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Earnings Call Analysis
Q3-2023 Analysis
Geo Group Inc
The GEO Group has weathered the turbulent market with a sturdy financial shield, posting $603 million in third-quarter revenues with a solid adjusted EBITDA of $119 million. The company’s leadership celebrated these figures, heralding them as a beacon of operational stability and financial resilience.
Secure Services is revving its engines with renewed federal contracts and an uptick in populations at ICE processing centers, marking a notable 30% increase. Meanwhile, the Resilient Reentry Services has renewed a slew of contracts, enhancing their legacy in residential and non-residential sectors, ensuring they continue to steer rehabilitative progress on the right track.
Facing headwinds like a static ISAP participant count and looming budgetary pressures, The GEO Group has tightened its fourth-quarter financial guidance. For the remaining quarter of 2023, the organization projects revenues oscillating between $590 million and $600 million, with GAAP net income expected to be nestled in the range of $19 million to $24 million.
The company’s strategists aren't resting on their laurels—they've diminished net debt by around $109 million and set ambitious plans to slash it down further by $175 to $200 million annually. Noteworthy is the planned divestiture of select assets, such as residential reentry centers, to inject momentum into the debt reduction crusade.
The organization's rehabilitation services have achieved remarkable milestones, conferring over 640 high school equivalency diplomas and numerous vocational certifications—a testament to their commitment to corrective education and reintegration initiatives. The Continuum of Care division alone has handed out a supportive $400,000 for post-release services underpinning their dedicated mission towards societal rehabilitation.
As legislative gears grind slowly, impacting budget allocations for programs like ISAP, The GEO Group is poised with the necessary resources to pivot and expand should ICE opt to enhance the program's utilization post budget approval. They continue to liaise with ICE, ensuring that responsiveness and readiness remain at the heart of their operations.
The executives have painted a picture of optimism despite current fiscal constraints, laying out a roadmap that includes activating idle facilities, exploring new contracts across their diversified business units, and potential asset sales. They underscore their compelling valuation case, anchoring it in a robust portfolio of owned beds and a steadfast history of government service irrespective of political regimes.
Good day and welcome to the GEO Group Third Quarter 2023 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference over to Pablo Paez, Executive Vice President of Corporate Relations.
Good morning, everyone. And thank you for joining us for today's discussion of The GEO Group's third quarter 2023 earnings results. With us today are George Zoley, Executive Chairman of the Board, Jose Gordo, Chief Executive Officer, Brian Evans, Chief Financial Officer, Wayne Calabrese, Chief Operating Officer and James Black, President of GEO Secure Services.This morning we will discuss our third quarter results as well as our outlook. We will conclude the call with a question-and-answer session. This conference call is also being webcast live on our Investor website at investors.geogroup.com.Today we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and supplemental disclosure we issued this morning. Additionally, much of the information we will discuss today, including the answers we give in response to your questions may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the safe harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q and 8-K reports.With that, please allow me to turn this call over to our Executive Chairman, George Zoley.
Thank you for joining us on our third quarter 2023 earnings call. I'm joined today by our senior management team to review our third quarter financial results, to discuss our financial guidance for the balance of the year, and our continued focus on debt reduction and provide an update on the trends for each of our business segments.This morning we reported third quarter revenues of approximately $603 million. GAAP net income of approximately $24.5 million and adjusted EBITDA of approximately $119 million. Our diversified business units continued to deliver steady operational and financial performance.During the third quarter our Secure Services business unit renewed several important contracts. At the federal level, we renewed 2 direct contracts with the U.S. Marshal Service. One was at our company-owned 1900 bed Rio Grande Processing Center in Texas for a 5-year term. And the second was at our company leased 770 bed Western Region Detention Facility in San Diego for a 2-year term. We also renewed 3 contracts with ICE for respective 1 year terms that include our company own 700 Bed Broward Transitional Center in Florida. Our company owned 19104 bed, South Texas ICE Processing Center, and our company owned 13114 bed, Montgomery Processing Center in Texas.Populations across our ICE processing centers have continued to steadily increase. Since the beginning of July we've experienced approximately a 30% increase particularly in our central and western regions. At the state level, we recently renewed our management only contract in the state of Florida for the 2,000 bed Blackwater