Yahoo Finance CoreCivic, Inc. (NYSE:CXW) Q1 2024 Earnings Call Transcript
CoreCivic, Inc. (NYSE:CXW) Q1 2024 Earnings Call Transcript May 9, 2024
CoreCivic, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Good day and thank you for standing by. Welcome to the Q1 2024 CoreCivic, Incorporated Earnings Conference Call. At this time, all participants are in a listen-only mode. After the speakers' presentation, there will be a question-and-answer session. [Operator Instructions]. Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Mike Grant, Managing Director of Investor Relations. Please go ahead.
Mike Grant: Thank you, Operator. Good morning, ladies and gentlemen, and thank you for joining us today. Participating on today's call are Damon Hininger, CoreCivic's President and Chief Executive Officer; and David Garfinkle, our Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. On this call, we will discuss financial results for the first quarter of 2024 as well as updated financial guidance for the 2024 year. We'll also discuss developments with our government partners and provide you with other general business updates. During today's call, our remarks, including our answers to your questions will include forward-looking statements pursuant to the Safe Harbor provision of the Private Securities and Litigation Reform Act.
Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our first quarter 2024 earnings release issued after market yesterday as well as in our Securities and Exchange Commission 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. Management will also discuss certain non-GAAP metrics. A reconciliation of the most comparable GAAP measurement is provided in the corresponding earnings release and included in the company's quarterly supplemental financial data report posted on the Investors page of the company's website at corecivic.com.
With that, it is my pleasure to turn the call over to our President and CEO, Damon Hininger.
Damon Hininger: Thank you, Mike. Good morning, and thank you for joining us for our first quarter 2024 earnings call. On today's call, I will provide details of our first quarter financial performance. I will also discuss with you our latest operational results, and update you on the latest developments with our government partners and our capital allocation strategy. Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will provide greater detail on our financial results and on our updated 2024 financial guidance. Dave will also provide an update on a very active quarter for our ongoing capital structure initiatives, including details regarding our recently completed debt refinancing. I'll start with a high level overview of our first quarter financial results.
In the first quarter, we generated revenue just over $500 million, a 9% increase compared with the prior year quarter. This is our highest level of quarterly revenue achieved since the third quarter of 2019, 18 quarters ago, and it is also our highest rate of year-over-year revenue growth since the same quarter of 2019. The composition of our revenue growth also speaks to the current strengths of our business, as well as to the level of partners' needs and their trust in us. During this quarter, we experienced revenue growth from all three of our partner groups, federal, state and local governments. I will provide more color on each later in this call. For the first quarter of 2024, we generated normalized funds from operation, or FFO, of $52.6 million or $0.46 per share, compared to $38.9 million or $0.34 per share in the first quarter of 2023, representing a per share increase of 35%.
The increase in FFO was driven by the higher federal, state and local populations combined with expense normalization and lower interest expense resulting from our debt reduction strategy partly offset by higher G&A expenses. Revenue from our federal partners, primarily Immigration and Customs Enforcement and the United States Marshals Service increased 11% versus the first quarter of last year. ICE in particular was up significantly as Title 42 was still in place in the comparable period of last year. As a reminder, Title 42, which was invoked in March of 2020, at the start of the COVID-19 response, is a law that empowers federal health authorities to deny migrants entry into the United States in order to prevent the spread of contagious diseases.
Title 42 officially ended May 11 of 2023, and our populations with ICE have been consistently higher since then. As mentioned in our earnings release, during the first quarter of 2024, revenue from ICE was $153.8 million, compared to $130.7 million during the comparable quarter in 2023. After several months of deliberation, Congress passed a bipartisan funding bill in March providing for 41,500 ICE detention beds. Note that these funded beds also include a number of beds reserved at certain facilities under fixed monthly payment contracts, so the actual number detained will likely not achieve that full 41,500 level in the near-term. Interestingly, ICE's total detainee population declined towards the end of the quarter and into the start of the second quarter, and the most recent detainee count published by ICE was 34,373 as of April 20, down from roughly 37,000 to 39,000 during most of the first quarter of 2024.
