Corrections of America's (CXW) CEO Damon Hininger on Q1 2014 Results - Earnings Call Transcript

May. 8.14 | About: Corrections Corporation (CXW)

Corrections of America (NYSE:CXW)

Q1 2014 Earnings Call

May 08, 2014 11:00 am ET

Executives

Damon T. Hininger - Chief Executive Officer, President, Director and Member of Executive Committee

David M. Garfinkle - Chief Financial Officer and Executive Vice President

Analysts

Gregory Bardi - Barclays Capital, Research Division

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Kevin D. McVeigh - Macquarie Research

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Clara Houin - Avondale Partners, LLC, Research Division

Operator

Good morning, everyone, and welcome to CCA's First Quarter 2014 Earnings Conference Call. If you need a copy of our press release or supplemental financial data, both documents are available on the Investor page of our website at www.cca.com.

Before we begin, let me remind today's listeners that this call contains forward-looking statements pursuant to the Safe Harbor provisions of the Securities and Litigations Reform Act. These statements are subject to risks and uncertainties that could cause actual results to differ materially from statements made today. Factors that could cause operating and financial results to differ are described in the press release as well as our Form 10-K and other documents filed with the SEC.

This call may include discussion of non-GAAP measures. The reconciliation of most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data on our website. We are under no obligation to update or revise any forward-looking statements that may be made to reflect events or circumstances after the date hereof or to reflect the occurrences of unanticipated events.

Participating on today's call will be our President and CEO, Damon Hininger; and Chief Financial Officer, David Garfinkle.

I'd now like to turn the call over to Mr. Hininger. Please go ahead, sir.

Damon T. Hininger

Thank you, Zach. Good morning, and thank you to our valued shareholders, analysts and other participants for joining our call today. In addition to David Garfinkle, we also have our Chairman of the Board, John Ferguson; Director, Bill Andrews; and also, our VP of Finance, Brian Hammonds, joining us on the call today.

After my opening comments, I'll give a highlight of the results of the first quarter, then give a business update and then finally hand it off to David Garfinkle in a few minutes.

But first, a couple of global comments for new REIT investors, first of which is to tell you that CCA's business is stronger than ever. 2013 marked our 13th consecutive year of EPS growth and a compounded average growth rate of 11% over the last 8 years of AFFO per share. And based on our guidance from last night, we are well on our way to our 14th consecutive year. More importantly, our 10-year share price performance is north of 250%, showing our long-term track record of outperformance.

Now with CCA, you have a clear market leader with the company owning and controlling almost 60% of the privately owned beds in the U.S. marketplace. And with that, 95% of our net operating income is generated from our owned beds. But we also enjoy a very modest real estate maintenance CapEx of 5% of NOI.

As for the market, we're experiencing extremely limited public sector investment on new government-owned capacity to address the challenges they face with growth, overcrowding and aging facilities. And this lack of development is unprecedented in the last few decades within our industry. And with less than 10% penetration by the private sector, we have meaningful opportunities in the U.S. marketplace as evidenced by our new agreements at our Cal City, Red Rock and Trousdale facilities.

So for some highlights of the quarter, first of which normalized FFO was nearly $73 million, an increase in operating cash flow as compared to last year. Second, you will see -- you have seen in this quarter and will see going forward for a few quarters a decline in our revenue when comparing year-over-year. This has had minimal impact on our earnings as net income is actually up year-over-year, and this represents in large part our successful efforts this past year in transitioning out of several underperforming managed-only contracts. This year, we have been working diligently on our new Trousdale project. And on Monday, April 28, the Trousdale County commission here in Tennessee approved unanimously the 2 agreements for this new facility. The agreement between CCA and the county has been executed, and the IGA between the state and the county should be executed this quarter. We're very excited about this new $140 million project that should be completed and online the last half of 2015.

The durable nature of our cash flow growth has enabled us to pay a $0.51 dividend and work towards an annual rate of $2.04 a share. We are only just over 1 year as a REIT, and we did a 6.25% increase to our dividend in the first quarter. And we think this is a good indicator in our confidence in the business.

At the same time, as we are focused on delivering continued shareholder value, we are also consistent in managing our business with discipline. At the end of the quarter, our debt-to-EBITDA was at 3.3x, which, as you know, is low compared to other REITs. Our outstanding credit metrics, scale of our real estate assets with a 75-year life, extremely durable earnings record, high barriers to entry, diverse, highly-rated government payers and long contract terms have allowed us to enjoy industry record low pricing in the debt markets this past year.