River Correctional Rehabilitation Facility for a 2-year term.During the third quarter, our GEO Reentry Services division also renewed 7 existing contracts for our residential entry centers and 6 existing contracts for our non-residential day reporting centers.Our third quarter results reflect an increase in our GTI secure transportation revenues. This increase was primarily driven by our new emergency contract to provide air operations in support for ICE. This contract could generate up to $16 million in total revenues if it runs for its full term of 9 months. The multi-year procurement for these services remains under bid protest and we hope to continue to be a strong contender for a long term contract award in the future.Internationally, our third quarter results reflect a sequential increase in revenues due to the activation of our new contract to deliver healthcare services across public prisons in the state of Victoria in Australia.Turning to our electronic monitoring and supervision services segment. The number of participants in the federal government's Intensive Supervision Appearance Program, or ISAP has remained relatively stable since early August at approximately 192 to 195,000 individuals. While the ISAP participant count has remained largely stable over the last 3 months, we've not experienced the moderate increase beginning in the fourth quarter that was contemplated in our previously issued financial guidance.We believe that ICE continues to face budgetary pressures and the timing of the passage of appropriation bills in Congress remains uncertain. Given these factors, our tightened financial guidance range for the fourth quarter now assumes the ISAP participant counts will be flat to slightly down for the balance of the year. The federal government is currently funded under a short-term continuing resolution, which expires on November 17. And Congress has yet to reach an agreement on the appropriation bills to fund the government in fiscal year 2024, which began on October 1. We estimate the ICE detention census is presently at approximately 39,000. The Senate version of the Homeland Security Appropriations bill keeps funding for ICE at the current level of 34,000 beds, and slightly increases the overall funding available for the alternatives to detention programs. The current version of the House Homeland Security Appropriation bill would increase ICE beds to 41,000 and includes a provision that would require the use of ISAP electronic monitoring capabilities for all individuals in the non-detained docket for the entire duration of their proceedings.Additionally, the White House has submitted a supplemental appropriations request to Congress, which we believe includes additional funding for ICE beds and the alternatives to detention program. If Congress is unable to reach an agreement within the next 10 days, the federal government could once again be funded under a short term or long term continuing resolution or face the prospect of a government shutdown. We are continuing to monitor the congressional appropriations process and remain focused on providing high quality services on behalf of DHS and ICE. We are continuing our efforts to market our current idle facilities to federal, state and local government agencies.As has been publicly reported, several counties across the country are experiencing overcrowding challenges in their local jails and some of these jurisdictions are exploring the potential use of private sector facilities to address these challenges. We believe that our modern, well-located facilities could generate significant increased annualized adjusted EBITDA if they are reactivated either under GEO management or leased to local state or federal agencies.Finally, we remain focused on reducing our net debt which is a key strategic priority for our company. During the third quarter, we reduced our net debt by approximately $109 million and are at $1.8 billion in total net debt presently. Our objective is to continue reducing net debt by approximately $175 million to $200 million per year in the future. We also remain hopeful that we will be able to refinance portions of our debt at the earliest possible time.I will now turn the call over to Brian Evans to address our financial results and guidance in more detail.
Today we reported GAAP net income of approximately $24.5 million on quarterly revenues of approximately $603 million. We reported quarterly adjusted EBITDA of approximately $119 million. Third quarter 2023 results reflect higher transportation revenues, due to our recent emergency contract to provide air support services for ICE and higher international revenues from the activation of our new health care contract in Victoria, Australia.Additionally, in the third quarter 2023, we experienced a year-over-year increase of 14% in revenues from our residential reentry centers as populations and our reentry segment have continued to improve post pandemic. Similarly, quarterly revenues from our non-residential day reporting centers increased by almost 10% year-over-year during the third quarter 2023. These revenue increases were offset by lower revenue from our electronic monitoring and supervision services segment during the third quarter 2023. Our third quarter results also reflect an increase of approximately $13 million in net interest expense compared to the third quarter of 2022 due to higher interest rates and the debt restructuring we completed in August of 2022.Moving to our guidance for the balance