CoreCivic Inc

NYSE:CXW

Earnings Call Transcript 2021-Q3

[Operator]

Good morning. My name is Eli 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 the CoreCivic's Third Quarter 2021 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speaker’s remarks, there will be a question-and-answer session. [Operator Instructions]

Thank you. I would now like to now 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]

Thank you Eli. 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 third quarter 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 third quarter 2021 earnings release issued after market yesterday and in our SEC 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 quarterly supplemental financial data report posted on the Investors page of our website corecivic.com.

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

[Damon Hininger, President & Chief Executive Officer]

Thank you Cameron. Good morning, everyone and thank you for joining us today for our third quarter 2021 earnings conference call. Going to our agenda for the call, we will provide you with a breakdown of our third quarter financial performance; 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 our continued response to the COVID-19 pandemic. Following my remarks, I will turn the call over to our CFO, Dave Garfinkle who will review our financial results in greater detail.

Our third quarter revenue of $471.2 million, represented a 1% increase over the prior year quarter despite the sale of 47 non-core real estate assets within our property segment in multiple transactions between December 2020 and June 2021 and our decision to exit two managed-only contracts with local governments in the State of Tennessee during the fourth quarter of 2020. And in the five quarters, since we announced the change in our capital allocation strategy we have substantially improved our credit profile, reducing our net debt balance by approximately $730 million during a time of unprecedented challenges.

We remained committed to reaching and maintaining a total leverage ratio, or net debt to adjusted EBITDA of 2.25 times to 2.75 times. Using the trailing 12 months ended September 30, 2021, our total leverage ratio was 2.7 times. Just one year ago, our total leverage ratio was at 4.0 times, so we have made significant progress. And the last time our total leverage ratio was below three times was in 2012, nine years ago.

While we have touched the high-end of our targeted leverage range, we remain committed to continue to reduce debt to ensure we remain comfortably within the range. Our EBITDA has shown to be durable since the beginning of the pandemic. But there are many other factors that can cause our net leverage ratio to fluctuate quarter-to-quarter such as changes in our net cash balance due to semi-annual interest payments on our debt, capital expenditures or changes in working capital.

We continue to believe our capital allocation strategy is the most prudent approach to position 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 partners.

I believe, this is evidenced, by our recent $225 million unsecured bond issuance which priced nearly 100 basis points lower, than the bonds we issued back in April of this year. However, within the next few quarters, we could also be in a position to shift our capital allocation strategy to one that once again returned to a portion of our cash flows to our shareholders and less aggressively de-levers.

We believe the valuation of our equity remains well below its fair value. And we feel strongly that once we achieve our debt reduction goals, we could create substantial value for our shareholders by repurchasing shares.

In 2009, one of my first acts as CEO was to seek authorization from our Board of Directors for an equity repurchase program. So I have a full appreciation of the potential value creation that the current stock presents.

Fully appreciating the potential opportunity we have further progress to make with our current debt reduction strategy. We continue to see criminal justice related populations meaningfully below their pre-pandemic levels.

The declines have been mostly been due to reduction in new intakes, rather than early releases. Governments have acted faster to transfer certain residents assigned to our reentry facilities to non-residential statuses such as, furloughs, home confinement or early leases to create additional space for enhanced social distancing within our facilities.

However, during the third quarter we did see many of our state customers increased their utilization of our facilities which contributed to modest increases in our occupancy compared with the prior year quarter.

Our safety segment's occupancy was 73.2% in the quarter, an increase of 110 basis points compared with the prior year quarter. And our community segment's occupancy was 56.4%, up 180 basis points.

As courtroom operations gradually reopened and operations normalized, we anticipate this trend in utilization to continue. And with that, we are leaning way forward, on increasing our staffing levels in anticipation of higher utilization rates of our partners.

This of course will likely have a material impact on margins, as we go into 2022. Normalized Funds from Operations or FFO for the third quarter was $0.48 per share, a decline of 8% compared with the third quarter of 2020.

However, this decline was primarily driven by our decision to convert to a taxable C Corporation, effective January 1st 2021 from a REIT. We have added disclosures in our third quarter supplemental financial information document, available now on our website, which provides our pro-forma results for 2020, reflecting income taxes -- income tax expense excuse me, by applying our estimated tax rate to pre-tax income in the prior year.

When compared to pro forma results for the third quarter of 2020, our adjusted earnings per share normalized FFO per share and AFFO per share increased 33%, 9% and 15% respectively.

Our adjusted EBITDA of $100.9 million increased 7%, compared to the third quarter of 2020. And again, this is after the sale of 47 non-core assets since the end of the third quarter of 2020.

Dave will provide greater details about our third quarter financial results, including reconciling between our GAAP and normalized results, following the remainder of my comments. We will start our operational and business development discussion with a brief update on the impact of the COVID-19 pandemic and our ongoing response.

While the rate of positive cases around the nation was significantly increasing due to the delta variant during the third quarter, we only experienced a small temporary increase in positive cases at some of our facilities.

The most substantial impact of the emergence of the delta variant was that, it temporarily slowed the timeline for normalizing facility operations to remove various protocols that were enacted in response to the pandemic.

As we moved towards normalized in operations, the most substantial challenge in today's environment is attracting and retaining qualified employees.

No different from our government partners' own correctional systems, the current employment market has caused staffing challenges for us at many locations across the country. We have responded to the challenge by aggressively developing new and creative hiring and retention strategies. And be in the private sector and a multi-state national employer, we have a lot of tools we can deploy in this environment. These include increasing wages, sign-on and retention bonuses and multiple other programs that can increase engagement, a sense of shared mission and overall job satisfaction.

Our government partners have been very collaborative in this effort by supporting our request for per diem increases that reflect above average wage inflation in current market. Across the company this year, we have provided the largest wage increases in my 12 years as CEO. And we are committed to utilizing all necessary resources to address this challenge.

