial Capital]

Okay. Maybe that 900 was first quarter. So 1,800, how many of those could be without absent occupancy limitations at the nearby facilities? How many of those 1,800 ICE detainees might end up at another CoreCivic facility?

[Damon Hininger, President and Chief Executive Officer]

If the limitations were put in place?

[Kirk Ludtke, Imperial Capital]

Correct?

[Damon Hininger, President and Chief Executive Officer]

Probably five – probably additional 500, which is maybe…

[David Garfinkle, Chief Financial Officer]

Pretty much the remaining population.

[Damon Hininger, President and Chief Executive Officer]

Yes. Maybe a little higher, maybe 700, but I’d say yeah. 500 to 700.

[Kirk Ludtke, Imperial Capital]

Got it. I appreciate that. Thank you. And then lastly, on the ICE funding, its funded ICE is funded for 34,000 detainees. Currently, you said the population I think was 24,000 and we’re coming up…

[David Garfinkle, Chief Financial Officer]

That’s correct.

[Kirk Ludtke, Imperial Capital]

Into a budget process. Has Congress ever not funded ICE?

[David Garfinkle, Chief Financial Officer]

Oh gosh. I’ve been with company 30 years and I’d say, no, I don’t remember ever not getting funded. Again, the funding levels have gone up and down over the years. But yes, I’ve never seen a situation where they haven’t fund ICE for detention capacity. And I guess, one thing, is not to your question, but I do want to kind of elaborate on point made earlier, even though they’re funded 34,000 [ph] ICE was required to spend a lot of money in kind of non-related detention capacity expenses this fiscal year and that was all COVID-related.

So, we do think that, the nationwide number of 24,000, 25,000 the reason that’s lower than the actual funded amount is just because they had to kind of take money from that account that’s used for detention capacity and spend it for other corporate related expenditures, but anything you’d add to the Dave?

[David Garfinkle, Chief Financial Officer]

Yes, no, I was – going back to the earlier question, I have been tracking the funding levels, detention – funding levels for ICE since 2007 back then it was 27,500 and it’s gone up and it’s, it was around 34,000 throughout the Obama Administration, which is – when higher during the Trump Administrations come back down. So as far as funding for ICE goes, no, I mean, it used to be INS, but it’s been funded since, however long that agency has existed.

[Kirk Ludtke, Imperial Capital]

Got it. Thank you. Thank you very much.

[David Garfinkle, Chief Financial Officer]

Yes, sir.

[Operator]

And we’ll take our next question from M. Marin with Zachs. Please go ahead.

[M. Marin, Zachs]

Thank you. So, I’d like to follow up on one of the questions you received earlier on staffing and with wage inflation, impacting you and impacting so many others, across the board in lots of sectors, do you think longer term there might be an opportunity to reduce the ratio of staff to occupancy either through, I don’t know, enhanced training of staff or other measures.

[Damon Hininger, President and Chief Executive Officer]

Yes. Good question. I guess, the way I’d answer it is that, there are some things that, over time have improved staffing, technology as an example, but I’d say the biggest impact is the way we design facilities. And so look at it from this perspective, operational costs wise about two-thirds of operational cost. If you look at P&L for facility is salary and benefits. And so we take a lot of time on the front end when we design facility.

In some cases we even remodel or maybe reconfigure facilities to make it most staff efficient, where, there’s clean lines of sight. It’s a very safe, very open lot of natural lighting, but also helps us on the staffing levels. And so that’s been kind of goal number one, when we design new facilities that we own and operate, but also it’s been a big catalyst for the, solutions we’ve done on this – on the property side, because we can save, in the case of Kansas a couple years ago, I mean, we saved them almost $18 million annually on operating cost for salary and benefits just because we designed a much more efficient facility from a staffing perspective. But anything add to that, Dave?

[David Garfinkle, Chief Financial Officer]

Yes, I can take of two facilities that we renovated this year that would redesign the facility to add additional populations without a commensurate increase in staffing. So that’s how you really get the efficiencies, but as I think, that most of our contracts have required staffing patterns. And so those aren’t decisions that we make in a vacuum, that’s always a collaborative discussion we have with our government partners.

[M. Marin, Zachs]

Okay. Thank you for that answer. One other question, which is from an ESG perspective, where are you right now regarding some of the training and other programs that you are generally offer in the facilities have things returned to more normalized pre-COVID level?

[Damon Hininger, President and Chief Executive Officer]

Yes. Great question. And I would say yes pretty, pretty darn close. I mean, we have resumed, in-person training, I guess for several, several months for all the required training that we do pre-service, or in-service at our facilities, but also our national I’d say program like course of a university, those have resumed to be back in-person. And then in fact, we actually had our leadership conference in Tampa last week for all of our facility leaders, where there was a lot of training, within those sessions. So yes, I’d say we’re virtually no [indiscernible]. I mean, we were back kind of back in-person kind of regular sessions and training both at the national level and also at the local level. Anything add to that Dave?