of the year. Our previous guidance for the fourth quarter of 2023 assumed a moderate increase in ISAP participants during the quarter. While the ISAP participant count has remained relatively stable over the last 3 months, we have not experienced the moderate increase that was contemplated in our previous guide.As George mentioned, we believe that ICE continues to face budgetary pressures, and the timing of the passage of appropriations bills in Congress remains uncertain. As a result of these factors, we have updated our guidance assumptions, and now assume for budget purposes that the ISAP participant count will be flat to slightly down for the balance of the year.This morning, we provided updated guidance for the fourth quarter 2023 of GAAP net income in a range of $19 million to $24 million and quarterly revenues in a range of $590 million to $600 million.We expect our fourth quarter 2023 adjusted EBITDA to be in a range of $117 million to $122 million. For the full year 2023, we expect GAAP net income to be in a range of $100 million to $105 million on annual revenues of approximately $2.4 billion. We expect our effective tax rate for the full year 2023 to be approximately 29% exclusive of any discrete items. We expect our full year 2023 adjusted EBITDA to be between $495 million and $500 million.Our full year 2023 guidance represents the second highest level of annual adjusted EBITDA in our company's history. Our continued and steady performance is representative of the strength of our diversified services platform.We have been able to offset declines in our electronic monitoring and supervision services segment throughout 2023 with growth in revenues and earnings from several of our other diversified segments. Our guidance does not include the potential reactivation of any of our remaining idle secure services facilities, which total approximately 9,000 beds and could provide meaningful upside to our annualized revenues and cash flows fully reactivated. Additionally, increases in the ISAP participant count or further increases in the utilization of our ICE detention beds could generate significant upside to our guidance.With respect to ISAP specifically, BI is the sole provider of electronic monitoring solutions to ICE and has provided these services with bipartisan support for over 20 years, successfully achieving high levels of compliance under the program. BI has all the necessary resources to assist ICE going forward, should the agency decide to increase the utilization of ISAP once appropriation bills are approved by Congress.Moving to our capital structure. During the third quarter of 2023, we reduced our total net debt by approximately $109 million. We ended the quarter with total net debt of approximately $1.8 billion. Our debt reduction during the third quarter was supported by the sale of our Bo Robinson reentry facility in New Jersey for approximately $15 million, which closed in September. Our objective is to continue to reduce our net debt by approximately $175 million to $200 million per year in the future, bringing our total net debt to approximately $1.6 billion by the end of 2024.Going forward we expect interest rates to stabilize and potentially decrease, further enhancing our ability to reduce our net debt. As a reminder, approximately half of our debt is under floating interest rates and future increases in interest rates would bolster our annual -- or future decreases in interest rates will bolster our annual free cash flows. It can be used to further reduce our overall debt. We also expect to explore further assets sale to complement these efforts, including the potential sale of additional residential reentry assets.Our residential reentry centers are typically located in urban areas, and can usually be repurposed for alternative uses. These factors can often result in a larger pool of potential interested buyers. We have two additional reentry facilities that we are currently actively marketing for sale.With respect to our idle secure services facilities, we are focused on marketing these facilities to local state and federal agencies for reactivation either under traditional management contract or a lease agreement. However, we may also consider the sale of some of these larger assets if the price adequately reflects their value.Finally, we remain hopeful to be able to refinance portions of our debt at the earliest possible time. As a first step, we would expect to address our revolving credit facility, which as a reminder, is comprised of 2 tranches, including $87 million, which matures in 2024, and approximately $187 million, which matures in 2027. We currently have no borrowings outstanding under either of these tranches, and our goal would be to comprehensively address our revolving credit facility prior to the maturity of the first tranche.We continue to have strong relationships with our existing banking partners, and we have received interest from several new banks, as well as institutional investors who would participate in future refinancing transactions. Through these efforts, we hope to be able to achieve interest cost savings and gain more flexibility within the covenants under our credit agreements to explore options to return capital to our shareholders in the near future. We continue to believe that our focus on reducing debt and deleveraging will enhance value for all our shareholders over time.At this time, I will turn the call over to James Black for a review of our GEO Secure Services segment.