Now we are winning with our solutions in all the ways that are most important to us, in customer loyalty and customer satisfaction. For many years, CCA has enjoyed strong customer retention rates in excess of 90%, and each spring, late summer, we renew many of our contracts with our state partners. So sitting here today, we feel good about all of our July 1 renewals. Our retention record is not something we -- is not something we do not nor cannot take for granted. We focus relentlessly on continuous improvement on our operations, from running even safer and more secure facilities to offering evidence-based reentry progress proven to help prepare inmates for success when they return to our communities. Ensuring our operations are performed with integrity and deliver high-quality services while creating meaningful value allows us to achieve this high level of contract retention.

As reported late last year, we are extremely pleased with our new lease agreement with California at our California City facility. This is a great solution for California in providing in-state capacity at a critical juncture in their federal court overcrowding case.

Similar to our Cal City solution, we are seeing around the country more meaningful interest, primarily in the local market, which we define as cities and counties, for this similar type of partnership where we would purchase a government-owned facility and lease it back to the government jurisdiction.

Now because we know we have a tremendous opportunity to create value for our shareholders by offering our partner solutions that optimize occupancy with our existing owned facilities, this continues to be our #1 priority because filling our existing capacity could add significant cash flow, up to $1 of diluted EPS with little or no incremental capital expenditures.

We're sitting here today with occupancy in the mid-80s, which is similar to where we were about 10 years ago coming out of the last recession. Our occupancy peaked around 98% in 2008 -- excuse me, 2007, which led us to build additional capacity for new and existing partners. And we've made great progress against this goal during the last half of 2013 with us both -- with us having both our 2,400-bed North Fork and 1,700-bed Cimarron facility in Oklahoma being ramped up so they will now be fully utilized as we go through 2014, along with the entire capacity of our Cal City facility being absorbed now by California and the entire Red Rock capacity of 1,500 beds being dedicated to Arizona. Even with this progress, our CCA team continues to actively identify ways to meet the significant needs of existing or new partners to utilize this existing capacity as we look to the balance of 2014.

And just finally, a comment about CAI. Nine months have passed since our acquisition last August, I should say, and we are very thrilled by both the financial and operational performance of these facilities. We see this business, which is residential reentry, as the natural broadening of the scope of reentry services we provide as well being a nice platform to continuing our growth for the foreseeable future. And we see -- we are currently, I should say, pursuing additional opportunities in this area.

So let me now provide a few specific updates on the business and go in first on the state side with a few updates since we last talked in February, first of which we're still very thankful for our new contract with the state of Arizona. This is utilizing capacity that was formerly used by California at our Red Rock facility. We had to do some retrofits, which were fully completed late last year, and we started taking inmates in January. Currently, our population is nearly at 500 at this facility. But I should also note that the 2015 budget has been enacted in Arizona and includes funding for a second allotment of 500 beds at our Red Rock facility.

Now this facility showed a 23% occupancy in the first quarter and is currently running at a loss. So we estimate that this will be about a $0.13 to $0.15 earnings swing when at full utilization versus 2014 performance, and this is just going to be a matter of time. And just as a reminder, Arizona is one of the states that has been showing growth. And in this past year, they've grown by 1,000 inmates.

As I said earlier, we're extremely excited about our new Trousdale County facility, which is 200 -- 2,552 beds here in Tennessee, and this will help with the state deal with their overcrowding. This new contract will be our first one in nearly 10 years here within the state of Tennessee, and this new facility will generate north of $50 million in revenues and about $0.10 to $0.12 in earnings at full utilization.

Now a couple specific observations I'd like to share about the current landscape and how state partners will be looking at CCA to help them address their challenges.

Eight existing state customers have seen increases in the past 12 months at a combined total of 4,500 inmates. And a couple of examples of these, first of which is Tennessee. Tennessee has seen an increase by over 1,700 inmates over the last 3 years. And even with our new Trousdale facility, they are projected to be meaningfully overcrowded over the next few years.

Oklahoma is another one of those states. Oklahoma has increased their utilization of our in-state beds by 800 inmates over the last 22 months, and they currently have an RFP on the street for up to another 2,000 beds.