We are also following closely the recent vaccination mandates issued by various states and the federal government, including the September 9, 2021 executive order on ensuring adequate COVID safety protocols for federal contractors. We are working diligently evaluating the new guidance being received from our government partners and ensure we are positioned to fully comply.

For our inmate, detainee and resident populations, we do not have the ability to mandate vaccinations. Just as we've seen in our communities, there has been some hesitancy for many to accept the vaccine. So it should come as no surprise that the rate of vaccination acceptance is similar to that of the general public. We continue to provide educational resources to all our residents in order to encourage more to get vaccinated.

I will move next to discuss some recent federal and state level business development updates. We are continuing to evaluate the impact of the executive order signed by President Biden issued in January that directed Attorney General to not renew Department of Justice contracts with privately operated criminal detention facilities. Two agencies of the Department of Justice utilized our services, the Federal Bureau of Prisons or BoP; and the United States Marshal Service or USMS.

As a reminder, the BoP takes custody of inmates who have been convicted for federal crimes and the USMS is responsible for prisoners who are awaiting trial in Federal Court. The BoP has experienced a significant decline in inmate population since 2013 and simply does not have as much of a need for prison capacity from the private sector. The decline in BoP populations has intensified by COVID-19.

We currently have one prison contract with the BoP, accounting for approximately 2% of our total revenue. Marshal Service populations have remained relatively consistent in recent years, so their capacity needs remained unchanged. In fact, nationwide Marshal population has increased over the past year.

We continue to believe that the Marshals do not have sufficient detention capacity to satisfy their current needs without much of the capacity we provide. We began the year with four contracts with the Marshals that expire in 2021. In the first half of the year, we are able to enter into new contractual arrangements for our Northeast Ohio Correctional Center and Crossroads Correctional Center in Montana to remain operational and served various government partners where both facilities previously had direct contracts with the Marshals.

At the end of September of 2021, our contract with the Marshals at our 600 bed West Tennessee detention facility expired and the federal detainee populations were transferred to alternative locations, including approximately 200 to our Tallahatchie County Correctional Facility in Mississippi.

We have elected to retain our staff from the West Tennessee Detention Facility as we pursued an active procurement for the facility with an existing government partner. The only remaining Marshals contract I have yet to discuss is that our 1,033-bed Leavenworth Detention Center expiring in December of 2021. Of note, we are currently in discussions with other potential government partners to utilize the Leavenworth facility in the event that we are unable to reach a solution that enables the Marshal Service to fulfill its mission at this facility.

Our third federal partner is Immigration and Customs Enforcement, or ICE, which is not impacted by the previously mentioned executive order. They continue to be the government partner with the most significant impact from COVID-19 on their capacity utilization. However, recent activity along the Southwest border has caused significant volatility in their utilization levels.

Nationwide, ICE detainee populations doubled during the first half of 2021, and we have experienced a similar utilization increase at our facilities under contract with ICE. During the third quarter of 2021, ICE detainee populations remained relatively flat. As a result, our facility utilization levels continue to remain materially below historical averages.

The largest driver of their lower utilization levels has been the enactment of Title 42 since March of 2020, which prevents nearly all asylum claims at the country's borders and ports of entry in order to prevent the spread of COVID-19. Instead Title 42 allows individuals apprehended at the Southwest border to immediately be expelled to Mexico or the individual's country of origin.

Administrative changes and court decisions have occurred since the enactment of Title 42, which have enabled unaccompanied minors and some family units to enter and remain in the United States while their immigration cases are adjudicated.

As I discussed last quarter, these changes have essentially no impact on the demand for our services by ICE, because we do not house unaccompanied miners in any of our facilities. And our one facility with family mission is provided to ICE on a fixed price basis.

We primarily provide ICE with detention capacity for adult populations. And it is unclear when Title 42 will no longer be applied to adults. Certain factors, such as, criminal histories or previous deportations, may compel the government to keep individuals in custody instead of applying Title 42. These situations appear to be the primary driver of the increase in ICE utilization we have experienced this year.

Whenever Title 42 is receded, we believe there will be a significant surge in the need for detention capacity. Our facilities support ICE for providing safe appropriate housing and care for individuals as the agency works through the various processes associated with an individual's immigration case, deportation 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. 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.

Finally, we know there has been a great deal of coverage of a minimum wage ICE detainee lawsuit faced by our largest competitor in Washington State. We don't have a facility in Washington. And so we are subject to litigation-related to the Washington minimum wage statute.

We do have a pair of similar lawsuits in California, but those are both stayed while one of them is on appeal in the 9th Circuit. We don't have trial dates scheduled for those and the timing of any future litigation activity is uncertain.

We don't generally comment on litigation. And this will be my only comment on this subject during this call. But, as our competitor has pointed out, very similar litigation has been dismissed and that dismissal has been upheld on appeal by the 4th Circuit Court of appeals.

We also have other litigation around the US related to the ICE Voluntary Work Program or also known as VWP, but those lawsuits don't raise minimum wage claims. The VWP is an ICE contract requirement. And as the VWP's name suggests, it's voluntary.

Detainees aren't forced or cursed to participate in the VWP. VWP assign has provide an opportunity to avoid idleness, improve morale, learn new skills and earn money at or above the ICE prescribed minimum daily rate.

Moving now to state level developments and opportunities. I will first mention our new lease agreement with the State of New Mexico for our 596-bed Northwest New Mexico Correctional Center that we announced in September. The new lease has an initial term of three years but includes automatic extension options that could extend the lease term through 2041.

The new lease commenced on November 1st and we successfully transitioned operations of the facility to the state. So, you will see that property reclassified from our safety segment to the property segment during the fourth quarter.

We continue to pursue an opportunity with the State of Arizona which has an active procurement for up to 2,700-beds for medium and close security inmates. The state intends to close its oldest prison facility in Florence due to its outdated condition operational and maintenance cost concerns. Instead of deploying taxpayer funds to build new capacity, the outstanding request for proposal will allow the state to evaluate alternative capacity available from the private sector. We have responded to the procurement and believe the State Department of Corrections Rehabilitation and Reentry is poised to move quickly on the procurement.

