Corrections Corporation of America (NYSE:CXW) Q3 2016 Earnings Conference Call November 3, 2016 11:00 AM ET
Cameron Hopewell - Managing Director of IR
Damon Hininger - President and CEO
David Garfinkle - CFO
Tobey Sommer - SunTrust
Michael Kodesch - Conaccord
Andrew Berg - Post Advisory Group
Good Morning. My name is David, and I will be your conference operator. As a reminder, this call is being recorded.
At this time, I'd like to welcome you to the CoreCivic's previously known as the Corrections Corporation of America, Third Quarter 2016 Earnings Conference Call. All lines have been placed on mute to avoid any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator instruction]
I would now like to turn the call over to Cameron Hopewell, CoreCivic's Managing Director of Investor Relations. Mr. Hopewell, you may now begin your conference.
Thanks, David. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer.
During today's call, our remarks will include forward-looking statements pursuant to the Safe Harbor provisions of the Private Securities and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors including those identified in our third quarter of 2016 earnings release and 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. This call will include discussion of non-GAAP measures. A reconciliation of the most comparable GAAP measurements is provided in our corresponding earnings release and included in the supplemental financial data on the Investors page of our website.
With that, it's my pleasure to turn the call over to our President and CEO, Damon Hininger.
Thank you, Cameron, and good morning and thank you to everyone for joining our call today. Also joining us here in the room is our Vice President of Finance, Brian Hammonds.
I'd like to start the call off today by once again expressing how proud I am of the entire team for maintaining a sharp focus on providing outstanding service and high-quality operations across each of our facilities, not just recently, but for many years.
Despite poorly-source claims from industry critics and activists to the contrary, our continued focus on operational excellence, flexibility and our compelling value proposition have continued to create opportunities for the Company to grow, where our partners need and want solutions that we can deliver.
In the last few weeks, we have secured an important contract retention with Immigration and Customs Enforcement at our South Texas Family Residential Center, while also executing a new contract with ICE at our Cibola County Correction Center.
These achievements are only possible because our government partners have an appreciation for the dependability and professionalism of our people and we are capable of delivering solutions to answer their challenges -- the challenges they face.
Also announced last week was our intention to rebrand the corporate enterprise as CoreCivic. This announcement was a culmination of a multi-year strategy to transform the Company from largely corrections and detention services to a diversified government solutions provider.
This strategy has included converting to a real estate investment trust in 2013, making unprecedented public commitments to re-entry programs at our correction facilities and we did that in 2014, launching a comprehensive real estate solutions business in 2015 and finally investing nearly $250 million in acquisitions over the last three years to build an expanding network of residential reentry, and community corrections facilities.
The result of these efforts are three distinct business offerings. CoreCivic Safety, a national leader in high-quality corrections and detention management. CoreCivic Properties, offering a wide range of innovative cost savings government real estate solutions, and CoreCivic Community, a growing network of residential reentry centers to help tackle America's recidivism crisis.
We understand, as you all do too, that government has core responsibilities that are vital for safe, healthy and thriving communities. But in our increasingly complex and budget-constrained world, performing these basic functions is becoming harder to do.
As CoreCivic, we will deliver the scale, experience and professionalism required to solve the tough fundamental challenges facing government at all levels, while enhancing the deep sense of service that we feel every day and making a positive difference in our communities and individual lives.
Throughout the rebranding process, we listen to our employees, government partners, and investment community, and there is a strong recognition and appreciation for the Company we have built over more than 30 years. However, after intense research and evaluation of our long-term strategic direction, the Board of Directors approved the recommendation to rebrand under the CoreCivic banner on August 11, 2016.
We believe CoreCivic reflects the Company we have evolved into today and provides us multiple platforms to continue to grow. Each of these three business offerings; CoreCivic Safety, Properties and Community offer different solutions to unique challenges allowing government organizations to address the various needs while customizing the solution based on their unique circumstances. Each presents a compelling value proposition to customers and have large addressable markets that present attractive growth prospects over the long-term.
In the coming months, you'll begin to see many changes as the Company rolls out updates to our external materials, our website, investor presentations, public disclosures that align with the new CoreCivic brand. However, our ticker symbol and the rights of our shareholders remain the same as well our passion, professionalism, and our calling to help people entrusted to our care.
