Geo Group Inc

NYSE:GEO

Earnings Call Transcript 2024-Q1

[Operator]

Good day, and welcome to the GEO Group First Quarter 2024 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Pablo Paez, Executive Vice President of Corporate Relations. Please go ahead.

[Pablo Paez, executive]

Thank you, operator. Good morning, everyone, and thank you for joining us for today's discussion of the GEO Group's First Quarter 2024 Earnings Results. With us today are George Zoley, Executive Chairman of the Board; Brian Evans, Chief Executive Officer; Wayne Calabrese, President and Chief Operating Officer; Shayn March, acting Chief Financial Officer; and James Black, President of GEO Secure Services. This morning, we will discuss our first quarter results as well as our outlook. We will conclude the call with a question-and-answer session. This conference call is also being webcast live on our investor website at investors.geogroup.com. Today, we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and supplemental disclosure we issued this morning. Additionally, much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the safe harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q and 8-K reports. With that, please allow me to turn this call over to our Executive Chairman, George. George?

[George Zoley, executive]

Thank you, Pablo, and good morning to everyone. Thank you for joining us in our first quarter 2021 earnings call. I'm pleased to be joined today by our senior management team. During today's call, we will review the first quarter financial results and the operational milestones for each of our business segments, provide an update on our recent refinancing transactions and our continued efforts to enhance long-term value for our shareholders and discuss our financial guidance and outlook for the balance of the year. During the first quarter, our diversified business units continued to deliver strong operational and financial performance. This morning, we reported first quarter revenues of approximately $606 million and GAAP net income of approximately $23 million. We also reported first quarter adjusted EBITDA of approximately $116 million. Looking at our key quarterly trends, revenues for our owned and leased secured facilities increased by approximately 7% from a year ago. This increase was driven primarily by year-over-year population increases across our ICE facilities. Utilization in our ICE facilities averaged approximately 13,000 beds during the first quarter of 2024. We estimate that during the same time frame, the utilization across all ICE facilities nationwide averaged approximately 38,500 beds. We estimate that the utilization across ICE facilities nationwide is currently at approximately 37,000 beds, and the current utilization at GEO's ICE facilities remain at approximately 13,000 beds. With respect to federal funding, the appropriations bill for fiscal year '24, which recently was enacted by Congress increased funding for ICE incentive 41,500 beds from the previously funded level of 34,000 debt. Moving to our managed-only segment compared to 1 year ago, our quarterly revenues increased by approximately 14%. The year-over-year increase in managed only revenues was driven by new contract activations in our secured transportation and international businesses. In the third quarter of 2023, our GTI Transportation division activated a new contract to provide air operation support for ICE. This contract was first activated on an emergency basis and more recently, we announced a new long-term 5-year contract for GTI to continue to deliver these services as a subcontractor to CSI aviation, which holds the prime contract with us. Internationally, our GEO Australia subsidiary activated a new contract in July 23 to deliver primary health care services across 13 public prisons in the state of Victoria. Moving to our GEO Reentry Services division, we renewed 3 residential reentry center contracts with the Federal Bureau of Prisons during the first quarter of 2024. And the quarterly revenues for our nonresidential reentry services segment increased by approximately 19% from a year ago. With respect to the federal government's Intensive Supervision Appearance Program or ISAP, participant count averaged approximately 188,000 individuals during the first quarter of 2024 compared to an average ISAPs count of approximately $192,000 during the fourth quarter of 2023. Since the end of the first quarter, the ISAP participant count has fluctuated between approximately 184,000 and 185,000 individuals. With respect to federal funding, the appropriation bills for fiscal year '24, which was recently enacted by Congress, increased funding for alternatives to detention programs to approximately $470 million, an increase of approximately 7% over the previously funded level of approximately $440 million. While we would expect utilization rates for detention beds and the alternative retention programs to potentially increase in the second half of the year, consistent with seasonal increases in border crossing activity, the timing and impact of such increases are difficult to estimate. Additionally, policy influencer decisions that can often impact the utilization of ICE detention beds and the alternatives to detention program, ISAP are outside of GEO's control as a service provider to the federal government. For these reasons, we have decided to maintain our full year 2024 adjusted EBITDA guidance. We remain focused on providing high-quality services on behalf of DHS and ICE and we stand ready to provide any needed services and resources to help the federal government and all of our government agency partners with their needs. Finally, we are pleased to have recently completed the refinancing of substantial all of our debt. These important refinancing transactions have pushed our debt maturities, reduced our overall cost of debt and have given us greater flexibility for potential capital returns under our debt covenants. I will now turn the call over to our CEO, Brian Evans.