It is my pleasure to provide an update on GEO Secure Services. During the third quarter of 2023, our Secure Services facilities successfully underwent 52 audits, including internal audits, government reviews, third party accreditations, and Prison Rape Elimination Act or PREA certifications. Six of our secure services facilities received accreditation from the American Correctional Association with an average score of 99.2%. And another 6 of our facilities received PREA certification. Our GTI Transportation division and our GEOAmey U.K. joint venture completed approximately 4.3 million miles driven in the United States and overseas during the third quarter.Moving to the current transfer of our government agency partners at the federal level. Populations at our contract U.S. Marshals detention facilities continue to be stable. Our U.S. Marshals facilities around the country support the agency as it carries out its mission of providing custodial services for pretrial detainees facing federal criminal proceedings. We believe that all these important facilities provide needed bed space and services near federal courthouses, where there's generally a lack of suitable alternative detention capacity for the U.S. Marshal Service. During the third quarter, we renewed our contracts with the U.S. Marshal Service for our company on 1900 Bed Rio Grande processing center for a 5-year term, and our company leased 770 Bed Western Region detention facility for 2-year winter ice processing centers.Moving to our ICE processing centers. During the third quarter we renewed 3 contracts for respective 1-year terms at our company owned 700bed Broward Transitional Center, our 19,104 bed South Texas ICE processing center, and our 13,114 bed Montgomery ICE processing Center.Across our ICE processing centers, we have experienced a 30% increase in population since the beginning of July. As George noted, the federal government is currently funded under a short term continuing resolution that runs through November 17. The U.S. Congress has not yet reached an agreement on the appropriations bill for fiscal year 2024. We estimate the present census of active ICE detention beds to be at 39,000. The current House version of the Homeland Security Appropriations Bill would fund ICE for 41,000 beds, while the Senate version would maintain funding at 34,000 beds.The U.S. Congress is also considering a supplemental appropriations package submitted by the White House, which would also increase funding for ICE beds. If a compromise between the House and Senate is not reached in the next 10 days, the federal government could again be funded under a short-term or a long-term continuing resolution or face the prospect of a government shutdown.As a long-standing service provider to the federal government, we play no role in and have no control over congressional appropriation decisions, the timing of those decisions or more broadly, the implementation of immigration policies. Our focus remains on providing the highest quality services to ICE, and we stand ready to support the agency with any additional services as needed. Our ICE processing centers have a long-standing track record, delivering professional support services on behalf of ICE and providing secure residential care consistent with our commitment to respecting the human rights of all of those entrusted to our care.Our ICE processing centers offer around-the-clock access to quality health care services. Health care staffing at our ICE processing centers is generally more than doubled the number of health care staff in a typical state correctional facility. Our ICE processing centers also offer access to legal counsel and legal libraries and resources, and we have dedicated space at our centers to accommodate meetings with legal counsel.Our ICE processing centers also provide daily meals that are culturally sensitive and are approved by registered dietitians. We also provide access to faith-based and religious opportunities, and we partner with community volunteers as needed to ensure a fair representation of various states and denominations. Our ICE processing centers also offer access to quality recreational activities. We have made significant investments to provide enhanced amenities at our centers, including artificial turf soccer fields, covered pavilions, exercise equipment and multipurpose groups. We have also historically provided secure transportation services and logistical support for ICE primarily at 12 of our ICE processing centers.During the third quarter, our GTI Transportation division also began providing air operation support for ICE under an emergency contract, which could have a full term of 9 months. The federal procurement for the multiyear contract for these services is currently under bid protest and we hope GTI can remain a strong contender for these services in the future.Moving to our state government agency partners. Our state correctional facilities deliver high-quality support services across 7 states, including enhanced rehabilitation programs on behalf of corrections departments in Florida, Georgia, Indiana, Oklahoma, Arizona, New Mexico and Virginia. During the third quarter, we renewed our managed-only contract for the 2,000bed Blackwater River Correctional Facility in Florida for a 2-year term.With respect to our international markets, during the third quarter, we began delivering primary health services across 13 public prisons in Australia under our new health care contract with the state of Victoria. This new contract is expected to generate approximately $33 million in annualized revenues.Finally, we continue to market our current idle secure services facilities, which totaled approximately 9,000 beds. We have had recent active discussions, particularly with a number of local agencies as counties across the country are facing overcrowding challenges as a result of increases in local jail populations post-pandemic. We believe our facilities are modern and well located and can help address these challenges.At this time, I would like to turn the call over to Wayne Calabrese for a review of GEO Care.