Shifting now to provide updates for various partners. I'd like to first touch on developments with our federal partners. During the third quarter, we experienced increasing demand trends for ICE, which has continued to persist since the conclusion of the quarter and resulted in the new contract at Cibola County facility that commenced this month.
ICE officials have been vocal on recent months about growing bed capacity needs being driven by Haydn apprehensions across the Southwest border. Maintaining adequate detention bed capacity within a limited budget is always a challenge for ICE, particularly when needed to respond to emergency situations and it is with great pride that we have been able to accommodate these developing needs and expedite it in cost effective manner for our federal partner.
During the third quarter, United States Marshals Service populations remain relatively stable across our portfolio comparing both sequential and year-over-year quarters. This trend has been consistent over the last few years overall as Marshal populations nationwide have remained at an average daily population of approximately 50,000. At the state level, we experienced very stable population trends with our ongoing contracts while also ramping up a number of new contracts.
In Arizona, we remain on budget to complete the expansion of our Red Rock Correctional Center from approximately 1,600 beds to 2,024 beds by late in the fourth quarter. And we are on schedule to ramp the remaining populations under the new contract early in the first quarter of 2017.
As a reminder, we began ramping populations under the second 1,000-bed contract in July and now housed approximately 1,400 offenders at the facility by the end of the third quarter. As of today, we house approximately 1,500 inmates at the facility.
In Tennessee, we completed the ramp up of populations at our Trousdale Turner Correctional Center during the third quarter. The facility opened in January and is now housing approximately 2,500 offenders from the state.
In New Mexico, starting in October, we begin converting the mission of our northwest New Mexico Correctional Center to a male population pursuant to a new contract awarded during the second quarter. We are very proud to have been the successful bidder for the contract and are excited that the contract has a substantial focus on re-entry services for individuals to be housed at facility.
Also during the third quarter, we began ramping a new 120-bed residential reentry contract with the State of California at our CAI-Boston Avenue facility, which was awarded in July. We are pleased to have the opportunity to work with the state to provide residential reentry services under this contract, and we are also very excited that the State of California now joins Oklahoma as a second state to utilize each of the business offerings under our new CoreCivic brand.
Approximately 5,000 out-of-state beds we provide to California are delivered through CoreCivic Safety. Our 2,560-bed California City Correctional Center is leased to the state under the CoreCivic Properties brand, and CoreCivic Community delivers a residential reentry solution at our Boston Avenue facility in San Diego. This is a great example of the flexible solutions we can provide across multiple platforms to a single government partner.
We are in ongoing discussions with multiple current and potential customers about challenges they are facing, and how the offerings of CoreCivic can help address their needs.
We have a number of idle or unutilized facilities that are well suited to address their near-term needs of current state partners, particularly in Kentucky, Minnesota, Oklahoma and Ohio. We are also in discussions with other potential partners about currently available capacity within our portfolio, all of which provide an opportunity for us to grow without the deployment of additional capital.
However, as I stated earlier, we also see ample opportunities across all three business offerings to deploy capital towards attractive growth opportunities as government at all levels have significant needs in the areas where CoreCivic can bring meaningful solutions.
Let me now wind down my comments with a couple of more key points, and those are; is that we see every day house approximately 65,000 inmates, detainees, and residents in more than 70 facilities across the country and lease nearly 6,000 beds to other operators to house inmate and resident populations. These mission-critical assets help meet the needs of more than 30 unique customers through more than 100 contractual agreements.
Alternative capacity is in most cases not available as our government partners rely on the private sector for the necessary capacity or face meaningful overcrowding in their own systems. There also continues to be a great deal of prison infrastructure in the United States that is significantly beyond its useful life and should be replaced in the near future.
However, other public works infrastructure like transportation, education and utilities also requires significant investment to modernize as infrastructure as a whole has lagged proper investment for many years.
As you know, the need for new infrastructure has been frequently discussed during this election season, and CoreCivic is positioned to assist government organizations and making investments to modernize their mission critical criminal justice infrastructure while allowing them to maintain their borrowing capacity to address other capital needs.
Our modern facilities in key geographical locations with the ability to provide high-quality operations are very attractive to our partners. Our announcement of our new Cibola contract on Monday and lease with Oklahoma earlier this year clearly reaffirms that fact. Because of these factors, there has been an overreaction in the market to the long-term viability of our business. It reflects a fundamental misunderstanding in these market dynamics, which underpin our business and the value of our mission critical real estate.