[Brian Evans, executive]

Thank you, George. Good morning, everyone. Our continued and steady financial performance continues to be underpinned by the strength of our diversified services platform. As we have demonstrated over the last several years, the diversification of our company has allowed us to deliver steady operational and financial results. As we have expressed to you in the past, the government policy and budgetary decisions that can impact the utilization of our diversified services are outside of our company's control as a service provider to agencies at all levels of government. Therefore, our focus has always been on delivering high-quality services and innovative solutions to meet the needs of our government agency partners with an unwavering commitment to operational excellence across all our service lines. At the Board and management level, we have focused our growth and investment strategy on developing a service platform that we believe is unmatched in terms of diversification and scope in our industry. We have done so by carefully allocating capital for more than 20 years, investing in company-owned facilities and pursuing strategic acquisitions of businesses and assets. We believe this strategy has allowed us to develop leading market positions across the spectrum of services in our industry, giving us the ability to effectively respond to the needs of our government agency partners as policy priorities evolve over time. Specifically, as it relates to U.S. Immigration and Customs Enforcement, we have a long-standing public-private partnership with the federal government dating back to the mid-1980s. We currently have 17 company-owned facilities under contract with price, providing needed bed space and support services across the United States. Our BI subsidiary has provided electronic monitoring and case management services on behalf of ICE under the ISAP contract for over 20 years. Over this time frame, BI has built what we believe is an unparalleled platform of technology solutions and case management services, successfully achieving high levels of compliance under the program with bipartisan support. Given our unparalleled diversified services platform and our long-standing public-private partnership with ICE, we believe GEO is uniquely positioned to continue to support the agency with the spectrum of support services and solutions, including additional bed capacity, secure transportation, electronic monitoring technology and case management services. While we expect the utilization of ICE detention beds and alternatives to detention programs to potentially increase in the second half of this year, consistent with seasonal increases in border crossing activity that remains difficult to estimate the exact timing impact of these potential trends. We remain focused on the daily delivery of high-quality services on behalf of ICE and all our government agency partners and we stand ready to support the potential future needs. We are focused on marketing our currently idle secure services facilities, which total approximately 10,000 beds to local, state and federal agencies for reactivation, either on our traditional secure services contract or a lease arrangement. These important assets could provide meaningful upside to our annualized revenues and cash flows if fully reactivated. Another strategic priority for our management team is to continue our disciplined allocation of capital to enhance long-term value for our shareholders. For the past 3 years, we have prioritized deleveraging our balance sheet and reducing our debt, and we have made significant progress towards this objective. We are pleased with the successful execution of the strategic priority, enabled our company to refinance substantially all our debt as previous months. In addition to pushing out our maturities and lowering our average cost of debt, the recent refinancing transactions have given us greater flexibility to explore options to return capital to shareholders. Under our new credit facility covenants, we will be able to retain 25% of excess cash flow until September 2025 and 50% of excess cash flow after that date as long as our leverage remains between 2.5 and less than 3.5x adjusted EBITDA. This would give us the ability to use our cumulative retained excess cash flow for restricted payments, such as dividends or share repurchases as long as our total leverage remained below 3.5x adjusted EBITDA. Under our new senior notes indenture, we will have an initial restricted payments basket of $125 million, which will increase over time by 50% of net income. We believe that these new covenants will provide our Board greater flexibility to evaluate options to return capital to shareholders in conjunction with our company's overall capital needs. We will also continue to evaluate future potential asset sales to complement our capital needs, primarily focusing on our idle or underutilized residential reentry centers since these assets are typically located in urban areas, can usually be repurposed for alternative uses and generally attract a larger pool of potential interested buyers. As we continue to execute our strategic priorities and allocate capital towards enhancing long-term value for shareholders, we believe our company will continue to be an attractive value proposition for investors, given the strong and predictable nature of our cash flows. At this time, I'll turn the call over to acting CFO, Shayn March.