Colorado will be the last current state partner I'll highlight here. Our Colorado populations have increased by 10% over the last 7 months. And looking forward, our 11 state customers where we provide owned and managed solutions, excluding California, are expecting a significant bed shortfall over the next 5 years, which can result in overcrowded situations.

We've been reporting also for several quarters about possible new state prospects with significant projected overcrowding in the next 5 years. And West Virginia has been one of those states. They currently have a procurement on the street for 400 beds, and we submitted our proposal on that procurement back in November of last year, which we understand that ours is the only one submitted. We think our available capacity in Kentucky will be very attractive to them. And on the procurement, we expect a decision on the award in the coming weeks.

I'd also like to make a comment about our Diamondback activation. As mentioned in the press release, we have decided to re-idle this facility. While the state of Oklahoma still has a peak in procurement for additional beds in-state and we still feel that Diamondback will be a very attractive solution, it doesn't appear Oklahoma will be acting on the procurement anytime soon, and we feel idling the facility would be a prudent course for the company in the near term. But we are also taking steps to position ourselves to react very quickly to any future needs of our partners.

And as for state customer budgets, we are in the late innings of the legislative season for many of our state partners in their budget development for 2015. 13 of our state partners have legislative sessions this year. And to date, 7 of those 13 have completed their budget work. Those 7 have passed budgets at -- that are at levels that fully fund our contracts.

At a higher level, we are seeing state economies modestly improving, and many states are exceeding their revenues forecasts. With this, we continue to be cautiously optimistic that this will manifest itself into a price improvement going forward. But in the near term, we're also encouraged that this improved budget environment has led to recent actions taken by Tennessee and Arizona and, moving forward, in using the private sector demands. So really very real challenges of growth, overcrowding and aging infrastructure.

As for requested new public sector capacity, we have observed minimal new appropriations for construction of new government-owned capacity to address overcrowding and population growth over the last few years. This limited amount of public sector investment in critical capacity is unprecedented. And to make matters worse, our research indicates that 200,000 public sector beds are in operation today that are in facilities that are 75 to 100 years old. As I've said earlier, we are in the thick of legislative season for our -- many of our state partners, but it appears that we will see another year in 2015 with very limited public sector investment.

Now to the federal book of business, and note here the President's proposed budget for 2015. The President released his budget for fiscal year 2015 on March 4. For both BOP and the United States Marshals Service, the President is proposing modest increases over the 2014 funding levels, which shows appropriate funding levels for all of our contracts. As for ICE, the President is proposing a 2015 budget at a lower level than the approved 2014 funding level. Now this is similar to what happened last year when the President requested lower ICE funding levels, and Congress ultimately approved and enacted higher funding levels for ICE detention [ph] and enforcement operations. As the process dictates, Congress has begun work on fiscal year 2015 appropriation bills for ICE and our other federal government partners, and final funding levels are expected to be agreed upon later this year.

So with that, we are very pleased about the quarter. I greatly appreciate the CCA management team, the wardens and our entire team of CCA corrections professionals here in Nashville and nationwide. So with that, let me welcome my new earnings call partner to the microphone, David Garfinkle. As mentioned several weeks ago, we have promoted Dave to the role of CFO. Dave, as you know, is a 13-year veteran of CCA, and both the board and management team are excited about his ascension to this position. So with that lead in, let me now turn the call over to David.

David M. Garfinkle

Thank you, Damon, and good morning, everyone. After serving in a supportive role on these earnings call for many years, I can't tell you how excited I am to be sitting in this chair today. I would like to thank Damon, John, Bill and the rest of the Board of Directors for placing their confidence in me, and Todd for sharing his wisdom and guidance, which has enabled me to assume this responsibility. To our shareholders, I'm committed to continuing to be a good steward of our capital, which I realize is your investment. Now on to the quarter.

In the first quarter of 2014, we generated $0.44 of adjusted EPS, while normalized FFO totaled $0.62 per share. One important reminder when comparing 2014 per share amounts to 2013, per share amounts were impacted by the issuance of 14 million shares as part of the special REIT conversion dividend in May 2013. However, the 2013 per share amounts, as reported in the GAAP financial statements, have not been restated to fully reflect shares issued as part of the stock dividend. Therefore, for your convenience, pro forma per share amounts for 2013, calculated assuming those shares have been outstanding for all of 2013, are presented in both the press release and supplemental.