I personally purchase more shares in August as did multiple members of our Board prior to the closure of our trading window. Today, I directly own more than 200,000 shares, while having nearly 475,000 unexercised stock options and more than 50,000 unvested restricted stock units. I just hit my seven-year anniversary as CEO this past month and as you can see during my tenure, I have sold a very small amount of shares during those seven years.
I also own more than double as many shares as I'm required to hold under the company's stock ownership guidelines. So, all I have to say is that my personal optimism of the Company is unwavering by these recent events that I meanly invested in the long-term performance of our Company. And I am focused on positioning the Company to create shareholder value over the long-term.
With that, I'd like to turn the call over to Dave to review our third quarter financial results and provide additional details on our forward-looking guidance. Dave?
Thank you, Damon, and good morning everyone. In the third quarter, we generated $0.49 of adjusted EPS compared to our prior guidance range of $0.47 to $0.48. Normalized FFO totaled $0.69 per share compared to our prior guidance range of $0.67 to $0.68 and also $0.03 ahead of the first call consensus estimate.
AFFO totaled $0.68 per share ahead of our prior guidance range of $0.63 to $0.64. Adjusted and normalized results exclude a $2 million gain on settlement of contingent consideration and $4 million of restructuring charges we announced on September 27.
Per share results exceeded expectations largely due to stronger revenue driven by higher than anticipated inmate populations across numerous facilities. Our federal revenue, particularly from Immigration and Customs Enforcement, remained elevated during the third quarter in Arizona and California, and we also recently experienced higher than expected federal populations at our Torrance facility in New Mexico.
AFFO exceeded expectations by more than adjusted EPS and normalized FFO because maintenance capital expenditures on real estate were $2.7 million lower than expected. As I've mentioned in the past, the timing of maintenance capital expenditures is difficult to predict and can fluctuate from quarter-to-quarter.
We have maintained our annual guidance for maintenance CapEx on real estate, so we expect to incur higher CapEx levels in the fourth quarter relative to the first three quarters. Adjusted EPS was 9% higher than the prior-year quarter while normalized FFO per share and AFFO per share were both 8% higher than the prior-year quarter.
The most significant factors affecting third quarter results compared with the prior year-quarter include higher populations from Immigration and Customs Enforcement, most notably in Arizona and at our new Otay Mesa Detention Center in California, lower expenses at the South Texas Family Residential Center, a new lease with the State of Oklahoma at our North Fork Correctional Center and acquisitions totaling $214 million for 23 residential reentry centers from the beginning of the third quarter of 2015 to the third quarter of 2016.
The positive impact of these events was partially offset by refinancing short-term debt with long-term debt in the third quarter of 2015 and lower capitalized interest in the current year quarter resulting in higher interest expense, lower inmate populations from the states of California and Colorado that were consistent with our expectations, and a short-term contract with the state of Arizona in the prior-year quarter to assist them in providing bed capacity while repairs were being made at another facility operated by another provider. That emergency contract ended in December of 2015.
Our balance sheet remains strong with leverage of 3.5 times and fixed charge coverage of 6.8 times using trailing 12 months. At September 30, we had $43 million of cash on-hand and $472 million of availability under $900 million revolving bank credit facility and no debt maturities until 2020.
Based on our updated guidance for 2017, which does not assume EBITDA from any new contracts, M&A activity or the impact on leverage for any capital markets transactions, our total leverage peaks at 3.7 times and we would have $475 million of debt cushion or $95 million of EBITDA cushion under our debt covenants. We have always managed our balance sheet conservatively relative to other companies in the industry as well as to other REITs generally. We intend to continue to manage our balance sheet in a prudent manner.
Although we continue to pursue growth opportunities that require capital, the only substantial capital project we have for the remainder of the year is about $7 million remaining on the expansion of our Red Rock Correctional Center pursuant to a new contract that was awarded in late December 2015 from the state of Arizona for an additional 1,000 inmates.
As we had approximately 1,000 inmates at the facility pursuant to a pre-existing contract with Arizona, we are expanding the design capacity of that facility to 2,024 beds and estimated total cost of $37 million to $38 million including additional space for inmate reentry programming and support services.