The only other opportunity I will mention is in Hawaii. The state continues to determine the best approach to replace the Oahu Community Correctional Center, the largest jail facility in the state. The existing facility has exceeded its useful life and the state is in need of a new modern facility to meet the current meet its current and future needs.

We remained actively engaged with the state regarding various solutions we could deliver and we anticipate a competitive procurement in 2022 to replace the current facility.

Two final comments before I turn the call over to Dave. First, Newsweek recently released their list of America's Most Responsible Companies for 2021. And we were so very honored to learn of our placement on this list.

At the beginning of their report, they note and I quote "As this difficult year comes to an end, it's good to remember that we're all part of a community; neighbors, family, friends, first responders, we depend on, appreciate, and hope to be helpful to each other. Many corporations also step-up. They care about being good citizens and give back to the communities they operate in."

Their ranking goes through a rigorous four-step process starting with a review of the top 2000 public companies based on revenue. Then afterwards a detailed review of company ESG reports and the relevant KPIs along with a reputational survey of 7,500 US residents. This list is a who's who of companies I have long observed, admired, and have inspired to emulate. And I am deeply grateful and proud of every single CoreCivic team member for their tireless passion for our mission that has allowed us to achieve this well-deserved recognition.

Finally, we shared last month that CoreCivic Co-Founder and industry visionary T. Don Hutto passed away on October 22nd, 2021. Known as a fierce advocate for correctional professionals and for the safety and well-being of justice involved individuals, Don was instrumental in the creation and implementation of industry-recognized standards at greatly improved conditions for incarcerated people and those who care for them. He will be missed by everyone who knew him and remember truly as a hero in the field.

Prior to co-founding CoreCivic, then known as Corrections Corporation of America, with businessman Tom Beasley in 1983, Don had a long and prestigious career in the corrections industry including as Commissioner of Corrections for the State of Arkansas and later the Director of Corrections for the Commonwealth of Virginia.

Don's rise to industry leader came through a time of uncertainty in America. Not long before he began serving as the Commissioner of Corrections in Arkansas, the landmark hold for versus solver decision declared the entire State of Arkansas to prison system unconstitutional.

At that time, there were over 40 states that had some level of control or oversight by the federal government due to in humane conditions. This need for higher standards is what sparked the birth of CoreCivic and ushered in improved conditions across the country.

Don's experience gave him extensive insight and to modernized the systems to emphasize rehabilitation and education and he used that experience at CoreCivic. Don was absolutely the right person at the right time to create a better way and lead our profession into the modern era. And CoreCivic is so very grateful for his leadership for our wonderful company. But I am also personally grateful for his mentoring and friendship with me.

I'll now turn the call over to Dave to provide a more detailed look of our financial results in the third quarter of 2021 as well as factors that could affect our business for the remainder of this year. Dave?

[David Garfinkle, Chief Financial Officer]

Thank you Damon, and good morning everyone. In the third quarter of 2021, we reported net income of $0.25 per share, or $0.28 of adjusted earnings per share, $0.48 of normalized FFO per share, and AFFO per share of $0.47. Adjusted and normalized per share amounts exclude an impairment charge of $5.2 million for pre-development activities associated with the Alabama project that we are no longer pursuing, as disclosed last quarter.

Financial results in 2021 reflect a higher income tax provision under our new corporate tax structure compared with the prior year when we elected to qualify as a REIT. For illustration purposes in the supplemental disclosure report posted on our website, we present the calculations of adjusted net income, normalized funds from operations and AFFO for each quarter and full year of 2020 on a pro forma basis to reflect such metrics applying an estimated effective tax rate of 27.5%.

Adjusted net income per share in the third quarter of 2021 of $0.28 compares to $0.21 on a pro forma basis applying this estimated effective tax rate for the third quarter of 2020 while normalized FFO per share of $0.48 compares to $0.44 on a pro forma basis for the prior year quarter, and AFFO per share of $0.47 compares to $0.41 on a pro forma basis for the prior year quarter.

Adjusted EBITDA, which is obviously before income taxes was $100.9 million in the third quarter of 2021 compared with $94.6 million in the prior year quarter. The growth in adjusted EBITDA and the aforementioned per share metrics were achieved despite the sale of 47 properties since the end of the third quarter of 2020 and the execution of numerous refinancing transactions that were collectively diluted for the quarter, as we paid down low-cost, short-term, variable rate, bank debt with the proceeds from the property sales and issued new unsecured senior notes that have higher interest rates than the debt we repaid.

The property sales and refinancing transactions lowered our overall debt levels extended our weighted average debt maturities and re-positioned the balance sheet for long-term success. The 47 properties that we sold accounted for $7.3 million of EBITDA in the prior year quarter.

Therefore excluding these sales, adjusted EBITDA increased $13.6 million, or 16% from the prior year quarter, demonstrating strong core operating results. Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, but increased to 72.1% in the third quarter of 2021 from 70.9% in the prior year quarter and increased from 71.6% in the second quarter of 2021. The impact of COVID-19 began in the second quarter of last year, 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 prevent the spread of COVID-19.

As the federal and state court systems have begun to return to normal operations and as the number of undocumented people encountered at the southern border has increased, the utilization of our facilities has increased. Operating margins have trended similarly and were 27.2% in the third quarter of 2021 compared with 23.8% in the prior year quarter and 26.8% in the second quarter of 2021.

The increase in our operating margins reflects a continuation of lower cost trends combined with higher occupancies. Many of our facilities continue to operate with pandemic-related capacity and operating restrictions that are modifying the services that we are able to provide impacting margins compared with normal operations.

Further, staffing in this challenging labor market has become increasingly difficult. And we have provided annual, as well as additional off cycle, wage increases and special incentives to help address depressed staffing levels. Conversely our government partners are experiencing the same staffing challenges, which has contributed to some of the per diem increases we were able to achieve as more budget dollars are allocated to help offset the wage increases.