[Shayn March, executive]

Thank you, Brian. Good morning, everyone. Today, we reported first quarter 2024 GAAP net income of approximately $23 million on quarterly revenues of approximately $606 million. We also reported first quarter of 2024 adjusted EBITDA of approximately $118 million. Current revenues in our owned and leased secured services segment increased by approximately 10% year-over-year, primarily driven by higher occupancy rate levels at our U.S. Marshals Services and ICE facilities. Revenues in our Managed owner segment increased by 5.4% during the first quarter of 2024 compared to 1 year ago. This year-over-year increase in our Managed owner segment was driven by higher revenues in our secured transportation and international segments. Finally, quartely revenues in our nonresidential Services segment increased by approximately 19% year-over-year. These revenue increases were offset by lower quarterly revenue from our electronic finance and supervision services segment, which is the result of lower participant tenants under the ISAP contract compared to 1 year ago. During the first quarter of 2024, operating expenses increased by approximately 2% as a result of inflationary cost increases, higher occupancy levels and the shift in quarterly revenue mix compared to the first quarter of 2023. Our first quarter 2024 results also reflect a year-over-year decrease in net interest expense due to the repayment of debt over the past 12 months as well as due to higher interest income compared to the first quarter of 2024. Our effective tax rate for the first quarter of 2024 was approximately 26%. Moving to our guidance for the full year and the second quarter of 2022. For the full year of 2024, we expect GAAP net income to be in a range of $55 million to $75 million on annual revenues of approximately $2.4 billion and an effective tax rate of approximately 20%, inclusive of known discrete sales. Our full year 2024 guidance reflects an $86 million pretax loss on a distinction of [indiscernible] as a result of our recent refinancing transactions. We expect our full year 2024 adjusted EBITDA to be in the range of $485 515 million, the low end of our adjusted EBITDA guidance range assumes a continuation of the current utilization rate for our ICE participant and the current ISAP participant count, which is presently below the average participant count we experienced during the first quarter. The high end of our adjusted EBITDA guidance with guidance range assumes that utilization rates for ICE kitchen bed and the ISAP contracts increased during the second half of the year, consist of seasonal increases in order packing activity. For the second quarter of 2024, we expect a GAAP net loss in a range of $27 million to $30 million as a result of the $86 million pretax loss on the expansion of debt during the second quarter. And we expect second quarter 2024 revenues to be in the range of $600 million to $610 million. We expect second quarter 2020 adjusted EBITDA to be in a range of $119 million to $125 million. Moving to our capital structure. As previously noted, we reconcepted the refinancing of suspense all of our debt. On April 18, we closed on a new $750 million senior credit facility comprised of a $450 million term loan bearing interest at over plus 5.5% a $310 million revolving line of credit, which has no borrowings outstanding at closing. In a simultaneous transaction, we also closed our 2 senior note offering, a $650 million senior secured note at 8% and 8%, a $625 million senior unsecured note at 10.25%. The offer of these 2 notes and a term loan resulted in net proceeds of approximately $1.67 billion. We used the net proceeds to refinance approximately $1.5 billion of existing debt, including our previous 2 term loans, the 9 and one half and 10 and one half of their second lien secured notes and the 6% senior unsecured notes. Subsequently, on May we also retired a proximity of $177 million in principal amount of our 6.5% convertible notes in exchange for approximately $177 million in cash and approximately 9.8 million shares of GEO common stock. There are now approximately 436 million shares outstanding of GEO common stock. We now have approximately $53 million in outstanding principal amount of our convertible notes due to 2026, and we are considering all of our options for addressing these doors. As a result of these transactions, we have reduced our average cost of debt by approximately 1% on the portion of our debt that were restructured in 2022. This meaningfully improved debt structure, our fixed rate debt represents approximately 75% of our total indebtedness, and we pushed out substantially all of our debt maturities to 2029 and 2031. Likewise we expect to continue to focus on further reducing our net debt. And as far as cost, we've also had greater flexibility to evaluate options to return capital to shareholders under our new debt restrictions. At this time, I will turn the call over to James Black for a review of our GEO Secure Services segment.