We believe that this was the result of an expectation of lower number of funded detention beds following the unsuccessful passage of the supplemental funding bill in the early part of the calendar year. As you know, ICE populations are rarely static and we continue to work closely with ICE’s system in their important mission. Our state revenue in the first quarter grew 5% versus the prior year based on higher per diem rates and sturdy occupancy from many of our state government partners, as well as contributions from two new state contracts signed in the fourth quarter of 2023. Now, in its second full year under a management contract with the State of Arizona, our La Palma Correctional Center in Eloy, Arizona continues to show stable occupancy as well as improving operating and financial metrics.
During the first quarter, we were able to discontinue the facility's reliance on temporary labor resources and incentives due to strong local hiring and management oversight. This is a welcomed accomplishment as La Palma is our second largest facility by capacity, so moving its financial performance in the right direction has been and continues to be a priority. To round out our revenue discussion, local revenue, which is primarily revenue generated from contracts with county governments grew by 44% albeit off a smaller base. This was the first full quarter with both Hinds County, Mississippi, and Harris County, Texas, as partners resulting from management contracts signed during the second half of 2023. Both populations are housed at our Tallahatchie County Correctional Facility located in Tutwiler, Mississippi, and both contracts are now fully ramped.
Our occupancy for the first quarter of 2024 was 75.2%. This is our highest occupancy rate since the first quarter of 2020, which as you may recall is the quarter that marked the start of the COVID-19 pandemic response. From the first quarter of 2023 to the first quarter of this year, occupancy in our Safety segment increased from 71% to 76% and occupancy in our Community segment increased from 59% to 63%. As we have mentioned in the past, our operating model has significant operating leverage to changes in occupancy and this was a factor in our margin improvement during the first quarter. In addition to receiving larger populations from existing contracts with ICE and state customers, our strong occupancy also reflects the successful ramp of four new contracts announced during the third and fourth quarters of 2023.
These new contracts include a contract for 120 Montana inmates at our Saguaro Correctional Facility in Eloy, Arizona, a contract for 240 Wyoming inmates at our Tallahatchie County Facility in Mississippi, and the two new county contracts mentioned previously for up to 610 detainees also at our Tallahatchie facility. These four new contracts completed their initial intakes during the fourth quarter of 2023 and into the first quarter of 2024 and contributed to our growth in occupancy and revenue. We are grateful for the high degree of trust from our partners that these existing expanded contracts represent, and I couldn't be more prouder of our dedicated employees who helped earn that trust by providing the flexibility and timely delivery of quality services our partners rely on to fulfill their missions.
Next, I want to provide an update on labor attraction and retention, an important component of our business that became unusually challenging starting with the onset of the COVID-19 pandemic. During 2022 and 2023, labor market pressures necessitated temporary incentives and related incremental operating expenses. During those two years, we designed and deployed different human capital strategies and made significant investments in our frontline employees. Through those actions, we have increased our staffing levels through improved recruiting and retention. We are now seeing significant normalization in our labor market as well as greater workforce stability. Financially as we review first quarter results, our improved staffing has allowed us to dial back the higher spending on temporary incentives and associated travel expenses and has positioned us well operationally to manage our customers' higher population needs.
Turning to our Community segment, which is comprised of 23 residential reentry facilities, we experienced an increase in occupancy to 63.1% in the first quarter of 2024 versus 59.4% in the prior year period. Our facilities in this segment serve the Bureau of Prisons as well as state and county governments, and the increase in occupancy in this segment was broad-based. We also provide electronic monitoring and case management services in our Community segment. Our Community segment represents a vital part of our reentry mission and is often critical to the successful reentry of residents in our care. Net operating income in this segment increased 56% in the first quarter of 2024 from the prior year quarter due to increased occupancy as well as per diem increases obtained in connection with contract renewals.
Similar to our Safety segment, our Community segment facilities have been able to reduce temporary staff incentives. The positive occupancy trend in the Community segment is likely to continue now that pandemic-related public health policies have ended and as more of our government partners return to these important residential reentry programs that help individuals better prepare for successfully returning our communities. The strong financial results reflected throughout our business have enabled us to execute on our long-term capital allocation strategy with more intensity. During the first quarter of 2024, we repurchased 2.7 million shares of our common stock at a cost of nearly $40 million, surpassing the amount we repurchased during all of 2023.