Construction is expected to be completed near year-end, although we began receiving inmates under the new contract in the third quarter and expect the ramp to last through January 2017. At the end of the third quarter, we housed is approximately 1,400 inmates at this facility.
Moving next to a further discussion of our guidance, as indicated in the press release, adjusted EPS guidance for the full-year 2016 is a range of a $1.80 to $1.81, that's up from $1.78 to $1.81 from our prior guidance, while Q4 adjusted EPS guidance is a range of $0.42 to $0.43. Full-year 2016 normalized FFO per share guidance is a range of $2.59 to $2.60, up from $2.57 to $2.60 from our prior guidance.
And full-year 2016 AFFO per share guidance is $2.49 to $2.50, compared with $2.46 to $2.49 from our prior guidance. The increase in our annual 2016 guidance is due to the financial performance for Q3 carrying through to the full year.
Subsequent to our announcement three weeks ago of the modification and extension to the contract at our South Texas Family Residential Center, whereby we updated 2016 guidance and issued 2017 guidance, on Monday, we announced a new contract enabling ICE to house up to 1,116 detainees at our Cibola County Correctional Center.
Our contract with the BOP at this facility expired in September and was extended to October 30, 2016. So, this facility will transition very smoothly with in-place staff, trained and ready to accept the new ICE population. This new contract has no net impact on our fourth quarter 2016 guidance due to the ramp down and transitions from the BOP contract to the ramp up and transition to the ICE contract within the quarter.
Our updated full-year 2017 guidance includes approximately $0.04 to $0.06 per share for this new contract. This new five-year contract demonstrates the marketability of our valuable real estate assets across multiple government partners, and is the latest example of our ability to provide flexible solutions and fulfill emergent needs of our government partners that would be very difficult, if not impossible, to replicate in the public sector.
Inclusive of this new contract, as indicated in the press release, adjusted EPS for 2017 is range of a dollar $1.40 to $1.50, up from our prior guidance of $1.35 to $1.45. 2017 FFO per share guidance is range of $2.16 to $2.27, up from our prior guidance of $2.11 to $2.21, and 2017 AFFO per share guidance is range of $2.07 to $2.17, up from our prior guidance range of $2.02 to $2.12.
We have three contracts with the BOP expiring over the next year, including at our 1,978-bed McRae Correctional Center expiring at the end of this month; our 1,422 Eden Detention Center, which is part of the CAR-16 rebid expiring in April, 2017, and our 2,232-bed Adams County Correctional Center expiring in July 2017.
To reiterate what we said in our September 2017 investor call, it is impossible to predict what precisely will occur upon expiration of these contracts. Our guidance contemplates a range of potential outcomes associated with these contract renewals. We have not assumed the loss of all of these contracts upon expiration of the current contracting period, neither have we assumed status quo.
However, we do not expect to have to lower our guidance following the announcement of the BOP CAR-16 or as a result of the renegotiations of these contracts. These three contracts with the BOP comprise approximately 7% of our total revenue for the nine months ended September 30, 2016. Our guidance assumes a population from the state of California consistent with current levels, which have been between 4,700 and 4,900 throughout 2016.
This projection is consistent with the state's final budget approved in June and updated report of inmate population projections released by the state in January and is essentially unchanged from our prior to forecasts.
Our full-year guidance includes a total of $0.02 to $0.03 per share generated for the acquisition of Correctional Management Inc., completed on April 8 and of the Long Beach Community Correction Center completed on June 10. Although we continue to pursue a number of attractive investment opportunities, particularly in the reentry space, our guidance does not include any new M&A activity beyond these acquisitions.
The magnitude and timing of our M&A activities is difficult to predict and therefore we will update our guidance on a quarterly basis if and when we successfully complete such transactions. Further, we have recently seen increased activity from potential customers to utilize our idle facilities. However, our guidance does not include any new contract awards beyond those previously announced as the timing on government actions is always difficult to predict.
Once again we've provided EBITDA guidance in our press release, which enables you to calculate our estimated effective income tax rate and provides you with our estimate of total depreciation and interest expense for the fourth quarter and full-year 2016 as well as full-year 2017. We expect G&A expenses to be slightly more than 5.5% of total revenue for each period.
As I mentioned on our September 27 Investor Call, we are currently assessing our capital allocation and dividend policies with our Board of Directors. As a reminder, our dividend policies currently took back our dividend to approximately 80% of AFFO, which for 2017, translates into a normalized FFO payout ratio of about 77% at the midpoint or $1.70. Based on current estimates, the minimum AFFO payout ratio to maintain requalification status will be approximately 66% or 63% of normalized FFO or $1.40.