[James Black, executive]

Thank you, Shayn. Good morning, everyone. It is my pleasure to review the quarterly milestones for GEO Secure Services. During the first quarter of 2024, our Secure Services facilities successfully underwent a total of 60 audits, including internal audits, government reviews, third-party accreditations and the prismatic or precertifications. 5 of our Secure Services facilities received accreditation from the American Correctional Association with an average score of 99.8% and 1 facility received precertification. Our GTI Transportation division and our GEO Amey U.K. joint venture completed approximately 5 million miles driven in the United States and the U.K. during the first quarter. Moving to current trends for our government agency partners. At the federal level, populations at our U.S. Marshall detention facilities increased by approximately 5% since the beginning of the year. Our U.S. Marshall facility around the country support the agency as it carries out its mission of providing custodial services for pretrial detainees facing federal criminal proceedings. We believe that our U.S. Marshall facilities provide needed bed space near federal was where there is generally a lack of suitable alternative detention capacity. Moving to our ICE processing centers. We experienced stable utilization of approximately 13,000 beds throughout the first quarter of 2024. During the first quarter, we expect utilization across all ICE facilities nationwide averaged approximately 38,500 bps. We estimate that the utilization across ICE facilities nationwide is currently at approximately 37,000 beds. The current utilization at our ICE facilities remains at approximately 13,000 beds. With respect to federal funding, Congress recently enacted an appropriations bill for fiscal year 2024, which provides funding for 41,500 ICE detention beds, an increase of 7,500 beds from the previously funded level of 34,000 beds. GEO has a long-standing track record of delivering professional support services on behalf of ICE at GEO Contracted ICE Processing facility, and we stand ready to support ICE with any additional needs. We have a total of 10,000 beds at several idle facilities that we believe are well suited to support ICE's mission, and we have the expertise and resources to provide the needed ancillary services to meet the agency's need. GEO Contracted ICE Processing centers offer around-the-clock access to quality health care services. Our health care staff at ICE processing centers where we provide resident health care is generally more than double the number of health care staff in a typical state correctional facility. GEO Contracted ICE Processing centers offer full access to legal counsel and legal library and resources, and we have dedicated space at each eye center to accommodate meetings with legal counsel. GEO Contracted ICE Processing centers provided residents with 3 daily meals that are culturally sensitive, special diet appropriate and approved by registered dietitians. We also provide access to faith-based and religious opportunities at each GEO Contracted ICE Processing center. And we partner with community volunteers that are needed to ensure a fair representation of various states and denominations. GEO Contracted ICE Processing centers also offer access to quality recreational activities. We have made significant investments in enhanced amenity at these centers, including artificial turf soccer fields, covered pavilions, exercise equipment and multipurpose work. We provide secure transportation services for ICE primarily at 12 of the GEO Contracted ICE Processing centers. Starting in the second half of 2023, our GTI Transportation division also began providing secure air operation support for ICE, initially under emergency contract. During the first quarter of 2024, we announced that GTI has been awarded a long-term 5-year contract to continue to provide air operation support services on behalf of ICE as a subcontractor at CSI Aviation, which holds the fine contract. This important contract is expected to generate approximately $25 million in annualized revenues. At this time, I will turn the call over to Wayne Calabrese for a review of our GEO Care division.