Even after these repurchases, we ended the quarter with leverage measured as net debt to adjusted EBITDA at 2.7x for the trailing 12 months, placing us for the first time within our target leverage range of 2.25x to 2.75x that we established in August of 2020. This is a significant accomplishment and we are proud of the strategy, focus and discipline that has led us here. We believe maintaining a disciplined capital allocation strategy, combined with strong financial results, also contributed to the successful refinancing of substantial portion of our debt during the quarter, including the issuance of $500 million of 8.25% senior unsecured notes and the repayment of nearly $600 million of our senior unsecured notes. Dave will provide you further detail regarding these significant capital market activities.
Looking ahead, the longer-term macro environment for our federal, state and local business remains positive. Our government partners are facing complex capacity, infrastructure, budgetary and population challenges, and we see increased opportunities to serve their evolving needs. This demand potential is evident from looking at jail backlogs, prison forecasts, and from discussions with our government partners. In particular, we remain in discussions with federal, state and local government agencies, including agencies we do not currently serve to help address their various challenges in the near to long-term. In conclusion, the macro environment in which we operate continues to improve. Our financial results, including those published last night, reflect that improved environment, but those results also reflect the hard work, the attention to detail, and the smart decisions made by our dedicated team here at CoreCivic.
Our occupancy is rebounding to its highest level in nearly four years, and our margin is beginning to illustrate the operating leverage that comes with higher occupancy and normalized expense structure, reflecting our progress against labor-related cost pressures that rose sharply during the COVID-19 pandemic. Our strong financial results and disciplined capital allocation strategy has provided us with tremendous balance sheet flexibility to better maximize shareholder value. Based on our financial performance to start 2024 and positive outlook for the remainder of the year, we have updated our full year financial guidance, including increases to our adjusted EBITDA by nearly $10 million, adjusted EPS by $0.06, and normalized FFO per share of $0.08.
One more comment if you don't mind, before I turn the call over to Dave. This week is National Correctional Officers and Employees Week, a week started by President Ronald Reagan in the 1980s to recognize the contributions of the professionals in our vocation. I would like to say to our teachers, nurses, chaplains, those who wear the uniform, and all who work within our company, my sincere appreciation for what you do in helping us achieve our mission each and every day. Now, I will turn the call over to Dave Garfinkle, our CFO, who will provide a more detailed look at our strong first quarter financial results, assumptions included in our newly updated financial guidance, as well as further details regarding our capital market activities. Over to you, Dave.
David Garfinkle: Thank you, Damon, and good morning, everyone. In the first quarter of 2024, we reported GAAP net income of $0.08 per share compared with $0.11 per share in the prior year quarter. Excluding special items, adjusted EPS during the first quarter of 2024 was $0.25 compared with $0.13 per share in the prior year quarter. Special items in the first quarter include $27.2 million of expenses associated with debt repayments and refinancing transactions and a small gain on sale of real estate assets. Normalized FFO per share was $0.46 during the first quarter of 2024, compared with $0.34 in the prior year quarter, an increase of 35%. Adjusted EBITDA was $89.5 million during the first quarter of 2024, compared with $73.7 million in the prior year quarter, an increase of $15.8 million, or 21%.
The increase in adjusted EBITDA resulted from higher occupancy from federal, state and local populations and the continued normalization of our operating expense structure, partially offset by an increase in G&A expenses. These factors, along with a lower normalized effective income tax rate in the current year quarter, also contributed to the increase in adjusted EPS and normalized FFO per share. The lower normalized effective income tax rate resulted from an income tax benefit associated with stock-based compensation vesting, contributing to a favorable impact of $0.02 per share. While this tax consequence occurs every year, the benefit was amplified by a rise in our stock price since the grant date, resulting in a higher tax deduction. In our Safety segment, our largest segment facility net operating income increased $18.4 million, or 21%, to $107.6 million in the current year quarter from $89.3 million in the prior year quarter.