I'm pleased to provide an operational update on our GEO Care business unit, starting with our Reentry Services division. During the third quarter, our reentry services facility successfully underwent 38 audits, including internal audits, government reviews, third-party accreditations and pre-certifications. 2 of our residential reentry centers received accreditation from the American Correctional Association, both receiving perfect scores of 100%, and 3 of our residential reentry centers received pre-certification.We also renewed 7 residential reentry contracts, including 4 contracts with the Federal Bureau of Prisons as well as 6 non-residential day reporting center contracts. Our 35 residential reentry centers provide transitional housing and rehabilitation programs for individuals reentering their communities across 14 states. Our non-residential and day reporting centers provide high-quality, community-based services, including cognitive behavioral treatment for up to approximately 9,000 parolees and probationers at approximately 90 locations across 10 states. All key outcome metrics showed improvement during the third quarter, attesting to our evidence-based practices and their track record for lowering the rate of recidivism.Moving to our GEO Continuum of Care and In-Prison Programs division. During the third quarter, we delivered enhanced in-custody rehabilitation and post-release support to an average daily population of approximately 2,600 individuals at 31 in-prison programs sites in 7 states and approximately 21,000 individuals at 13 Continuum of Care sites in 8 states. Our in-custody rehabilitation services include academic programs that are focused on helping those in our care attain high school equivalency diplomas. We have made a significant investment to equip all of our classrooms with smart boards to aid in the delivery of academic instruction at all of our facilities.We have also focused on developing vocational programs that not only lead to certification when completed, but are also based on market job placement needs. Our substance abuse treatment programs are an important part of our rehabilitation services because many of the individuals in our care suffer from addiction. Our facilities also provide extensive faith-based and character-based programs. And we have designated faith-based and character-based housing units or dorms across our facilities to enhance the delivery of these important programs.During the third quarter, we completed approximately 700,000 hours of in-custody rehabilitation programming. Our academic programs awarded 644 high school equivalency diplomas, and our vocational courses awarded 695 vocational training certifications. Our substance abuse treatment programs awarded approximately 3,500 program completions, and we achieved over 21,000 behavioral program completions and more than 18,000 individual cognitive behavioral treatment sessions.During the third quarter, we also allocated over $400,000 for post-release services to support 873 individuals released from GEO facilities as they return to their communities. Our GEO Continuum of Care program integrates enhanced in-custody rehabilitation services, 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-plusmillion people in the U.S. 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. At the federal level, the number of participants required to be monitored under our ISAP contract with the Department of Homeland Security, has remained relatively stable over the last 3 months at approximately 192,000 to 195,000 individuals. While we had previously expected the number of ISAP participants to begin to moderately increase beginning in the fourth quarter, we now assume for budget purposes that ISAP participant counts will be flat to slightly down for the balance of the year.We believe that ICE continues to face budgetary pressures, and as it has been previously noted, the timing of the passage of the appropriations bills currently being considered by the U.S. Congress remains uncertain.BI has provided technology solutions, holistic case management, supervision, monitoring and compliance services under ISAP for almost 20 years. Under BI's tenure, the federal government's Supervision and Appearance Program has achieved high levels of compliance using a variety of new technologies and case management services over that time. And going forward, we expect BI to continue to explore new and innovative technology solutions to support the needs of ICE and all of our government agency partners.At this time, I'd like to turn the call over to Jose Gordo for closing remarks.
In closing, our diversified business units delivered steady financial and operational performance during the third quarter of 2023. We remain focused on reducing our overall net debt and on positioning our company to refinance portions of our debt in order to reduce our interest costs and gain the flexibility to potentially return capital to shareholders in the future.We continue to believe that we have several potential upside opportunities, including further increases in populations at our ICE processing centers and/or increased number of participants enrolled in ISAP, the activation of our idle secure services facilities where we have a total of approximately 9,000 available beds, either under GEO management or under lease to local, state or federal agencies, new managed-only contract wins by our reentry, electronic monitoring, secured transportation or international divisions and the selective sale of non-core assets.We also expect to continue to selectively pursue new areas of growth, both with our current government agency clients as well as with new clients and/or in-service lines that are adjacent to or complementary with our existing business. In seeking these future growth opportunities, we plan to leverage our successful track record and the talent of our employees, who we believe are the best in our industry.As we have expressed in the past, we believe that our valuable assets underpin a compelling valuation case for our company. We own approximately 45,000 beds at secured facilities that we believe are generally more modern and better located than many of the existing public facilities in those geographic markets.We believe that the aggregate replacement value of these company-owned beds alone based on estimated current construction costs and sales of comparable facilities is equal to, or in excess of our current enterprise value. And this valuation is before taking into account the significant operating cash flows and real estate values of our other diversified segments, where we have substantial assets and market presence.Based on a conservative valuation of these various components, we believe that our current stock price has significant upside potential. We have consistently delivered as an essential government services provider at the federal and state levels through both Republican and Democratic presidential administrations for almost 40 years.We remain steadfast in our commitment to being a consummately professional organization that our clients can trust with complex, resource-intensive and critical projects, and that prioritizes the well-being of those entrusted to our care. We are proud of our over 18,000 employees worldwide who carry out our mission on a daily basis with great purpose and professionalism, and we stand ready to continue to meet the future demands of our clients as they may continue to evolve. That completes our remarks, and we would be glad to take questions.