Turning to the balance sheet. As of September 30th, we had $456 million of cash on hand and $786 million of availability on our revolving credit facility, which matures in 2023. During the third quarter of 2021, we issued an additional $225 million aggregate principal amount of 8.25% senior unsecured notes due 2026. The issuance constituted a tack on to the original 8.25% senior notes we issued in April, 2021, a $450 million aggregate principal amount. The additional 8.25% senior notes were priced at 102.25% of their face value, resulting in an effective yield to maturity of 7.65%. While we believe this effective yield is still high relative to the stability of our cash flows and credit ratings, it compares favorably to the issuance in April when the notes were priced at 99% of face value, resulting in an effective yield to maturity of 8.5%.

As a reminder, the net proceeds from the April issuance were used to fully repay $250 million of 5% senior unsecured notes that were scheduled to mature in 2022 and to repurchase in privately negotiated transactions, $176 million of the $350 million outstanding principal balance of our 4.58% senior unsecured notes that are scheduled to mature in 2023.

We continue to be steadfast on our debt reduction strategy paying down $188 million of additional debt during the third quarter alone, net of the change in cash including the $112 million outstanding balance on our revolving credit facility, which remains undrawn today. Subsequent to quarter-end, we repaid $90 million of the outstanding balance on our Term loan B reducing its outstanding balance to $133.4 million.

Including the repayments of the mortgage notes associated with the aforementioned sale of non-core assets during the nine-months ended September 30 2021, we have reduced our total net debt balance by over $500 million and our net recourse debt balance by $334 million.

Our leverage measured by net debt-to-EBITDA was 2.7 times using the trailing-12 months down from four times, using the trailing-12 months at the end of the third quarter of 2020 when we announced our revised capital allocation strategy and decision to revoke our REIT election.

As Damon mentioned, the last time our leverage was below three times was 2012, which was the last year we operated as a taxable C Corporation prior to our conversion to a REIT in 2013. Notably 2012 followed an aggressive stock repurchase program in 2009 through 2011 when we repurchased over $0.5 billion of stock or equal to half our market capitalization today. As a REIT from 2013 through 2020, we could not implement a meaningful share repurchase program.

It is possible we could slip slightly above our targeted leverage ratio of 2.25 times to 2.75 times in the fourth quarter when we are scheduled to make almost $40 million of semiannual interest payments on our unsecured notes about $15 million in social security payments that were deferred under the Cares Act and capital expenditures consistent with our previous guidance. But we expect to be sustainably within the range on a quarterly basis thereafter.

We have made great strides in enhancing our capital structure by accessing the debt capital markets, addressing near-term maturities, selling non-core assets, reducing debt and positioning the balance sheet to enable us to take advantage of growth opportunities and return capital to shareholders. These steps have enabled us to reduce our reliance on bank capital. And we intend to address the 2023 maturity of our bank credit facility next in order to provide us with the clarity needed around our future liquidity and to ensure the implementation of our capital strategy remains on track. Our intention is to reduce the size of our bank credit facility and extend the maturity, yet enabling us to continue operating with optimal flexibility and cost efficiency.

We continue to get increasing clarity around many of the uncertainties that existed when we suspended our financial guidance and currently anticipate providing full year 2022 guidance in February when we report our financial results for the fourth quarter and full year 2021.

I've already highlighted some of the factors experienced in the third quarter that could have an impact on our financial results for the fourth quarter. These include the anticipation of modestly higher occupancy levels as the country continues to emerge from the pandemic. Higher demand for our detention facilities could also result from lifting title 42, the health care policy causing the southern border to remain effectively closed in an effort to prevent the spread of COVID-19.

However, the timing of when the federal government ends Title 42, which is evaluated every 60 days is difficult to predict and therefore likely won't have a material impact in the fourth quarter. We also anticipate higher staffing levels, as we returned our correctional detention and reentry facilities to normalized pre pandemic operations. Longer term, as we look toward 2022, we will endeavor to higher in anticipation of increases in occupancy, which could have a negative impact on our margins at least until we experience further increases in occupancy

We continue to anticipate a challenging labor market which could require us to provide further wage increases and other incentives in certain markets necessary to attract and retain qualified staffing levels. Recall however, that our federal facilities -- at our federal facilities, we are entitled to equitable adjustments to per diem rates to compensate us for any increases in wage rates mandated by the Department of Labor providing a potential hedge against increasing wage rates at such facilities.

By signing a new contract with Mahoning County at our Northeast Ohio Correctional Center and expanding the contract with Montana at our Crossroads Correctional Center, we have successfully resolved two of the four 2021 contract expirations with the US Marshal service. The contract with the US Marshals Service at our 600-bed West Tennessee Detention Facility expired September 30th and was not renewed. As we previously disclosed, we responded to a request for proposal to utilize the West Tennessee facility and we remain optimistic in signing a new contract.

We have temporarily redeployed most of the staff at this facility to other facilities we operate, while we negotiate the contract in order to provide minimal disruption in ramping back up operations. But depending on the outcome and timing of a decision as well as the pace of utilization, we could experience a reduction in earnings in the fourth quarter of up to $0.02 per share compared with the third quarter.

Our last contract with US Marshals expiring in 2021 is at our 1033-bed Leavenworth Detention Center in Kansas which expires in December. We are in discussions with other potential partners to utilize the Leavenworth facility in the event we are unable to reach a solution that enables the US Marshals to fulfill its mission at this facility. Since the contract doesn't end until the end of the fourth quarter, however, we don't expect a material impact in the fourth quarter, even if the contract is not renewed.

During the third quarter, we responded to a request for proposal from the State of Arizona to care for up to 2,700 inmates the state plans to transfer from a facility owned and operated by the Arizona Department of Corrections Rehabilitation and Reentry. We are optimistic in a contract award near the end of the year, which would obviously be more impactful in 2022.