A press release is expected to be issued shortly after our next Board meeting scheduled in December, announcing the amount of the next quarterly dividend that will be paid in January along with any changes to our dividend policy.
I will now turn the call back to David to open the lines for questions.
Thank you, gentlemen. [Operator Instructions] And we'll take our first question from Tobey Sommer with SunTrust. Your line is open.
Thank you. Good morning. I was wondering if you could start off by giving us a little bit more color about the interest you are receiving in idle capacity it could take multiple flavors, I don't know if it could all be categorized the same, but more color would be helpful. Thank you.
Absolutely Tobey and thanks for your question. We've got, as you know, kind of pockets of beds in Oklahoma, Kentucky, Minnesota, Colorado, Ohio, those are kind of the big pockets and we are seeing good interest in several those states who have maybe overcrowding in their system or projected growth.
And so, I would say, the interest and the need is probably greater than it was, say, 6, 12 months ago. So, we're seeing some good interest and as I think about those respective states that I just mentioned they're looking at our capacity. So, as there is no development, looking purely at our capacity, is kind of a long-term solution.
To the extent that you are able to kind of capitalize on new projects and they require capital and I'm interested to hear what you think about the different avenues you have to finance those investments and where you may source the capital? Thanks.
Yes, obviously the filling of the idle capacity wouldn't require any capital, but we obviously have a revolving credit facility -- our $900 million revolving credit facility available for that.
Then, we have an ATM program in place, but at this point, we don't see any need to issue of the ATM program and obviously we have access to debt capital markets in the past, but I'd say for the near-term and even medium-term any capital requirements would be funded from our revolving credit facility.
And then, I'm interested with the CoreCivic brand coming out and that the brands underneath I guess that, could you talk about the value proposition in the real estate only solution under CoreCivic Properties and how do you see maybe the importance of that contributing to growth in the future?
Absolutely, and so, let me -- before I answer that maybe let me give a little more definition on kind of what the problem that we're seeing with our existing or potential prospective partners. So, what we are seeing is that we've got some partners who have an old facility or facilities, some of which are 100 years old or older. They're very, very inefficient to operate from a staffing perspective and costly to maintain.
And so, it is very clear to them that they need a new facility to replace the older facility as well pass its useful life cycle. And so a new facility to them brings a lot of economic benefits, which I could touch on here in a minute, but I think more importantly a new facility brings state-of-art systems that provide a safer and more humane environment for the staff and its inhabitants.
So, what do we bring to the table, I'd say, there are several things, one of which is a deep expertise on how to build these facilities. So, no one in the last 15 years has built more mission-critical criminal justices real estate projects than CoreCivic here in United States.
And so why does that matter, and I'd say, it matters for a couple reasons, one of which is if you're a county or a smaller state you may build a project like this only once every 50 years. So, you got a leader if it's a the Director of Corrections or Sheriff and they clearly needed new facility, but you've only done it once or twice in the history that jurisdiction, the question is where do you start, and how do get started and what you do? So, that's one thing would bring to the table.
The second thing is that it is a chronic risk of government, especially counties to build projects that are bigger than they need, that are over-budget and take longer to build than they projected. So, we have a strong record of bringing projects online, that is projects that are on-time and under-budget. And we also are providing a best-in-class project that meets all the appropriate national standards.
And the last thing, I'd say, on that point is that we have a deep expertise also on how to staff facilities with our management services. And so, we design a facility, we can do it in a way that is very staff efficient. So, that's two-thirds the operational costs of the facility but with that we can kind of pass expertise back to the jurisdiction and they can see staff savings from an older inefficient staff facility to a newer modern facility.
Tobey, I guess, it's a couple of things we bring to the table that we're hearing from our customers is, one is that we have a really robust preventive maintenance program, and what we're seeing especially with jails at the local level is that you may have these jails that were built only 25 years ago, but already need to be replaced because they've had little if any preventive maintenance.
So, our government partners are telling us that it is nearly impossible to get dollars appropriate at these levels to adequately maintain their assets and they also have to do tremendous amount of red tape to get approval to replace or repair critical systems. So, we have a national team located here not only in Nashville, but around the country that really are second to none on experience to help maintain these type of asset that many jurisdictions just really can't afford to do themselves.