Pro forma adjusted EPS and normalized FFO per share in the prior year quarter were $0.44 and $0.61, respectively. These amounts excludes REIT conversion costs, refinancing expenses and the significant income tax benefit resulting from the reversal of net deferred tax liabilities associated with our conversion to a REIT. First quarter 2014 earnings were at the high end of our expectations primarily due to higher revenues, excluding the contract adjustment mentioned in our press release, which had no net P&L impact when you consider the same reduction to operating expenses.

We also experienced lower-than-anticipated income tax expense, which resulted from some tax planning strategies and other onetime factors in our taxable REIT subsidiary.

G&A expenses were higher than forecasted due to a $1.5 million write-off for a parcel of land in California we previously optioned [ph] in connection with the construction of our Otay Mesa detention center. We were able to design a more efficient structure that no longer required this parcel as part of the footprint.

AFFO for the first quarter of 2014 was within the range of our guidance and was negatively impacted by the accelerated timing of capital expenditures that we don't believe will be indicative of an increase in capital expenditures for the full year. In other words our AFFO guidance for the full year is unchanged at $2.49 to $2.58.

Comparing the sequential quarter, adjusted EPS was in line with the fourth quarter of 2013 despite 2 fewer calendar days in Q1 and an increase in unemployment taxes of about $0.03 due to lease termination expenses at our North Georgia facility in Q4 and an improvement in NOI at Red Rock due to the ramp down in Q4 and commencement of the new contract in Q1. We also generated a full quarter of lease revenue at Cal City in Q1.

Moving next to a discussion of our guidance. As indicated in the press release, adjusted EPS guidance for the full year remains unchanged at a range of $1.84 to $1.92, while Q2 2014 adjusted EPS guidance is a range of $0.45 to $0.47. Full year FFO per share guidance also remains unchanged at $2.56 to $2.64.

I would like to spend a few minutes walking through the primary issues affecting second quarter guidance. The reduction in unemployment taxes from Q1 to Q2 is about $3 million, or $0.02, as we pay over 2/3 of our annual unemployment taxes in the first quarter. In addition, we expect an additional $0.02 in Q2 for the elimination of closing costs incurred at -- in Q1 at the North Georgia facility and an improvement in operations at Red Rock as we expect to have approximately 500 inmates for the full quarter in Q2. These increases are partially offset by about $0.02 to $0.03 per share for an increase in our effective income tax rate from 2.6% in Q1 to about 8% to 9% in Q2, primarily due to seasonal factors and other onetime items in Q1.

With regards to our Diamondback facility, we began staffing our Diamondback facility late in the third quarter of 2013 in order to be able to immediately respond to the state of California's need for additional capacity in the event the 3-judge panel adhered to previously established deadlines for the state to reduce their population cap to 137.5% of capacity. Further, in January, the state of Oklahoma issued a request for a proposal for an initial 350 beds with the potential to expand up to 2,000 beds with the expectation of an award commencing in early May. Our Diamondback facility is ideally suited for either of these opportunities. However, the deadline for California's population cap was extended by 2 years. And although the RFP from Oklahoma remains outstanding, and we hope to win the award, when it became evident the contract will not be awarded and commenced in the near term, we made the difficult decision to re-idle the facility. Although we would, obviously, be happier with an award, our 2014 forecast was not materially affected by this decision since it initially contemplated a few hundred inmates for the balance of 2014.

Q2 and full year G&A expense are expected to approximate 6% of total revenues. Depreciation expense for the full year 2014 is estimated at $115 million to $117 million. We are assuming a consolidated GAAP income tax rate of approximately 8% to 9% in Q2 and an average of 7% to 8% for the full year because of the low rate in Q1.

Weighted average diluted shares outstanding for Q2 is estimated at 117.5 million, while full year weighted average shares outstanding is estimated at 118 million.

I will now turn it back over to Damon.