The increase in NOI was driven by an increase in occupancy in this segment from 70.9% to 76.1% primarily resulting from higher populations from ICE due to the expiration of Title 42 on May 11, 2023. Title 42 is a policy that had been used since March 2020 that denied entry at the U.S. border to asylum-seekers and anyone crossing the border without proper documentation or authority in an effort to contain the spread of COVID-19. Since Title 42 expired, ICE detention populations have grown nationwide. Occupancy also increased due to new contracts signed in the second half of 2023, including two new state contracts with the states of Montana and Wyoming, and two new county contracts with Hinds County, Mississippi, and Harris County, Texas. In our Community segment, facility net operating income increased $2.1 million, or 56% to $5.8 million in the current year quarter from $3.7 million in the prior year quarter.
Occupancy in the Community segment increased from 59.4% to 63.1% and was broad-based as more of our government partners are returning to these important residential reentry programs that help individuals to be better prepared for successfully transitioning from a period of incarceration into our communities following systemic disruptions during the COVID-19 pandemic. Operating margins in our Safety and Community facilities combined improved to 23.7% in the first quarter of 2024, compared to 21.2% in the prior year quarter. The increase in our operating margins was due to the increase in occupancy from 70.1% to 75.2% for our Safety and Community segments combined. Per diem increases we have been successful in obtaining, which served to increase revenue per mandate by 4.1% over the prior year quarter and the normalization of operating expense trends we have experienced over the past several quarters continuing into the first quarter of 2024.
During the first quarter, we were able to continue reducing certain incremental labor-related expenses such as registry nursing, temporary wage incentives, and travel, despite inflation and labor market pressures that have been steadily easing over the past several quarters. These three expense categories declined by $6.1 million from the first quarter of 2023. In our Property segment, facility net operating income declined $1.3 million due to the expiration of the lease with the State of Oklahoma at our North Fork Correctional Facility effective June 30, 2023, partially offset by the transition of the Allen Gamble Correctional Center from a facility we operated in our Safety segment to a facility we leased to the State of Oklahoma in the Property segment effective October 1, 2023.
Turning next to the balance sheet, during the first quarter, we completed the issuance of $500 million of unsecured notes at an interest rate of 8.25%. The proceeds of these notes, which have a maturity date of April 15, 2029, were used to tender for our then outstanding 8.25% unsecured notes with the maturity date of April 15, 2026. Note holders with an aggregate principal amount of $494.3 million, or 83.3% of the aggregate principal amount of the old 8.25% unsecured notes outstanding tendered their notes by the expiration date on March 11, and on April 15, we redeemed the remaining $98.8 million balance outstanding. In addition to the net proceeds received from the issuance of these notes, we used borrowings under our revolving credit facility and cash on hand to fund the tender and redemption of the old 8.25% unsecured notes.
The old 8.25% unsecured notes were originally issued in 2021, and we were very pleased to be able to issue the new notes with the same coupon as the old notes, even though treasury rates have risen by approximately 325 basis points since then, which we believe is a testament to our disciplined capital allocation strategy and ongoing strength of our business. During the first quarter, we also repurchased 2.7 million shares of our common stock at an aggregate purchase price of $39.4 million, or $14.52 per share, exceeding the $38.1 million of shares we repurchased throughout all of 2023. Since our share repurchase program was announced in May 2022 through March 31, we have repurchased 12.8 million shares of our stock at a total cost of $152 million, or an average price of $11.87 per share, leaving $73 million available under our $225 million Board authorization.
Our leverage measured by net debt to adjusted EBITDA was 2.7x using the trailing 12 months ended March 31, 2024, down from 2.8x at December 31, 2023, and reaching our targeted leverage of between 2.25x and 2.75x. We achieved our targeted leverage in the first quarter despite using $32 million of cash for costs associated with the debt repayments and issuance of the new notes, and despite repurchasing shares of our stock at an accelerated pace during the quarter. Following the repayment of the old 8.25% unsecured notes; we have no debt maturities until 2027, when a modest $243.1 million of unsecured notes at a rate of 4.75% mature. As of March 31, we had $111.4 million of cash on hand and an additional $257 million of borrowing capacity on our revolving credit facility, providing us with total liquidity of $368.4 million.