[Wayne Calabrese, executive]

Thank you, James. I'm pleased to provide an overview of the quarterly operational milestones for our GEO Care division. During the first quarter of 2024, we renewed 3 residential reentry center contracts with the Federal Bureau of Prisons. Additionally, we retained 3 contracts for our nonresidential day reporting centers, and we were awarded 1 new day reporting center contract. Our residential reentry centers, nonresidential day reporting centers and our ISAP offices successfully underwent a combined total of 77 audits, including internal audits, government reviews, third-party accreditations and Prison Rape Elimination Act or PREA certifications. Three of our residential reentry centers received accreditation from the American Correctional Association with an average accreditation score of 100%, and one of our residential reentry centers received pre-certification. Our 34 residential reentry centers provide transitional housing and rehabilitation programs for individuals reentering their communities across 14 states and census levels at these centers remained stable at approximately 5,000 individuals during the first quarter of the year. Our nonresidential and day reporting centers provide high-quality community-based services, including cognitive behavioral treatment for up to approximately 8,500 parole and probationers at approximately 90 locations across 10 different states. Moving to our GEO in-prison programs and our Continuum of Care division during the first quarter of 2024, we delivered enhanced in-custody rehab to an average daily population of approximately 2,600 individuals at 31 in Prison program sites in 7 states and to approximately 21,000 individuals at 13 Continuum of Care sites in 8 states. Our in-custody rehabilitation services include academic programs focused on helping those in our care attain high school equivalency diplomas. We have made a significant investment to equip all of our classrooms with smart boards to aid in the delivery of academic instruction at all our facilities. We have also focused on developing vocational programs that not only lead to certification when completed, but are also based on market job placement needs. Our substance abuse treatment programs are an important piece of our rehabilitation services because many of the individuals in our care suffer from addiction and substance use disorder. Our facilities also provide extensive faith-based and character-based programs. We've designated faith-based and character-based housing units or dorms across our facilities to enhance the delivery of these programs. During the first quarter of the year, we completed approximately 700,000 hours of enhanced in-custody rehabilitation program. Our academic programs awarded more than 600 high school equivalent into diplomas and our vocational forces awarded close to 850 vocational training certifications. Our substance abuse treatment programs awarded more than 1,200 program completions. We achieved over 700 behavioral treatment program completions in more than 4,000 individual cognitive behavioral treatment sessions. During the first quarter, we also allocated approximately $400,000 toward post-release services. This funding supported more than 600 individuals released from GEO facilities as they made their way back to their communities. Our GEO Continuum of Care integrates enhanced in-custody rehabilitation, including cognitive behavioral treatment with post-release support services that address critical community needs of released individuals. We believe our award-winning program provides a proven model on how the 2-plus million people in the United States criminal justice system can be better served in changing their lives. Finally, turning to our electronic monitoring and supervision services segment, our BI subsidiary provides a full suite of monitoring and supervision solutions, products and technologies on behalf of federal, state and local agencies across the country. During the first quarter, participant counts under the ISAP contract averaged approximately 188,000 individuals. Since the end of the first quarter, the ISAP participant count has fluctuated between approximately 184,000 and 185,000 individuals. With respect to federal funding, Congress recently approved an appropriations bill for the current fiscal year, which funds the federal government through September 30, 2024. That appropriations bill enacted by Congress increased funding for alternatives to detention programs, which includes the ISAP contract to approximately $470 million, representing an approximate 7% increase over the previously funded level of approximately $440 million. BI has provided technology solutions, holistic case management, supervision, monitoring and compliance services under the ISAP contract for almost 20 years. Under BI's tenure, ISAP has received bipartisan support and has achieved high levels of compliance using a variety of new technologies and case management services over that time. The current ISAP contract has a term of 5 years, terminating on July 31, 2025. BI will continue to explore new and innovative technology solutions to support the new device as we prepare to compete for this important contract. At this time, I will turn the call back to George for closing remarks.