Last two things, I'd say, that we bring to the table for these real estate only solutions is, one utility management services. So, we have dedicated staff here in Nashville that manage our utility program and have the ability to price utility contracts, but also looking at our systems -- constantly looking in our systems and also new technology, as it relates to lighting, water conservations, solar water heating and all of these different avenues where we can save utility costs and then pass that onto our partners.
And finally, a big one is the capital avoidance in the strong balance sheet. For more than 30 years, we have provided debt-free lease financing which allowed our government partners to use capital resources on other vital public needs. This is typically attracted to capital extreme jurisdictions that are feeling pressure on a credit rate because of significant debt loads or large unfunded pension liabilities.
So, that's what we're seeing as a real opportunity in these real estate only solutions and that's what we are hearing from our partners and it's not just in theory. I mean, now we've got to live examples of both Oklahoma and California and California and now being under lease for several years, I mean, this is the feedback we are getting with that agreement and with that transaction is these many, many benefits are outlined as providing real benefit back to them. So, we're hearing more, especially at the local level, where we can provide similar solutions around the country for the older facilities that need to be replaced.
Thanks for expanding upon that. If I could ask a follow-up to an earlier question, then I'll get back in queue. Among the conversations you are having regarding potentially contracting your idle capacity, does that include CoreCivic properties real estate type transactions or is that more along the traditional lines? Thanks.
It's both. Yes, great question, it's both. Yes, so we've got conversations with both a lease only and then also a complete management and own-and-manage solution.
Thank you very much.
You bet. Tobey, thank you.
And we'll take our next question from Michael Kodesch with Canaccord. Your line is open sir.
Hey. Good morning, guys Just a couple of questions from me here. I guess starting with the Cibola contract -- congratulations on that by the way and for a short turnaround from the BOP contract, but I think the two things that were most intriguing from that were the pricing, which seems to be equal to, if not better than what you had at the BOP contract, but then also the five-year term.
So, considering that, I think US Newsweek reported somewhere around 47,000 beds would be needed, reaching that number in fiscal year 2017, and it's currently, I think, at 44,000, the mandates at 34,000. I'm just trying to get an idea of, not only the subset or the opportunity set here for an increase in beds, but also the sustainability of ICE and kind of what your expectations are for that 45,000 or 47,000 number? Thanks.
I appreciate your question. So, the first part is, we've had, as I mentioned in my prepared marks, ongoing conversations with ICE. It led to the contract of Cibola which you just talked about. But as I mentioned also, we've seen increased utilization of existing capacity in our system that's already under contract with ICE.
So, those conversations are ongoing. It's a very fluid kind of dynamic on the border right now with the population they're seeing come across primarily Asian nationals, which is reported widely in the press. And so, I think, they see a potential need going into not only 2017 but potential beyond based on some of the numbers I think they're hearing coming up through Central and South America.
And so, I'd say, longer-term, I think the expiration of their contract, five years, I think, gives us a sense and hopefully gives you a sense to how to think about the need for the foreseeable future. We've had contracts ensures a couple years with ICE, and we've had contract as long as up to 10 years and even 20 years with Marshals Service. So, I think the expiration of a five-year term, I think, give the sense of how ICE will think about the need that they have for this population.
Thanks, that's helpful color. And then just kind of touching on some of -- on an earlier question with an idle facility. I noticed that Kit Carson was idled in the quarter and their populations I think were moved to the other two facilities in Colorado.
It looks like they might not need as much capacity as previous. Just kind of wondering what the decision to idle that facility was there and then also if you actually see an opportunity with that facility near-term or if it's maybe with the federal agency or it's just kind what you're seeing there. Thanks.
Absolutely. So, let me, this is David again. Let me tackle that question. So, Kit Carson has been a facility, probably for two, three years where it's been at kind of 50%, maybe just below on occupancy. So, it's been really right on the edge of, is it viable to keep it open or is it makes sense to consolidate that population to Bent and Crowley, two other facilities that we own or operate within the state of Colorado.
And so, a reminder, and then you remember this is, in the last two years, we did have another contract to Kit Carson with the state of Idaho. So, that contract really was helpful to kind of keep it north of earnings being positive there from a financial perspective. And so when we lost Idaho contractor just because of reduction of their system-wide or overcrowding going down, we came to this decision to go ahead on Idaho facility and consolidate within the other two facilities.