Compared with the third quarter, we expect higher interest expense as a result of the additional issuance at the end of September of $225 million of our 8.25% senior notes, somewhat offset by the $90 million repayment in October of our Term Loan B which has a total effective rate of 7%. We currently estimate our income tax expense to reflect a normalized effective tax rate of 27% to 28%, although we estimate our cash taxes to be approximately 20% for the year because of net deductions for special items.

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

[Operator]

Thank you. [Operator Instructions] We'll take our first question from Joe Gomes from NOBLE Capital. Joe, please go ahead.

[Joe Gomes, NOBLE Capital]

Can you hear me?

[Damon Hininger, President & Chief Executive Officer]

Yes, we can now, Joe. Thank you.

[Joe Gomes, NOBLE Capital]

Oh, okay. I previously said good morning.

[Damon Hininger, President & Chief Executive Officer]

Oh, good morning, Joe. Sorry, we did not hear you. Good morning, Joe.

[Joe Gomes, NOBLE Capital]

Good morning, thanks for taking the question. So really nice job on achieving the target leverage ratio early in my opinion. It would seem to speak not only to your focus on deleveraging, but also the stability of the business overall. You did mention you wanted to see further progress to make on the debt reduction before you started implementing some of the other capital allocation programs such as share repurchases. I was wondering, if you might give us a little more color as to how much progress you're looking at what's your thought and what you want to see before you might implement something like a share repurchase program?

[Damon Hininger, President & Chief Executive Officer]

Yes. Great question, Joe. This is Damon and thank you for this. So yes, we're -- just eye lash below the target range as you know with the numbers we released last night. So -- and Dave, I think did a really good job of kind of walking through some of the puts and takes that I think we'll see both in the fourth quarter of this year going to early next year. So it still feels like, it's -- I think we've said previously, it still feels like that we're probably a couple of quarters away to where we could comfortably kind of be embedded within that range. So say a different way. Here we are -- start of the fourth quarter, could that be kind of second third quarter next year? That's a possibility. Again, we're really, really pleased with the progress. We've had great alignment from the management team on kind of working on various activities. Obviously, that drives that number in a positive. Notably the transaction we did early this year with the divestment of the non-core assets. So anything you could add to that, Dave?

[David Garfinkle, Chief Financial Officer]

Yes. And the credit facility as I mentioned in my script, matures in 2023. We'd really like to amend and extend that credit facility get that behind us. That will give us the clarity on liquidity and capital resources going forward. I think, we've done a really, really good job positioning the balance sheet to return capital to shareholders. We've addressed the short-term maturities for several years out now. So, that risk has really been limited from the balance sheet completely. So, getting through the credit facility would in my mind give us a lot more clarity to move forward and that would fall in-line with the timing that Damon mentioned.

[Joe Gomes, NOBLE Capital]

Okay. Thanks for that insight. And on the vaccine mandate, I don't know how deep you can go into or what percent of the CoreCivic employees are vaccinated especially at the facilities, is there any concerns on your part that contract could get terminated if you can't get everyone to be fully vaccinated? And I know that there's a lot of confusion out there over who -- some of these mandates apply to or don't apply to. But simply does the mandate also apply to the BOP that all of their staffing also has to be vaccinated?

[Damon Hininger, President & Chief Executive Officer]

Yes. So, several questions there, Joe. This is Damon again. So, a couple of observations. One is that, we have had vaccination acceptance rates a little behind what you see kind of generally in the public, but probably no surprise here in the last probably 30 to 60 days with some of the mandates that have been required. We -- notably all the attention has really been at the federal level. But we have had some local jurisdictions that are required too. So, I gave a pretty good indication of now how to approach it. We'd be thoughtful on how we communicate to employees to give them various options not only for the vaccine, but maybe other employment opportunities. So we had a pretty good playbook before the executive order was signed at the federal level.

So we've got work to do. We're clearly working really hard to make sure we again educate our employees, advising appropriately and also leadership as they go through the process if they've got either a physical or health a combination that needs to be considered or religious combination. And again, those are policies that are well-established just because, we're a public employer.

So, we're working through that progress. I would tell you I think we are making good progress on that side. As I just said earlier, we're starting to see a pretty meaningful uptick in vaccination rates within the organization. Again, it's focused primarily on our federal contracts with ICE Marshals. And as you know we just have that one BOP contract on the safety side with McRae. So, I think again, we're making good progress. I don't know anything you add to that Dave?

[David Garfinkle, Chief Financial Officer]

No, I don't that I think covers it.

[Joe Gomes, NOBLE Capital]

And do you know that I'm assuming it would but since there's a lot of -- seems to be exceptions. Does this apply -- this mandate also apply to the BOP staff people that work there?

[Damon Hininger, President & Chief Executive Officer]

Yes. In my understanding, it’s yes. Federal employees and then federal contractors, obviously, will fall in the second bucket. So that would be the case. So I do not have -- I don't think this is your question. I do not have a sense of how they're doing it and what their levels are. But yeah, my expectation does apply to them.

[Joe Gomes, NOBLE Capital]

Okay. And you talked some detail here on the staffing environment and you've got lots of different levers that you can pull to try and help with that. But I mean, what are we talking about here in terms of increased wages or bonuses, sign on bonus, whatever other types of things that you're offering to get people. I mean in this type of environment?

Again, it's not just you guys. Almost every company, I talk to these days, has the issues with staffing and in some way shape or form. But, the corrections, is a little more difficult just in a normal time. So maybe you can give us a sense of what are you having to do out there in order to attract the staff that you needed?

[Damon Hininger, President & Chief Executive Officer]

Yeah. Great question. So we're -- to your point, we're just like everybody else in the country dealing with some level of labor challenges either public or private companies. And I've made a really conservative point this past year to talk to a lot of my peers, especially here in the national business community.

And I've gotten a few good nuggets along the way that we've play drives and used in our playbook as we think about kind of labor opportunities. But having said that, everyone I've talked to here locally, they're dealing with similar challenges, especially my friends here in the healthcare community. So I would say our playbook consists of a couple of things.