[Operator Instructions] The first question today comes from Joe Gomes with NOBLE Capital.
So I wanted to start out on the Secure Services segment. You guys mentioned how the ICE population there are up significantly since the beginning of July. But the segment revenues actually declined year-over-year. I was just wondering, is that because the majority of the population increases went in 2 facilities that had yet to meet their guaranteed minimums? Or was there -- just trying to think off the top of my head whether there was another facility that would happen to have been contract lost or terminated last year that drove the revenues for that segment down?
No. I think this combination of first, there was the Northlake Facility. I think that discontinued in September of last year. So that was in there as a BOP facility. Now it’s probably worth about $9 million to $10 million a year -- or per quarter in revenue that went away. So that's not in this quarter and it was in the last quarter.
Okay. And you also mentioned that, I think the latest that I've seen, the ICE populations are exceeding 39,000. Are you continuing to see a similar type of increase in your ICE populations? I think at the end of September, that was about 35,000 in the ICE population.
We continue to provide approximately 1/3 of the capacity that's being used in the ICE processing centers. And the majority of our facilities that have the minimum guarantees have had an increase in above those minimum guarantees.
That's good news.
Yes, it is.
Great. And on the alternatives to detention, you guys mentioned in your prepared remarks about the House proposal of potentially everyone being monitored. Obviously, that's not -- hasn't been put into law yet. But what type of capacity increases would you guys need to see? Could you handle something that large? I think the last thing I saw was like 5 million people that are here that are -- do not -- are not U.S. citizens that could potentially be in that type of a program? Or would you have to see that type of a program split amongst the number of people?
Joe, this is Wayne Calabrese. I think we're well positioned, well-resourced and well capable of gearing up as required, whether the government would move to put -- place all of the $5 million or so of who may be in the non-detained docket into one or more programs remains to be seen, but they wouldn't all be in one program, certainly. So there are a lot of different facets to the alternative to detention programs. And as I said, we're well positioned and resourced. We have offices all over the country and would be able to gear up to cover that if that became the requirement of the contract.
And then you talked about some of the idle facilities. I don't know how much of discussions you are currently in with ICE about restarting maybe some of the idle facilities, but maybe you can give a little more color on that?
Well, ICE periodically reviews the capacity of existing facilities as well as the idle facilities. So they know what we have. They know we're currently operating, and we're capable of reactivating facilities. So we stay in touch with them, and they do the same with us.
And then one last one for me, and I'll get back in queue. Last couple of quarters, I think there's been a little bit of discussion. There's been some legal cases about illegal immigration and ICE. Anything that has come on from any of those proposed or the current legal cases that have changed that could potentially negatively impact GEO?
No, I don't think so. I'm not sure what legal cases you're referring to. What I have in my mind is what -- maybe I read the last couple of days that there's legal challenges to the current parole program and a desire by some individuals to further restrict it. It means there's not as many people could come through the country. Maybe some people would be put into the ICE processing centers for a review of their cases.
The next question comes from Brian Violino with Wedbush Securities.
So clearly, funding is a major factor as it relates to ISAP. But looking out further ahead and appreciate you're not going to be giving 2024 guidance, but can ISAP participants grow even if funding gets pushed out further, it doesn't come to fruition? I know on the last call, you mentioned there was some potential policy changes that could grow ISAP. Just kind of curious your thoughts because we did see ISAP numbers a lot higher a year ago when funding levels were the same at least from a congressional standpoint.
Well, I think we've said in prior calls that ICE as well as other divisions within the Department of Homeland Security have a certain level of budgetary flexibility and they move money around. And yes, we did have a much higher population count in ISAP program under the existing budgetary level. So it really becomes a decision as to where to put the priorities for the agency and redirect funding towards those priorities. So that could happen, but it's really an internal or decision by the agency or with the oversight and instructions by the White House.
Got it. And I'm not sure if I missed it, but I guess if you could just clarify, within your guidance that you gave today, the updated guidance, what's the underlying assumption for ICE detention levels? I think your last guidance assumed kind of steady occupancy rates, but obviously, with them climbing here, just curious what your underlying assumption is for the fourth quarter for ICE occupancy?
Pretty consistent quarter-over-quarter. We haven't assumed any facility reactivation or a significant step-up in the existing population level.