And that's not your question, but as it -- this is a constant question we are always asking ourselves internally to the management team, you know, there are opportunities to optimize our system-wide capacity especially with we've got multiple is in a certain geographic location or in a state like Colorado.
The last part of your question is that being in the western part of U.S. and being a fairly good proximity to the Southwest border, it could be a good solution for some of the emerging federal needs that we are seeing come up in the last half of 2016 going into 2017.
Great, that's really helpful. Moving to your managed business so we've kind of seen NOI margins fall at your managed properties over the last couple of years even beds as well continue to fall there. Are you guys thinking from kind of a long-term strategy to phase out the managed-only business or are you guys kind of just expecting kind of status quo for now?
I think status quo is the right answer. One key milestone that always happens on those contracts when they come for expiration is, as we think about the renewal of those contracts, what's the environment within that respective jurisdiction or state, what's the needs, were some of the dynamics, good and bad relative to respective needs in that state.
And I think what we've shown especially during the five, six, seven years is that we've got to have an appropriate margin and with that we've got to be resource appropriately through our per diem so we can pay competitive salaries to our staff within those facilities provided they can secure a facility but also adequate programming.
So, as you know, what we are during our last six, seven years we have in essence kind of divested or moved out of some jurisdictions where we just didn't feel like we had appropriate amount of resources or per diem levels to help support safe and secure operation. So, the short answer is, I think status quo.
Again, I think when we've got some contracts coming for renewal, we will always ask that question about what's the foreseeable future look like at that jurisdiction and how do we need to think about the proposal and the pricing on that, but I think there is going to be some managed-only contracts that we have today that are always going to be part of our operation that we're very proud of and feel like we're providing great, great solution to those jurisdictions be it at the local or at the state level.
And then one last quick question on just kind of an administrative note here. In your supplemental, you note that Whiteville facility in Tennessee, I believe, that had a July or -- June or July 2016 term. I was just kind of wondering what that was a typo, that it was renewed and then just kind of left in there or if that was still under negotiation?
Nothing unusual there. We would expect to renew that contract. It just was not signed as of the date of the report.
Okay. That's all for me. I'll jump back with anything else. Nice quarter guys, thanks.
Thanks so much. Appreciate your questions.
[Operator Instructions] And we'll return to Tobey Sommer with SunTrust. Please go ahead.
Thank you. Wanted to ask, if you could offer your perspective on the differences between Prop 57 in California, that's on the ballot next week, and Prop 47, a couple years ago, and maybe in the course of that explanation I'll inform us as to how you think about the stickiness of that business. Thanks.
Absolutely. So let me tackle that one. Tobey, I appreciate your question. So, Prop 57, which I think most people think next week it's going to pass, I would say, a couple things kind of unique about that Prop 57 as they compare to the previous one, one is that the governor, who has been a proponent on the passage of this provision has said publicly that this is basically a way to kind of create a kind of durable tools that they have on managing population long-term.
And so, it's a different way, as you know, they've been under Federal court order for many years and then with that, that granted them special powers on how they kind of manage their system, be under that federal court order, but one thing that the courts have said is that you've got to do something regulatory or passage of some of these props to make sure that you've got to power yourself after the federal court decide is removed to basically have these tools in place long-term.
And so, his view is that, by the passage of that, it really basically allows him to have this ability long-term, which they have in place today and it's been effective on managing their population.
The other thing I'd say is that the Prop itself is to deal with lower custody populations and they are typically non-violent individuals and so we think that it is important to note because our capacity out of state that we provide for California, which is about 5,000 beds, we are holding higher custody inmates in celled capacity and this is a higher-custody population that has to be in celled capacity.
So, even if Prop 57 does pass, which again most people think it will, it still in lower custody population that typically are housed in dormitory or low-security facilities. So, if there is a little fluctuation in our population, which again they're saying, they don't think it's going to be much, it's going to be pretty, pretty modest, that's not the capacity that's suitable for the populations we have out of state.
The last thing I'd say is that the forecast for the next couple of years, I should say, in California, they are estimating they're going to increase by about 2,000 to 3,000. So, they've kind of have in mind, kind of what their needs are even with the pass of Prop 57, again, they think that impact is going to be pretty modest, but they're still forecasting also a growth of about 3,000 beds to 4, 000 beds or 2,000 beds to 3,000 beds.