Damon T. Hininger

Thank you, Dave. So let me bring to a close our comments and make these finals points. As you know, we completed the conversion to a REIT the past year. And for new REIT investors on the call, we are a company that, one, has had 14 conservative years of EPS growth with a CAGR of 11% over the last 8 years of AFFO per share, well on our way to our 14th consecutive year, and we think this demonstrates a strong and durable earnings performance for CCA. More importantly our 10-year share price performance is north of 250%, showing our long-term track record of outperformance. We are the clear market leader with the company owning and controlling almost 60% of privately owned beds in the U.S. marketplace. With that, 95% of our NOI is generated from owned beds, and modest real estate maintenance CapEx at 5% of NOI. Historical customer retention rate is in excess of 90%, which we expect to maintain based on our renewal activity this year. Competitive dividend payout ratio at 80%, 6.25% increase in the annual amount in the first quarter of this year, all the while deploying $300 million in new facility CapEx shows our confidence in the business, all the while we have a very strong balance sheet with debt-to-EBITDA of 3.3x, which, as you know, is low compared to other REITs.

So strong operating record, very viable real estate assets with 75-year life, high barriers to entry and diverse, highly-rated government payers make this industry and this investment very attractive. And with less than 10% penetration, meaningful opportunities in the U.S. marketplace.

As for the business outlook, population increases we are seeing indicate a continued need for our solutions we provide, and we are encouraged by the improved budget environment on the state side. We're seeing extremely limited public sector investment on new government-owned capacity to deal with growth and overcrowding and aging infrastructure. And we have existing capacity to deal with these challenges of our partners. And filling this capacity could add significant cash flow up to $1 to diluted EPS with little or no incremental CapEx.

So we clearly have more to do. But last year, first quarter of 2013, we had 6,400 owned beds at North Fork, Cal City and Cimarron, and these 3 facilities were running from an occupancy perspective 50% to 80%. Now all 3 are 100%, so we clearly are making progress. But clearly, as I've said earlier, we've got more to do.

So with increased utilization of existing owned beds, the further -- the future contributor -- contribution, excuse me, of Trousdale and Red Rock, purchase opportunities increasing for government-owned prisons and residential reentry acquisition opportunities, we had a good earnings return story of 5% to 7% over the next 3 to 5 years. And this is on top of a 6% dividend yield.

So this concludes my prepared remarks. Thank you again for calling on today's conference. But before I turn the call over to the operator for Q&A, I would like to recognize a few people. First, one in this past year and more recently 3 this quarter, we have had a total of 4 directors retire from our board. And that is [indiscernible] Russell [ph], John Horne, Dennis DeConcini and Bill Andrews. All 4 have been long-serving directors for us, and we are eternally grateful for their service to CCA. And for me personally, I appreciate their support, guidance and advice to me as CEO during my term, which has been nearly 5 years. And I especially appreciate Bill Andrews' many years of service as our Board Chair. Bill came in with John, when the company was in a ditch. He went on about business, putting together a very high-functioning, strong board to put us back on track, and I really appreciate his leadership.

I also want to make a comment about Todd Mullenger. As you know he's stepping down as CFO and has been with the company nearly 16 years and nearly 8 years as CFO. And we're extremely grateful for his service and all that he has also done for the company. Todd is a good friend of mine and has had many accomplishments, most recently, as you know, leading us through the successful REIT conversion this past year.

So with that, I'd now like to turn the call over to Zach for Q&A.

Question-and-Answer Session

Operator

[Operator Instructions] We'll go first to Manav Patnaik with Barclays.

Gregory Bardi - Barclays Capital, Research Division

This is actually Greg calling on for Manav. First, on -- as you're looking more and more into landlord-type contracts, I was wondering if your view on the 12% to 15% ROI targets has changed, especially for the contracts where you won't be taking on the operating risk.

Damon T. Hininger

This is Damon. The short answer is no. We are seeing pretty meaningful interest, as I said earlier, on the local side, city and counties. So this is somewhat uncharted territory to see if our solution would make sense, which is to buy the facility and lease it back to the government partner. We think there's a lot of value to provide not only in a case where help with an immediate capital infusion to a city or a county but also maybe help them get over the hurdle of dealing with some maybe deferred maintenance. And even if it's a county that has grown but they haven't been able to deal with the overcrowding, we can also help them with maybe optimizing the facility and/or expansion. So as of right now, we think our hurdle that we've set forth many years ago, we think, is appropriate. That is something we'll evaluate as we get further into these opportunities.

Gregory Bardi - Barclays Capital, Research Division

Okay, that's helpful. And I guess on the community services, 9 months into the CAI acquisition. I was wondering if you could give a little more color on the traction you're seeing in that business and maybe the opportunity you see there, especially in California.