[George Zoley, executive]

Thank you, Wayne. And in closing, our diversified business units have continued to deliver strong financial and operational performance. We are pleased that our steady results in our multiyear strategy to delever our balance sheet, successfully positioned GEO to refinance substantially all of our debt, which is presently approximately $1.8 billion and is expected to decrease to $1.6 billion by the end of the year. Our recent successful refinancing has lowered our average cost of debt and has given us greater flexibility to evaluate options to potentially return capital to shareholders. We believe we have several opportunities for potential upside in our financial performance. We are focused on marketing our current idle facilities and our diversified services to government agencies around the country. Operationally, we remain committed to achieving operational excellence in the delivery of our services on behalf of our government agency partners. We believe that our company is strong and predictable cash flows and our improved debt structure continues to present an attractive opportunity for investors. That completes our remarks, and we would be glad to take questions. Operator?

[Operator]

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

[Joseph Gomes, analyst]

Congrats on the quarter. But I just wanted to get a little clarification here, maybe. Are you guys saying that you're thinking at ICE currently is about 37,000 just looking at some of the numbers that ICE put out, it looks like the beds are more that they're saying are 34.5%. And I was just wondering if I missing something and you guys have some information that gives a more recent update versus some of the dated ICE data.

[Brian Evans, executive]

To our understanding, there's been a significant ramp-up in the census of those in the pension facilities. I think the first half of the fiscal year, which just ended last month, there was an intent for budgetary reasons to keep the bed count at a lower level in line with the original budget. And now that the recent refunding of the agency at a higher level of 41,500 bps is allowing them to now step up their account in their ICE facilities around the country.

[Joseph Gomes, analyst]

And then on the Marshall, you guys had a nice increase in the number of people in Marshall. I was wondering what is driving that? Is that a reflection of the courts getting back to a more normal operating environment or some of these, we've seen in the past, local localities are refusing to hold on to some of the [indiscernible] these days? Just trying to figure out what's driving the increase in the marginals populations?

[Brian Evans, executive]

It's probably a combination of both of those things, the reluctance of local governments to be dealing with providing extra beds to federal agencies versus having a need for those beds themselves or for political purposes of not wanting to participate in such a federal program, but also the need to expand the number of beds that they did have a decrease in bed capacity under this administration at the outset of the administration year.

[Joseph Gomes, analyst]

And you guys mentioned it from the bigger the 10,000-foot level, but I don't know if there was any more detail you can provide about some of the new business opportunities, especially on the state and local level that you're pursuing at this point?

[Brian Evans, executive]

We really don't discuss any marketing opportunities unless they are public procurements that we obviously would have a responsibility to react to. But at this time, there are no public procurements that we can comment on.

[Joseph Gomes, analyst]

Just generally, I guess, Brian, are you seeing more opportunities on the state and local level than you had historically? Or is that more flat there? Or maybe if you could just characterize it that way.

[Brian Evans, executive]

It's somewhat flat with some of our clients, but we're seeing other clients asking for bed at a smaller scale than we would prefer, and we haven't jumped at those opportunities because our facilities are generally large, I would say, 1,000 beds and above, and we are keeping those facilities in reserve for larger governmental users.

[Joseph Gomes, analyst]

And then one more for me, I'll jump back in line. This is more hypothetical George. But as we all know, when the current administration came in and they ended basically the contracts with BOP. If there was a change in administration and they were more favorable to contract with the BOP, Looking at the BOP populations, they've risen about about 10,000 people since 3 years ago. Do you think -- again, this is hypothetical. The BOP would still look upon favorably if they needed space of coming to you or given what's happened in the past couple of years, you think they would be more reluctant to reestablish contracts with firms like the private and the sector.

[George Zoley, executive]

We're using past experience as a guide under the previous administration, there was a reversal of the provision and using the private sectors for BOP contracting. So we would think that's a distinct possibility that the BOP facilities would once again be contracted to private sector entities like ourselves. And there was a similar impact under this administration regarding strong Marshall's facilities that were direct contracts that were discontinued. I would think there would be a similar attitude. If there's a new administration that would per possibly have a desire to reestablish those contracts with the Marshall's Services as well as the BOP.