[David Garfinkle, Chief Financial Officer]

No, I mean, they’re in the early parts of the pandemic, we kind of had to shut those things down. Our training department really got creative and started doing our training CoreCivic University virtually, but as Damon mentioned now, we’re back to in-person sessions.

[Damon Hininger, President and Chief Executive Officer]

And I will say, I don’t know if this is part of your question too. You noted it with ESG connection, but I’d say we’re pretty darn close the same also on in facility programming, education, vocation, whatnot. I mean, so, I think we’re pretty much back to normal on that front. Again, we use some technology on the front-end with tablets and other curriculums that we could deliver through those platforms. But I’d say we’re pretty much back to normal now on that front too.

[M. Marin, Zachs]

Okay. Thank you.

[Damon Hininger, President and Chief Executive Officer]

Thank you.

[Operator]

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

[Ben Briggs, StoneX Financial]

Good morning, I guess, good afternoon guys. And thank you for taking the questions. I wanted to touch on the McRae correctional facility sale. So the 66,000 of bed that you got for that facility comes to a rough, if you extrapolate that out, it comes to roughly $4.7 billion evaluation for the real estate. Can you talk a little bit about that? And while there’s obviously going to be some variability in valuation from facility-to-facility, do you think that 66,000 a bed metric is about right, generally speaking, and is that at the high or low end of new build replacement value?

[Damon Hininger, President and Chief Executive Officer]

Yes. Great, great question. So a couple answers there, and again, I’ll tag team of Dave on this a little bit, but we think that’s a great deal for Georgia. I mean, if they went out to build a brand new facility today, based on this construction environment and also cost materials, I would venture a guess that that’s probably going to be a 100,000 per bed, maybe even a little higher. So it’s a great transaction for Georgia, but you look at from our side. So I mean, this facility that we’ve had for 20 years, so we’ve built a brand new around 2001, 2002.

So it’s a 20-year old asset, but its decades younger than probably the average age of Georgia’s currently current inventory that they publicly operate. So again, great, great solution where they get a new more modern facility at a great rate. So, I think to answer your question, 66,000 per bed, we think that’s a very fair deal for both us and State of Georgia. But I think, looking at kind of replacement value and the cost of real estate, that’s probably, I don’t know if it’s – I’d say maybe kind of mid, what would you say?

[David Garfinkle, Chief Financial Officer]

Yes, certainly if they are constructing new facility, that themselves, it’s going to be way north of that. Again, it’s a 20 year old asset, so that, that accounts for some of the difference, but I think still it’s probably $150,000 a bed minimum. But I would add, there’s nothing unusual about that facility, as Damon mentioned, 20 years old, it’s about the same age as the average age in our portfolio. So, we think it’s very representative of the correctional assets that we own across the country, providing a good proxy for that, $4.7 billion of real estate. And if you back out our net debt as Damon described in his remarks, you end up with a stock price of around, $29, $30 a share, if you just extrapolate the, that price per bed.

[Damon Hininger, President and Chief Executive Officer]

One thing I would add too, it is politically really, really hard for jurisdiction, especially a state jurisdiction to build a new facility right – for obvious reasons. And so we again thinking that we’ve got newer or more modern facilities that we either could sell again, not looking to do this transaction quite frequently, as I mentioned earlier, or lease like we’ve done, through a lot of different states here the last couple of years or potentially do a, properties in Kansas. Again, we think not only these opportunities to sell, but also lease just really shows and how difficult it’s for a jurisdiction to do it themselves, just shows again how valuable our real estate is.

[Ben Briggs, StoneX Financial]

Okay. Yes. I appreciate that. That is that’s great color, especially on that, potential a $100,000 replacement value, our new build value. And then the second question for me, basically on the same subject is, your press release says $130 million sounded to me like that was gross proceeds. Can you just give any color on the net proceeds, net of transaction costs in the like?

[Damon Hininger, President and Chief Executive Officer]

Yes, there’d be very, there’s no broker, so it’d be very, the net proceeds would be very close to except for, taxes. So apply a tax rate that we will have to pay taxes on the gain. So the net proceeds will probably be a $105 million, $110 million after we satisfy taxes on a capital gain.

[Ben Briggs, StoneX Financial]

Okay, perfect. Thank you. That’s great caller. I appreciate the time. That’s all the questions for me. I’ll pass it on from here.

[Damon Hininger, President and Chief Executive Officer]

Thank you.

[Operator]

And that concludes today’s question-and-answer session, and it also concludes today’s call. Thank you for your participation and you may now disconnect.