Damon T. Hininger

Absolutely. So a couple of observations, one of which is on the federal side. So the Federal Bureau of Prisons is a major partner using those beds at CAI. And nationally, they have about 9,000 inmates in these facilities spread all over the country. And what we've seen over the last few years, the amount of beds they need has grown. The amount of funding they're getting from Congress has grown and pricing also has improved. So we're seeing kind of all the key metrics, population, pricing and also funding support from Congress, going in the right direction. And from a political perspective, it's been our kind of observation in talking to different stakeholders that Republicans and Democrats, they think that use of these beds is a good thing. So we think that there's going to be continued support for these type of facilities nationwide. Having a footprint in California with CAI is also, we think, a good thing. So it's kind of the second part to your question. As you know, California has gone through a significant change where they have moved population from the state level to a local level that's put a lot of strain on counties all over the state. And so we think having a footprint in San Diego could lead to providing a solution with other counties within the state of California. So nationally with the Federal Government, we think there's good opportunity there. And specifically in California, we also think having now a kind of foot in the door in that market in California is a good thing as counties deal with their issues at a local level going forward.

Gregory Bardi - Barclays Capital, Research Division

Great. And one more, if I can sneak it in. Your competitor on their call mentioned their interest in development of broader correctional complexes, especially for local governments. I was wondering if you guys have any interest in similar-type projects.

Damon T. Hininger

Yes, we're keeping a close eye on that. The -- around the country right now, we are seeing some kind of larger, I'd say, metropolitan areas looking at a complex that may have CapEx deployed on things in addition -- or, I guess, in addition to actual detention space. So you see some jurisdictions looking at a kind of a total turnkey solution where you have only jail space but also courtroom space, maybe space for law enforcement. So we're keeping a close eye on that. And there is, like I said, a little bit of activity where they're looking for somebody to provide that solution. So those, we think, are potential opportunities. I'd say on the earlier question, the opportunities where we can maybe go in and buy a jail, become the landlord and, again, give them certainty both [ph] on maintenance CapEx and where we'll also be their partner on dealing with growth and overcrowding, we think that may be is a little more of a higher or a bigger opportunity for us versus the early one about a complete turnkey solution on a complex.

Operator

And we'll go next to Tobey Sommer with SunTrust.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

This is actually Frank in for Tobey. I wanted to ask, in your prepared remarks, you talked about 7 of 13 states have passed budgets and you're seeing some nice conversations with some of your state partners. Can you give us an idea in terms of a little more color on rates going forward? And two, are they asking for additional services, which is often something we see in conjunction with REITs?

Damon T. Hininger

So a couple of answers there. This is Damon. The answer is yes on additional services. As I mentioned earlier, our state contracts, many of them get renewed on July 1. And that typically is part of the negotiation where they're looking maybe for increased utilization and/or additional services. So we are seeing some interest on some additional services on some of our state partners. And as to pricing improvement, I'd say it's modestly better than it was last year, and that's been a trend. So we have seen pricing improve modestly here over the last 36 months. So we're encouraged by that improvement. And again, I think that's tied directly to states feeling [ph] a little bit about their budget environment and they're seeing revenues modestly [ph] improve, too.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Okay, great. And if I could ask a little bit about the U.S. Marshals business in the quarter. Any color you can provide there and your outlook going into 2Q.

Damon T. Hininger

Marshals overall were pretty stable, I think, in the quarter. We did have some fluctuation late last year, and that was most notably because we were transitioning marshals out of California City in anticipation of California going into that facility. So we had a little fluctuation in the populations late last year. But I think overall, for the -- for this year, it's been fairly stable.

Frank Atkins - SunTrust Robinson Humphrey, Inc., Research Division

Okay, great. And finally, let me ask a little bit about the hiring and turnover environment. What are you seeing in terms of getting good people and keeping good people out there? And has anything changed on that front?

Damon T. Hininger

Generally, I'd say just kind of looking at nationally, the environment has been fairly good. And we're obviously keeping a close eye on the economy and how that's affected unemployment and, in turn, wages around the country. And we've had some pockets, most notably in facilities that are near what I'd say the oil and gas industry where we've had some fluctuation and had to deal with both wage rates and turnover. But generally, it's been fairly stable. But it's something we're keeping a very close eye on. The second thing I would just note that just over half of our business is with the Federal Government, and the Department of Labor, through our partners, sets the wage rates for our staff. So that is a process that is reviewed annually by the Department of Labor and then if there's any adjustments, then that flows through our federal partners. So that one is fairly stable because -- there could be some increases. But for us, it's fairly stable because if there is increases, we're able to get reimbursed from our federal partners. So the bigger area is looking on the state side where we've got the state contracts. And again, I'd say generally fairly stable but keeping a close eye on it.