And then last one for me. If I look at the secure services segment, it looks like the net operating margins trended down a little bit quarter-over-quarter. Just wondering if there's any sort of kind of onetime things in the expenses there? And I guess the general thoughts on where you think margins for that segment will trend in the near term?
I think what you're seeing in the margins in the Secure Services, and we've talked about this on prior calls is our facilities, which were underutilized, but were being paid for expected higher utilization levels, that when those utilization levels increase, we would get back to sort of normalized financial performance at those facilities. And I think we've seen that occur in the last 2 quarters, if you will, as these populations have moved up.So most of our facilities, as George said, are at or near their fixed payments or their minimum occupancy levels that were paid for and they're also being used at those levels. So if occupancy levels or utilization increases further, we should see some increase in revenue and increase in performance.
The next question comes from Brendan McCarthy with Sidoti.
Firstly, on the -- I believe you mentioned there was a supplemental funding initiative from the White House recently. Is that in excess of the short-term continuing resolution funding currently under place? And will there be any potential benefit in Q4?
I believe that is in addition to what has been previously requested. And we don't know exactly how many beds that funding would provide for, but it would be several tens -- several thousands.
And then secondly, with the ISAP capacity, just wondering, just curious if you can maybe quantify just what kind of the ramp-up process might look like looking into maybe 2024, if funding levels were to increase? Are you able to quantify what the timing of a potential ramp-up to a significantly more number of participants would look like?
It's hard to answer that question. As Wayne said, we have the ability to scale up fairly quickly. And how do you do that? You'd have to add more staff at our Boulder, Colorado facility and probably at various locations around the country. We have a very large country-wide footprint of almost 100 different locations. But the electronic devices are made in our Boulder facility, and we are capable of ramping up fairly quickly. We have the supplies. And I think ICE is aware of our capabilities and like on the detention side, they stay in touch with us as to what those capabilities are and relative to the different kinds of devices we have from the ankle monitors to watches, to -- we have 150,000 phones available at the facility. And there's different programs that can be applied using those different technologies, and that can scale up to much larger populations at a discounted cost for less frequent monitoring.
I'd add, our in-country offices have a lot of personnel who are dedicated to non-electronic services such as case management, office visits, home visits, all of that can be scaled up as needed. A great deal will depend, however, on the government's ability to scale up and repurpose folks that are working at the border, the ICE officials that work closely with them, all of that would have to be focused on the traffic that's coming in and the processing and enrollment of persons who are coming across the border into one or more programs based on the administration's policies and priorities, which is –
It's very lumpy. It can be lumpy.
The next question comes from Greg Gibas with Northland Securities.
I wanted to, I guess, first just ask if there's any significant or maybe notable contracts up for renewal in the near-term or upcoming quarters?
Not this year. No.
And then as it relates to the delevering, good progress there in terms of net debt reduction. You mentioned the 2 additional facilities. I think it was the New Jersey facility, the sale of that kind of accelerated the delevering. You talked about the 2 additional facilities. And I'm curious if you could share maybe interest levels or timing of those. Would this be like a Q4 event? Or do you have any sense of when those asset sales would happen?
No. I think there's facilities that we've got targeted and they're -- we have brokers active trying to place those properties. But right now, we don't have any contracts on those properties.
And I guess just lastly, as it relates to you marketing the idle facilities, which I believe count for like 9,000 beds. How do you kind of weigh like -- when I think about you hitting the net occupancy levels and obviously increased margins as occupancies increase after that, how do you kind of weigh reactivation of idle facilities versus just increasing those occupancy levels at existing facilities? Is that up to the customer? Or is -- just curious how you're kind of weighing those 2 things.
It's really up to the customer and where their priorities are on a regional basis. We have a lot of facilities, obviously, in the southern belt states, Texas, Louisiana, et cetera. But we do have other locations in the north and the northeast that are prime locations. And what makes it attractive for those locations is that a lot of county jails that have previously provided occupancy and services for DHS and ICE have been pulling out of the business, so to speak, because of either financial or political reasons. And therefore, our particular facilities, which are generally much more modern and more closely meet the most recent updated ICE standards are particularly attractive, and in the long haul will -- we think will be utilized eventually.
The next question comes from Kirk Ludtke with Imperial Capital.
I just have a couple of follow-ups. With respect to ISAP, how many people do you think would be monitored under the House proposal?