[Operator]

Next question comes from Brian Violino with Wedbush Securities.

[Brian Violino, analyst]

Just to start on the guide. It sounds like the high end is assuming we'll see some uptick in second half occupancy levels in the detention segment. Could you clarify if that assumes that we're going to be going up to the 415 head count that was approved in the budget or just a general increase here?

[Brian Evans, executive]

As we said, it's hard to predict exactly where they're going. The budget allocation projects the ability to go to 41,000, but I would think that would occur on a progressive incremental basis, on a step-by-step basis. So we've seen a change in the last few weeks going from 34,000 to approximately 37,000. So we expect a continuation about where it ends, we don't know.

[Brian Violino, analyst]

And then I appreciate all the details on the indentures and the credit agreements for the mine. Just curious if you could give us a bit more thoughts in terms of timing as it relates to capital returns. Would you potentially want to wait until the cash flows to be step down later next year? Or if your leverage gets lower into your target range as you think about repurchases earlier than that?

[Brian Evans, executive]

I think at a minimum, we have to wait until the leverage steps down towards the middle of next year. So we're locked in on the 75% to that point, and then it could step down based on leverage and we can access those covenants at that point in time.

[Brian Violino, analyst]

And then just one more for me. It looked like the NOI margins in the monitoring segment were a bit lower sequentially and year-over-year. Anything to note there onetime or seasonal? And if not, should we expect those margins to improve over the course of the year, otherwise?

[Brian Evans, executive]

The margins in that segment are obviously being impacted, as we've discussed on the call, by the change in the utilization of the ISAP contract predominantly. We discussed earlier of the guidance, if the numbers move up later in the year in ISAP similar to make with the ICE intention buses, we should see some nominal improvement in those margins.

[Operator]

Next question comes from Brendan McCarthy with Sidoti.

[Brendan Michael McCarthy, analyst]

I just wanted to start off looking at the idle facilities. It looks like there is an increase in the secure idle facility bed count by roughly 900 beds, I think it was driven by a reclassification or related to the Delaney asset. Can you just discuss what drove that increase?

[Brian Evans, executive]

It was a 1,000-bed facility that was previously a reentry facility. And we are looking at that facility for marketing in the near future.

[Brendan Michael McCarthy, analyst]

And then I just wanted to touch on the guidance. It looks like the assumption for shares outstanding increased, I think, it was like $137,000 from about $126,000 from the initial guidance. Obviously, that assumes --

[Brian Evans, executive]

Yes. $137 million approximately.

[Brendan Michael McCarthy, analyst]

Obviously, I assume that does not include any share repurchase activity. But driving that increase is likely related to the exchangeable notes. Is that correct?

[Brian Evans, executive]

Yes.

[Brendan Michael McCarthy, analyst]

One last question for me. Do you have any comment on potential executive action from the buy administration that's just been making headlines in recent days as it relates to the border?

[Brian Evans, executive]

I've heard that thinking about changing some policy, but I'm unclear as to what policy we're talking about.

[Operator]

The next question comes from Greg Gibas with Northland Securities.

[Gregory Gibas, analyst]

This is with respect to Q2 guidance, what do you expect that uplift in EBITDA to be driven by given the expectation of roughly flat revenue.

[Brian Evans, executive]

Yes, that's going to be primarily caused by the cost of payroll tax that we have in the first quarter, which is difficult for our business. And then in the second quarter, you'll definitely see a repeat of that expense, that's roughly $5 million, $6 million of payroll expense in the first quarter relative to the second.

[Gregory Gibas, analyst]

And as it relates to maybe just more general cost structure dynamics, could you address just any favorable or unfavorable trends that you're seeing on any weather or like the payroll. Obviously, there's some seasonality like you just said, but any trends you're seeing on those line items.