Operator

And we'll go next to Kevin McVeigh with Macquarie.

Kevin D. McVeigh - Macquarie Research

As we think about the payout ratio, it looks like it get ticked up a little bit in March of '14. I think that's a timing [ph] of the CapEx. But Damon, any thoughts on if we're around 80% now, do we continue to push that forward? And as we kind of shift a little bit, so that's question number one. And then just number two is, we kind of look to more the design and built. Does that impact kind of longer term targets you have for revenue growth and kind of AFFO and so on and so forth?

David M. Garfinkle

I'll take a crack on the first part of that. Our payout ratio ticked up in the first quarter primarily due to that acceleration of some HVAC equipment purchases during the first quarter that we don't expect to continue throughout the remainder of the year. So our annual payout ratio is still expected to approximate 80%. And with respect to increases in that payout ratio that it would go above obviously [ph] as a result of an increase in the dividend, which is a board decision. We evaluate that every quarter. And probably harder in -- at the end of the year during the first quarter once the final year has been completed. But we wouldn't expect any significant changes in the near term on that.

Damon T. Hininger

To take the second part of your question, Kevin, if I understand it correctly, the revenues you would see on our projects, they would be different, if I understand your question correctly, which is if it's an owned and managed facility, can you expect a higher total number of revenues? If we're providing services, you could also expect expenses providing those services. But clearly, yes, the profile or the amount of revenues coming in if we were just providing the real estate and maybe some small service like maintenance, then obviously [ph] that would affect the total amount of revenues come into that project since we don't have the big expenses for salary and benefits. So does that answer your question?

Kevin D. McVeigh - Macquarie Research

Yes, it does. It does, Damon. And then just as you're settling into this REIT structure, how has the reception been from an institutional perspective? As you continue to execute here, is the dialogue a little more active than when -- the initial conversion? Or just any thoughts around that as well.

Damon T. Hininger

The conversation's been good. The expectation which we had going into it is that we are a new company. And obviously, we went through the transition the same time as GEO. So a lot of investors were just really getting up to speed on who we are or what we do, what's our services we provide in our facilities. And so we've been working hard to educate a lot of investors on those kind of key, basic questions. But the reception's good. And again, as I went through some of the key things, we think we have a great story to tell relative to not only our performance in the past but also how we compare to the other REITs. So overall, it's been very well received. And we've taken full advantage. We became quickly members of NAREIT, and we've participated in all the NAREIT activities this past year and plan to do this year. And so that's been a great opportunity to touch [ph] a lot of individual investors very quickly.

David M. Garfinkle

I'd also add that we've been invited to more REIT and real estate conferences, and we're going to take full advantage of those opportunities as well.

Kevin D. McVeigh - Macquarie Research

Got it. And last one and I'll get back in the queue. For Trousdale County, when do you think that'll be kind of that $50 million run rate? Is that kind of more of a '16 event? I know it's going to be back half of '15, but should we think about kind of $25 million in '15 and then $50 million or so, fully loaded, into '16 from a revenue prospective?

Damon T. Hininger

It'd be a little premature to give anything real specific right now. But I'd say probably a little lower number in '15 because the construction would put us -- opening of the facility probably late third quarter or maybe fourth quarter. So we probably won't be able to achieve that level of performance into '15. And so that would require a meaningful amount of ramp-up in '16. So you really won't see probably a full utilization on an annual basis until '17, but you'll see, I'd say, meaningful contribution potentially in '16.

Operator

And we'll go next to Brian Ruttenbur with CRT Capital.

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Question number one is what needs to happen in order for you guys to hit the top end of the AFFO range that you had given for 2014? Is it a margin issue? As they ramp, a ramp utilization issue? That's a relatively big range with a couple of quarters left for a REIT.