Well, monitored is a generous word. It can cover a lot of topics. In terms of electronic monitoring, the numbers were substantially higher a year ago. They could accommodate that again. They could be in other areas. They could, for example, ask for more folks to be in social service oversight, case management. We mentioned The Watch is a new program that's been under pilot with ISAP. So there are a lot of different ways that they could accommodate growth in their numbers should that be the direction they take. But the policy remains to be set and more importantly, the budget remains to be set.And there's different programs that can be activated either on a less -- on a descending less-intensive basis. For example, some people could be monitored every day, every hour of every day. Some people weekly, some people monthly, some people biyearly. All those tools are available to ICE in deciding in addition to direct case management and support services, what level of periodic monitoring is appropriate for that particular person or group of persons.
The program can be opted.
Is this something that's been contemplated in the past? Or is this kind of a new thing?
The different programs we were just referring to, that is presently available to ICE. So they know about our capabilities in performing these different levels of intensity of services. And we have pricing for those different levels of services. It's just a matter of, I guess, funding and priorities where they want to put their money and what's most important at that particular time.
I think the element that's new in that House proposal and remains to be seen in what will be part of the final legislation is the GPS monitoring of all cases until they're decided. So if that were to actually be implemented, it could, in theory, capture most of the legal case docket. But it's just a proposal at this time.
And then just shifting gears quickly. I do appreciate the time. On the state level, have you been able to increase pricing on your state contract? I know that typically, those state contracts get repriced, I believe, on July 1. Did any of that take place for you?
Yes, we have, the last couple of years in particular, because I think -- I guess there's 2 forces at play. Because of COVID, there was a labor shortage and there was a drive -- a need to increase labor costs. And fortunately, for the states, they got a lot of COVID funding that allowed them to do just that in part is how they use those money. So we've been able to fairly consistently increase the pricing in our state contract, primarily to cover the increase in labor costs and medical costs.
You were recovering monies that were already being spent?
Yes. And improving our financial position through that process.
Can you quantify the magnitude of the price increases you got for this fiscal year?
I thought about how much of increased wages in the last 2 or 3 years, I think it's 20%. It's pretty significant because all prior years, I think the average increase was like the 2% CPI that we've seen for years and years and years. And going into the COVID years from '20 to now, it's required almost a 20% increase in labor costs, and probably a similar increase in health care costs.
The next question comes from Jordan Hymowitz with Philadelphia Financial.
First, I don't know if you're aware that actually on this call, what was going on that ICE stats came out and up to 36.8% beds, the highest level ever in the -- well, not ever, in the last 4 years or so. So I mean, I assume that your guidance in the fourth quarter was in any way based on those higher numbers?
No. As I said earlier, our guidance is based on where we've been running at approximately for the third quarter.
So not only did the quarter end higher, but the fourth quarter is beginning much higher than the average?
And it's different than prior years. In prior years, the fourth quarter is usually a lower population because of the weather changing on the southern border and getting colder, a lot of people coming across. Now that's the way it was historically for decades. This year, it seems it could be different.
And I know it's not as much as CXW, but the incremental margin at these levels is higher than the average margin, correct?
It varies by facility depending on how the contract is priced, but it should be incrementally better.
And next of the 9,000 or roughly 12% beds that are unoccupied, should we think about if they do get occupied, the earnings and margin are about average with what's out there? In other words, they're not substantially better or worse?
Well, they're owned facility, so they should be -- the margin should be -- the EBITDA margin should be in line with our historical average for owned facilities, which is in that 25% to 35% range. So it would be a little higher than our average margins because our average margins include international operations and managed only facilities that have lower margins.
And you just mentioned with this new proposal for ISAP, I mean, we're talking 5 million people that could potentially be monitored. I mean that's like multiples of the 100 to 200 you currently are monitoring, I mean, if you don't get all of them or half of them, but that business which has 50% margins could be substantially higher next year if this comes through. Is that correct?
Yes, quantitatively, but as we've discussed, there's different pricing levels for different programs of intensity as far as monitoring. As I said, the most intensive would be monitoring on a daily basis and throughout the day. But it could be as little as once every month or a few months or a couple of times a year.
And final question, could you remind me of the number of beds that were in place during the last Republican administration?
I think they got over 50,000, maybe 52,000.
I think 52 is the right number. So again, if we head towards an election year, if the Republicans should win, the number of beds could be 30% higher.
Could be.
This concludes our question-and-answer session. I would like to turn the conference back over to George Zoley, Executive Chairman for The GEO Group.
Okay. Thank you for joining us on this call, and we look forward to speaking to you on the next call in February. Thank you.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.