So California I think continues to say not only just publicly, but also I think in their actions with the budget this year where they fully funded to the 5,000 beds during this current fiscal year, but they want to make sure they've got adequate relief both in state and with our capacity out-of-state to where they can fully compliant with the 137.5 capacity. So, I don't think you want to add that David?
That's right. Yes. Nothing to add.
Then, maybe, just of a couple more from me. I noticed in New Mexico's the occupancy in your facility with them -- running a little bit hot. I wonder if you can comment on that, and then also generally talk about your state customers where they are either experiencing or expected to experience inmate population growth. Thank you.
Which facility in New Mexico you are referring to Tobey? It's probably the Northwest in Mexico that was formally a female facility started in New Mexico Women's facility. It's actually going through a transition and hence the name change Northwest New Mexico from New Mexico Women's Correctional Center.
In the fourth quarter, there is actually close to a penny drag for the transition of populations from a female facility to a male facility, but the state has had growing inmate populations. We just signed that contract with them pursuant to that they had issued to transition that population to a male, so they're kind of realigning where they are housing their female inmates.
So, that facility actually will probably drop population during the fourth quarter as we transition it here from female to male, but right now, we have for the third quarter, it was at 120% occupancy.
And then what are you hearing from your state customers about their expectations for inmate population trends ?
So, generally, we're seeing from our existing partners, I would say, modest growth over next three to five years. We will likely see in the spring, let's say, a season-updated population reports or projections, that's typically as you know, when they do them is around budget season. And so, we'll see some fresh numbers in the spring, but, I would say, generally, we're seeing pretty modest population growth for the existing partners over the next three to five years.
And then last question from me. Do you have an expectation for pricing in per diems. I know you've given guidance already for next year, so we're early in that same legislative season in the spring, will inform us more, but what's your outlook at this point?
I think it continues to improve. Over the last few years, we continue to see kind of modest improvement year-over-year. And as we've also talked about, as we see utilization improve in some key jurisdictions, that is also impactful on pricing. So, I would say, it will be modest, but, I would say, I think we'll see a spring as we go into the July 1 start date on many of our state contracts, will see a nice small improvement in the pricing.
With the obvious caveat that when you look at our per mandate statistics, that will be going down for the modified contract at our South Texas Family residential center.
We haven't quantified that publicly, but you'll expect to see lower revenue per mandate, as you look at our supplemental disclosure in our 10-Q as that revenue per mandate will reflect the new terms, which as we mentioned on our last call, when we announced that contract was a 40% reduction in the revenue.
Thanks for pointing that out.
And we'll take our last question from Andrew Berg with the Post Advisory Group. Your line is open.
Thank you. Hey guys. Just a quick question. It looks like there's a small tweak to CapEx for the year and the guidance was up by about $5 million. Is that just a timing issue or is it something that you're purchasing a piece of land or something?
No, actually a part of that was in connection with the transition that we're making at the New Mexico facility I just discussed. They're going to add some programming space and so there's some CapEx associated with that new contract as well as we have some CapEx that we added under the California City lease that we announced when we renewed that lease, I think that was back a couple quarters ago.
So, we've added that to the 2016 CapEx. I wasn't sure whether some of that would roll into 2017, but we've kind of put an accelerated plan to put that CapEx into 2016, at least some of it.
And then just to clarify, the New Mexico transition that you're talking about, the transition for Cibola going from BOP to ICE, so you're talking about the women's switchover to the men's facility.
I'm sorry, it was for the switching of the transition of the women to the men's facility.
Got it. Okay. Thank you.
This does conclude our Q&A session. I'll turn it over to you Mr. Hininger for closing comments.
Great. Thank you again, everyone for joining our call today. I am really, really proud of this management team. We are with a laser focus looking at opportunities around the country with either existing or new partners, utilizing existing capacity either through the CoreCivic Property, CoreCivic Safety or CoreCivic Community, different offerings.
I want to also say that, I think we probably see many of you at NAREIT's REIT World Conference during the week of November 14. Otherwise, if we don't see you then, look forward to reporting to you again on our fourth quarter results in February. Thank you so much.
This does conclude today's program. Thank you very much for your participation. You may disconnect at any time.
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