David M. Garfinkle

Well, it's a combination of things. I think it's obviously containing our expenses, looking out for the rest of the year anticipating inmate populations, which is always a little bit of a crystal ball. But I think we feel good about the guidance we have. It's consistent with the guidance that we had set forth in connection with our fourth quarter earnings release. But it's really just keeping on an eye on population, keeping an eye on costs and taking advantage of any opportunities that come along the way.

Brian W. Ruttenbur - CRT Capital Group LLC, Research Division

Great. The other question I have was on Oklahoma. And you mentioned the delay in the state. And how long a delay? Is this going to be years? Months? Quarters? Can you give us a little bit more color on that?

Damon T. Hininger

Oklahoma hasn't said anything publicly. Their procurement, when they advertise this out to the marketplace, they were anticipating the activation of the contract on May 1. So that hasn't happened. And so that led to our decision to re-idle the facility. But nothing I could say about the timing. Again, they haven't said anything publicly. I said the procurement is still active. I guess the only thing I would point to is that this is a state. This is one of the 8 I mentioned earlier that's growing. I mean, they've grown by 800 in our system here in the last couple of years and are projecting a growth going forward. So how much they can delay action on that if they're growing, that's really, I'd say, a question for them. The only thing I would just say or just maybe highlight is that the State Department or Department of Corrections, I should say, the Director just recently transitioned. We have a gentleman who came from Arizona, to the new director of Oklahoma. So he has come from out of state. So I think it's pretty natural when you have a new person that's the leader in the department come in and kind of take a full assessment of kind of all the things going on with the state of Oklahoma. This happened during the first part of this year, so that could be also part of the -- just the department taking a step back, kind of reassessing their needs and all the options they've got in front of them.

Kevin D. McVeigh - Macquarie Research

Okay. And then finally, on that same facility, is there opportunity to go federal with that facility? Or is that well positioned for some of the federal business coming down?

Damon T. Hininger

Absolutely. We think the Diamondback facility, which is just west of Oklahoma City [ph] we think could be a very attractive solution for the Federal Government. And we've -- actually, in the past when they've had procurements for incremental beds, we've proposed Diamondback. So we think that could be a very attractive solution, too.

Operator

And we'll go next to Brian Hoffman with Avondale Partners.

Clara Houin - Avondale Partners, LLC, Research Division

This is actually Clara Houin on for Brian. First, just on the pipeline of opportunities, how would you characterize the pipeline of non-public opportunities? And specifically, I guess, how does that pipeline of non-public opportunities stand this quarter versus how it's looked over the last several quarters?

Damon T. Hininger

This is Damon. I would say -- to the last part of your question, I would say that, that looks about the same as we've seen in the last few quarters. So a couple of key things we look at for kind of non-public opportunities on the state side is to look at how much capacity is being [ph] built within the respective state to deal with the overcrowding or growth. And as you've heard me earlier, generally we're seeing a very limited amount of investment on the states' side for new capacity. And then overlay that also with their 5-year projection on growth. So those [ph] states that we've looked at and mentioned in the past that are non-public, I'd say it's still about the -- kind of still in the same place where we're seeing meaningful growth and overcrowding and have opportunity deal with that by utilization of existing capacity in our system. That's our #1 offer. But if there's a need for a solution maybe in-state where we can do a design-build-own and manage, then we'll provide that solution, too.

Clara Houin - Avondale Partners, LLC, Research Division

Okay, great. And then as a follow-up, could you provide an update on the opportunity in Utah?

Damon T. Hininger

Nothing really notable to share today. The state is taking the steps to do an assessment on what would be the best course of action on their behalf to deal with their Draper facility. That is, getting the design or, say, kind of encroached by the development from Salt Lake City and looking at maybe a plan to find a new location to relocate the facility, maybe modernize it, making it a lot more efficient from a financial prospective and also improve the quality of the operations. So they're what I'd say is kind of the R&D phase this year. So it could be probably third, fourth quarter until we get more clarity on kind of what the state does going forward and how we can provide a solution as they go through that process.

Operator

[Operator Instructions] It appears we have no further questions at this time. I'd like to turn it back over to Mr. Hininger for closing remarks.

Damon T. Hininger

Thank you, Zach, and thank you to all the participants for your time and participation today. More importantly, thank you for your investment in CCA. Your management team is focused on executing on another good quarter and a strong end into 2014, and we look forward to reporting on our progress during the course of the year. So thank you again for calling in.

Operator

This does conclude today's conference. You may now disconnect, and have a wonderful day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!