One the things that you would expect of any employer, so, looking at base salaries and wages, looking at benefits and then the whole range of incentives. If that's a referral bonus, if that's a retention bonus. And we're looking at any incentive that either we've used in the past or we're seeing used by other employers regardless of the industry that maybe transferable and helpful with our challenges.

But I'd also say -- and we've got a few proprietary things that I won't go into great detail. But we've done a couple of pilots this summer going into fall that has shown some pretty good results. So we're looking at some things. And these are things that the public side can't do. So being a private employer with a multi-state operation there's a few things that we can do pretty creatively that potentially gives us some help on the labor side.

So, what you say very clearly to our HR and operations leadership any idea they have but also anything they're seeing in kind of the larger market again with employers even outside our industry, bring it to the table and let's do analysis, let's determine the risk and reward to make a decision.

And I had a call with the Board -- our Board of Directors last week. And I was telling them that we've done about 35 or 40 kind of different actions to deal with individual facilities in certain regions that are dealing with labor challenges. And that's give you a sense in a normal year pre-COVID that would be in a category of maybe five, less than a handful.

So we're doing a lot of actions very quickly after we do some analysis to make sure our leadership at the field level has got all the tools they can to be successful in our mission. And with that, seeing, as I mentioned in my comments, potentially increased utilization from our partners to levels closer to where they were pre-COVID. So, anything you would add to that Dave?

[David Garfinkle, Chief Financial Officer]

Yeah. The number of incentives, the list goes on and on. Our HR Department is, do a phenomenal job coming up with some creative solutions. Overtime premium you're pay for experienced employee, housing, it's just a long laundry list of things that we pull out which, as Damon mentioned, these things are much more easily done in the private sector than what our public sector counterparts are able to do, because they have to get appropriations for budget purposes and special appropriation.

So things like that. And we think it actually could end up generating new businesses. Some of the state partners are having the same challenges on staffing and may end up sending some inmates to our facilities as they're not able to staff their facilities adequately. So yeah, it's all of the above.

[Joe Gomes, NOBLE Capital]

Okay, great. And one more if I may please. So you talked about the West Tennessee facility you have an RFP out there Leavenworth. You're talking to other people. I think you have five other facilities that are idled right now. If I came to in Title 42 expires and you -- we see a knee by ICE for facilities. Given the staffing challenges you just talked about I mean, how easily or how long would it take for some of these idle facilities if they were needed to actually be back up and running or do you have enough existing facilities and occupancy, excuse me, in the facilities that are currently running you think that you probably wouldn't have to worry about opening one of the idled facilities?

[Damon Hininger, President & Chief Executive Officer]

Yes. That's a great question, Joe. This is Damon again. So let me give you a couple of answers. One of which is West Tennessee and Leavenworth, even though Leavenworth is a little further down on the calendar. We have not taken any employment action relative to employees that work at those facilities. So most notably with West Tennessee, with that contract expiring in the September.

We've kept that staff and have them working not only to kind of do some maybe work around the facility, do some maybe training in anticipation of some various partners that may use facility but also they could support some other operations here within West Tennessee. And potentially we may do the same thing at Leavenworth.

But also part of your question was relative to the other facilities that may be currently vacant at the moment outside of West Tennessee. We do have some challenges globally, I would say on the labor market. So that's been well said. But I will say, again this is the benefit of being a large multi-state operator and employer. We do have a couple of markets actually where the tailwind is with us on the employment side.

And so we basically, have told every facility that turn on the spigot wide open relative to employing staff. Even if that means that they go over their kind of budgeted FTE count in anticipation that that staff then maybe could be used for other facilities, as we were potentially activating or maybe other facilities that are going through maybe increase in - and may need some additional staffing while we ramp up the staffing there locally.

So we've got -- again the good news for us again be a multi-state, we've got a lot of different options not only with programs and incentives and salaries and other things that we can do. But also we've got like, I said a few markets, where we've got the wind at our back and we can maybe over-hire a little bit and use that staff in other parts of the enterprise. Anything you add to that, Dave?

[David Garfinkle, Chief Financial Officer]

No. I think that covers it.

[Joe Gomes, NOBLE Capital]

Thanks, guys for taking the questions. I'll pass it along and let someone else ask some. Thanks again.

[Damon Hininger, President & Chief Executive Officer]

Yes sir. Thank you, Joe.

[David Garfinkle, Chief Financial Officer]

Thank you, Joe.

[Operator]

And we'll go ahead and move on to our next question from Brian Violino from Wedbush Securities. Please go ahead.

[Brian Violino, Wedbush Securities]

Yes. Thanks for taking my question. Just one quick one for me. Appreciate the color on the 2021 US Marshals contracts. I was hoping you could just remind us about the contracts coming up in 2022 and 2023 and even beyond and I guess, how you're thinking about those? And any sort of commentary around that? Thanks.

[Damon Hininger, President & Chief Executive Officer]

Yes, sir. Thank you for that question. This is Damon, again. So we've got after West Tennessee and Leavenworth, which we have talked extensively about it on this call. Only other two after that are one in Arizona, which is in 2023. And then the final one would be in Nevada, in 2025. So several years out and say a different way we have nothing next year after Leavenworth so 2023 would be the next one. So those being so far off. Really the focus for us and I'd say on behalf of the Marshals service, it has really been focused on the ones in this current calendar year. I suspect as we go into 2022, then we'll start having conversations about the one in 2023 and one in 2025.

[Brian Violino, Wedbush Securities]

Great. Thank you.

[Operator]

And we'll go ahead and take our next question from Kirk Ludtke from Imperial Capital. Please go ahead.

[Kirk Ludtke, Imperial Capital]

Good morning, guys.

[Damon Hininger, President & Chief Executive Officer]

Good morning.