[Brian Evans, executive]

No, I don't think so over the last several years, we had to give some fairly significant adjustments at certain contracts, which we were able to negotiate with our client revenue increases to offset that. So I think that's slowed down. There's still pressure in the labor market, but it's more steady than it was. We did see previously also impact the food and utilities, but I think those have also stabilized some more recently. So not seeing any real significant pressures in those major cost categories other than what's normal in the market.

[Gregory Gibas, analyst]

And more high level, I know it's been this kind of slight decline here, but why is the ISAP population? What do you attribute that to in terms of why it's going to continue to decline sequentially?

[Brian Evans, executive]

Well, part of it was certainly the budget deficits that were being experienced within ICE. It's my understanding that they had an overall budget defect of approximately $700 million. So they had to cut back in certain areas, which included detention capacity as well as ISAP.

[Gregory Gibas, analyst]

And last one for me, just as it relates to full year guidance. Are there any contract renewals this year or other factors that could spin it one way or another? Or is it mostly just kind of fluctuations in those price populations.

[Brian Evans, executive]

With regard to our Adelanto facility in California, I believe that the current performance period is now extended to June 19. And we've been in discussions and have made a request to extend that period for the balance of the year, if possible, if not through at least September 30, and we're waiting to respond to that.

[George Zoley, executive]

And for the balance of the year, that will continue. So if for some reason, it didn't then that could have a downward impact.

[Gregory Gibas, analyst]

And we would expect maybe more of an update closer to that June time frame on it?

[George Zoley, executive]

If something changes, otherwise, we'll update on the next earnings call.

[Brian Evans, executive]

Well, we were to come back to center within the next few weeks at that point.

[Operator]

The next question comes from Kirk Ludtke with Imperial Capital.

[Kirk Ludtke, analyst]

Congratulations on the quater. You mentioned the ISAP contract expires in May of next year. What's the typical process for renewing that? And then also, have there been any developments with respect to that request for information that they imply a pretty significant increase in alternative to the tension.

[Brian Evans, executive]

A procurement process has not been yet announced for the rebid of that contract. And the lead time for a procurement process in that contract with is large scale, large volume is several months, probably 6, 9, 12 months lead time is necessary to reprocure such a contract. So we're not aware to any announcement to that effect has yet occurred leading to the possible possibility that the current term could be extended for some period of time. And Kirk, just to correct you there, the expiration date on the existing contract without any renewals, as George was talking about short-term extension would be July 31 of next year not on May 3.

[Kirk Ludtke, analyst]

So we're not quite to that 12-month kind of lease time, but you might start seeing some developments there July of this year?

[Brian Evans, executive]

Possibly. Yes.

[Kirk Ludtke, analyst]

And the request for information from a while ago that was implied a pretty significant increase in alternatives to the attention more broadly. Has there been any development on that front?

[Brian Evans, executive]

Well, there was additional funding, but part of that funding was used to offset the deficit that was in that program as well as other programs. You may recall, I said a moment ago that the agency, as a whole, had apparently a deficit of approximately $700 million. So the different programs from detention facilities to ISAP programs to other programs we're running hotter at the beginning of the fiscal year, and that had to be made up with this new funding that was made available just to offset the deficit before they could achieve higher levels. And I think in both areas of detention and ISAP will very possibly see higher levels, but it's only been recently that they were reduced to lower levels to offset the deficits.

[Wayne Calabrese, executive]

This is Wayne. As far as that alternate ISAP approach, it seems to have gone fairly dormant. We really haven't heard much more about that.

[Kirk Ludtke, analyst]

And you mentioned that you've got the 10,000 idle beds, would those all be appropriate for ICE to tens.

[Brian Evans, executive]

With some revisions to provide office space for staff, which is not normally a requirement to any great extent for BOP contracts or Marshall's contracts. The difference in the ICE facilities is you have more on-site ICE personnel, and he also probably need some courtrooms and other ancillary things.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to George Zoley for any closing remarks.

[George Zoley, executive]

Thank you very much. We look forward to addressing you at the next conference call.

[Operator]

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.