We used $106.9 million of this liquidity to fund the aforementioned final redemption of the old 8.25% unsecured notes in April, including the redemption premium and accrued interest on these notes. Moving lastly to a discussion of our 2024 financial guidance, we expect to generate adjusted EPS of $0.66 to $0.76, up from our previous guidance of $0.58 to $0.72 and normalize FFO per share of $1.56 to $1.66 up from our previous guidance of $1.46 to $1.51. Our guidance reflects our outperformance in Q1 relative to our internal forecast, leaving the remainder of our forecast essentially unchanged from our previous guidance. Relative to 2023, our guidance continues to reflect growth in state and local residential populations largely attributable to the new contract awards obtained during the second half of 2023.
Our guidance further reflects an increase in our average daily federal populations in 2024 compared with 2023, mainly due to the expiration of Title 42 in May. As with our previous guidance, we expect federal populations to remain within a stable range throughout 2024. Even though Congress appropriated additional funds for 41,500 detention beds, ICE detention populations nationwide have yet to approach this higher funded level. If federal populations increase toward the higher levels funded for detention beds, there could be upside to our guidance. Consistent with our last guidance, our updated guidance contemplates the continuation of a normalized hiring market for labor with less reliance on temporary incentives but resulting in higher staffing costs as we continue to increase staffing levels in response to the higher occupancy we are experiencing post-COVID.
Our guidance continues to contemplate the expiration of the lease with the State of California at our California City Correctional Center effective March 31, 2024. This facility generated EBITDA of $7.2 million and $25.5 million for the three months ended March 31, 2024 and the 12 months ended December 31, 2023, respectively, and is therefore expected to result in a per share reduction of $0.06 from Q1 to Q2 and $0.15 to $0.16 from 2023 to 2024. Our guidance does not include any other contract losses or any new contract awards not previously announced because the timing of government actions on new contracts is always difficult to predict. With respect to our capital allocation strategy, we expect to repurchase additional shares of our common stock, taking into consideration our leverage earnings trajectory, stock price, liquidity, and alternative opportunities to deploy capital.
Our guidance includes a range of pre-purchase scenarios at various amounts and at various assumed prices, but we will not likely sustain the pace in Q1 unless we experience a larger increase in populations than we had forecasted, maintaining discipline on our targeted leverage ratio. We also expect to use our cash on hand and cash flow from operations to continue paying down debt, prioritizing debt repayments on our revolving credit facility, which we utilize to redeem the remaining balance of our old 8.25% unsecured notes in April. Given the strength of both our balance sheet and cash flows, and newly extended debt maturities, we have considerable flexibility in how we deploy our liquidity and free cash flow as well as how we balance our capital allocation strategy between debt repayments and share repurchases.
Again, our guidance contemplates a range of scenarios associated with debt reduction and share repurchases. We expect AFFO, which we consider a proxy for our cash flow available for capital allocation decisions to range from $172.8 million to $185.3 million or $1.55 to $1.66 per share, up from our previous guidance of $158.3 million to $175.3 million or $1.42 to $1.57 per share. We expect that our normalized effective tax rate to be approximately 29% for the remainder of the year, which after considering the lower effective tax rate for the first quarter equates to an annual effective tax rate of approximately 27%. The full year EBITDA guidance in our press release provides you with our estimate of total depreciation and interest expense. We are forecasting G&A expenses in 2024 to be slightly higher than 2023.
We plan to spend $62 million to $66 million on maintenance capital expenditures during 2024, unchanged from our previous guidance, and $8 million to $10 million for other capital investments, up $1 million from our previous guidance. I will now turn the call back to our operator to open up the lines for questions.
Operator: Thank you. At this time, we will conduct the question-and-answer session. [Operator Instructions]. Our first question comes from the line of Joe Gomes of Noble Capital. Your line is now open.
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