[Kirk Ludtke, Imperial Capital]

I just follow-ups on a couple of topics. New Mexico, Leavenworth and then staffing. So three topics. On New Mexico, you've expressed some interest in the leasing model in the past. And this deal seems to be a step in that direction. I know you don't comment by profitability, by facility on profitability by facility. But maybe directionally, can you give us a sense for the economics of the new deal and maybe even more importantly are other states considering this option bringing operations in-house so to speak?

[Damon Hininger, President & Chief Executive Officer]

Yes, sir. Thank you. This is Damon again. I appreciate those questions. So for the first part I would say, I'm going through in my mind of all of the facilities that we've converted from safety to properties like the one you just mentioned with the New Mexico. And I would say, generally, that the return and earnings performance has been consistent with what it's previously safety if not maybe improved.

We've got a couple of situations coming to mind where you maybe had one year or two or maybe the earnings was a little stronger on the safety side versus what we did on the lease agreement on the property side, but there may be some times where it was well below. So one nice thing about these agreements and it's probably obvious point is that, it creates a lot of stability and durability and consistency from a returns perspective. And that's a big part of the allure when we're in discussions with these jurisdictions about potentially moving a facility from the safety segment over to the property segment.

And then to your last question, I would say, yes. We actually just did a review of a proposal for another existing safety operation that we're going to propose to a state for a lease. So yes, there's really good conversation and interest by jurisdictions for existing properties in the safety segment. And it may be a case where we're flipping one from a say to a federal or federal to a state. But I'd say the conversations are good and pretty robust at the moment. So anything you'd add to that Dave?

[David Garfinkle, Chief Financial Officer]

Yes. And the economics on Northwest, New Mexico, I think during the initial three-year base term, the average annual rent $3.2 million. So it's not a large facility. Although, it's $4.2 million in the second and third years of that lease, and then there's annual inflators thereafter. And that facility, I think we disclosed was operating at a loss year-to-date just due to COVID related population.

So it will actually flip that from an operating loss to a profitable agreement. And I think it will depend facility-by-facility just different dynamics in each location, but it's a stable cash flows. As you can imagine, the value you described the multiple you described with that cash flow is higher than it would be under the own and operated model where revenues are subject to ebbs and flows based on inmate populations versus a fixed multi payment and a lease arrangement.

[Kirk Ludtke, Imperial Capital]

That's super helpful. Thank you. Encouraging. On Leavenworth, I know sometimes it comes down to alternatives. What other facilities are nearby that the Marshals might utilize. And Leavenworth if I'm reading this correctly, the occupancy was 80% in the third quarter, which seems like a good sign. Do you have a sense or would you be willing to share the occupancy rates at the competing facilities or what -- the facilities are effectively competing with Leavenworth for the next contract?

[Damon Hininger, President & Chief Executive Officer]

Yes sir. So I would say, let me say, I know that they're pretty darn well. It's more in Leavenworth so I know that referral. And I would say, they're looking at, I'd say, alternatives in two buckets. One the local bucket, primarily counties. And no one again kind of Eastern Kansas, Western Missouri like I do.

I don't think there's a facility even if it's completely vacant that would be equal to size of our facility. So I think on the county side, they are really looking closely at various counties potentially provide capacity, but there clearly is not one. And it's probably -- even if you put five together, I don't know if they would be equal in vacant capacity with what we've got at Leavenworth.

Having said that, though, I know they're still looking at that very, very closely and looking at those alternatives, because some of those jurisdictions that you're looking at maybe existing partners with them. So they know those counties well, because they've had a historical relationship with them.

The other bucket, I would say is, the United States century there Leavenworth that's been there for about a century. Again that facility I know very well. It's about I think 2,000 beds total capacity. I think that's changed a little bit over the years based on maybe some reconfiguration of the capacity. I don't know to your question though what its actual population is today. My suspicion has been impacted probably like us with COVID.

I also suspect with the BOP down almost 70,000 in May since 2013, they probably have got some flexibility and moved to populations out of that facility to other BOP facilities to make capacity available to the Marshal service. So those would be the two buckets looking at counties and/or the BOP.

That BOP facility is within probably 10 minutes of our facility. So it's in very close proximity. And again, I don't know the actual population. But again, I suspect that, BOP has got some flexibility on that point. But anything you'd add to that Dave?

[David Garfinkle, Chief Financial Officer]

Just so we have had a couple of conversations with some other government partners that could back-fill it if Marshals decides to leave the facility. So, there are some things some balls in the air so to speak.

[Damon Hininger, President & Chief Executive Officer]

That's a good point. And actually I'd say, at a couple of different levels. So that's an opportunity we'll continue to look at very closely.

[Kirk Ludtke, Imperial Capital]

Great. Thank you. And then, lastly, a follow-up on the staffing question. Is there a way you can just give us a ballpark how many people you may need to add? And what the average wage rate is?

[Damon Hininger, President & Chief Executive Officer]

That would be a good question. And I can understand why you want to ask that. It probably would -- we'd all do ourselves a favor probably wait until we have guidance out in February, but we are leading towards an increase in staff. I don't know if anything you'd add to that Dave?

[David Garfinkle, Chief Financial Officer]

I don't think so. I mean, again, I think the opportunities with some government partners where you could see a surge in populations, those will be the facilities that we're focused in on, increasing staff, because you wouldn't want to lose business, because you don't have sufficient staff.

So those will be the facilities, primarily federal where we would be increasing staff. But there are some other state opportunities too where I think we would like to increase staffing levels too. So yeah, I wouldn't -- it's hard to -- I couldn't give you a number in terms of quantity, of staff, or dollar amount.

[Kirk Ludtke, Imperial Capital]

Got it. Yeah a lot of moving pieces, I understand, and I appreciate it. Thank you very much.

[David Garfinkle, Chief Financial Officer]

Thank you, Kirk. I appreciate your questions.

[Operator]

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

[Ben Briggs, StoneX Financial]

Hey guys. Thanks for taking my questions. And great job on the quarter. Kind of a follow-up I had to the previous question about facility level margins as you transfer from an own operate model to more of an own and lease model.

Are there any cost saves you guys can realized at the corporate level that are related to that just kind of with fewer operational things to manage as you transfer it to more of a landlord model?

[Damon Hininger, President & Chief Executive Officer]

Yeah. That's a great question. We've only had kind of one z two z here in the last couple of years where we've had that move from safety to property.

But yeah, I think as we go -- I don't know if any next year, but probably in the next couple of years I think if there continues to be some kind of movement of -- or that migration I should say of safety is going over the properties. And there's probably some opportunity now.

I wouldn't let's say put it in the category being largely material. But there could be a few opportunities there. I don't know anything you'd add to that Dave?

[David Garfinkle, Chief Financial Officer]

Yeah. If we had our portfolio totally converted from own and operate to one, where we're just the landlord obviously we have some decreases in the real estate staff, but more than offset reduction in the rest of the operational staff.

But I really don't see that happening. Certainly not over the next year or two like, Damon mentioned you'd have to have a pretty significant shift in the safety segment to the property segment before you'd be able to move the needle on staffing in the corporate office. And it's just -- we're not having those kind of conversations at that scale today.

[Ben Briggs, StoneX Financial]

Okay. Great. That's very helpful. I appreciate that.

[Damon Hininger, President & Chief Executive Officer]

Yeah. Thank you for the question.

[Operator]

And we'll go ahead and take our last question from M. Marin from Zacks. Please go ahead.

[M. Marin, Zacks]

Okay. Thank you. So, are there any services that you had offered pre-COVID that you're not currently offering? And would like to resume but are being hindered because of the staffing challenges you spoke about?

[Damon Hininger, President & Chief Executive Officer]

Keep me honest, here Dave. I'd say no. I mean, we did have kind of early days of the pandemic and this was kind of identical what we saw with our public sector counterparts and that was just scaling back services within our safety facilities around -- notably around programs academic vocational et cetera.

But those are starting to -- those have been I should say ramping back up and we'll continue to kind of ramp up based on occupancy within those respective facilities, but outside of that.

[David Garfinkle, Chief Financial Officer]

No. I agree. In the 2020 time period in consultation with our government partners, unfortunately had to shut down, some of those programs which is an unfortunate byproduct for the residents in our care, because obviously they need the skills training that you want to provide them so that when they get released they've got the tools to get a job and sustain living outside of a correctional facility. But most of those have been reinstated now. And so outside of those types of programs, industry trade certificates that we had temporarily shut down most of which are back operational today. I can't think of any other services that we're not performing today that we were pre-pandemic.

Okay. Thank you.

[David Garfinkle, Chief Financial Officer]

Okay. Thanks Red.

[Damon Hininger, President & Chief Executive Officer]

Thanks for the question.

[Operator]

And we actually got one more question. We'll take it from Michael Christodolou from Inwood Capital. Please go ahead.

[Michael Christodolou, Inwood Capital]

Good morning, gentlemen. I'm newer to the name. You've got a fascinating business which is clearly underappreciated. A couple of follow-on questions. You mentioned that you had a Hawaii proposal in Oahu that would be a build own operate. You mentioned there's also another RFP which is a lease only for an existing facility. Are there any RFPs on the horizon where you would envision needing to contribute equity-like was envisioned in that the Alabama project?

[Damon Hininger, President & Chief Executive Officer]

Yeah. Good question. The opportunity I alluded to a few minutes ago would not so that been an existing asset that's currently in the safety segment that potentially would go over to the property segment. If there is any investment, I'd say be relatively minor just to maybe make a few changes there for that mission in that new population. And then for Hawaii, I guess your question was outside of Hawaii. But I guess Hawaii that RFP actually won't be out we don't think until next year. And so, it's too early to tell exactly kind of what the opportunity would be and then what potentially the team would have to do or not do from an equity perspective. But outside of that, outside of kind of normal maintenance CapEx that we all talk about on a regular basis and forecast on, I don't see anything else beyond that do you Dave?

[David Garfinkle, Chief Financial Officer]

Yeah. Arizona is not a new build, so it's existing capacity. So no capital required for that opportunity. Hawaii could be -- I think they'd take the cost of $400 million to $600 million that one we would intend to finance like our Kansas project, a couple of years ago which is project-specific financing and equity -- actually Kansas was 100% debt financed. So no equity contribution on Kansas. I don't know if Hawaii we put in -- we likely have to put in some equity. But beyond that, there's nothing on the table today that would require us to put any equity capital into a new project.

[Michael Christodolou, Inwood Capital]

Okay. And then just a question on staffing and margins at the owned and operated facilities. Page 10 of 22 talks about the facilities margin through nine months, right 24% up from 22%. You've kind of signaled that if you have some higher staffing, you might have some margin impact there. But then there's some per diem increases. And I'm wondering I don't know if there's a rule of thumb, but do per diem increases happened in advance or concurrent with or in arrears of a population increase?

[David Garfinkle, Chief Financial Officer]

Yeah. I'd say most of our per diem increases go in to place July 1 in connection with the fiscal year of our state government customers. So this was a good year for per diem increases. Those are reflected in the third quarter results. Our federal per diem increases are usually on the contract anniversaries so they could be throughout the year. But so as you look at where we would be seeing increases in populations, if they're at the federal level, they're probably going to be -- most of them would be for under existing contracts. So I wouldn't anticipate per diem increases in advance of new populations coming in. That's typically at the end of the contract year. For any new contracts like the one we're describing at West Tennessee, we're negotiating the per diem upfront. So you know going into the new contract with the per diem is going to be and you build in inflators into the contract as…

[Michael Christodolou, Inwood Capital]

Thank you very much, commend your execution and your capital allocation journey that you're embarking on.

[Damon Hininger, President & Chief Executive Officer]

Good. Thank you.

[David Garfinkle, Chief Financial Officer]

Thank you so much.

[Operator]

And with that, that does conclude our question-and-answer session. Also, that does conclude today's call. Thank you for your participation. You may now disconnect.