Corecivic Inc (NYSE:CXW) Q4 2016 Earnings Conference Call February 9, 2017 11:00 AM ET
Cameron Hopewell - Managing Director of IR
Damon Hininger - President and CEO
David Garfinkle - CFO
Brian Hammonds - VP, Finance
Tobey Sommer - SunTrust Robinson Humphrey
Michael Kodesch - Canaccord Genuity
Kevin McClure - Wells Fargo
Jordan Hymowitz - Philadelphia Financial
Good Morning. My name is Catherine, 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 Fourth 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]. Thank you.
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, Catherine. 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 fourth 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 a 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 Web site at www.cca.com.
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. 2016 was an extremely busy and successful year for CoreCivic, and I’m so proud of our entire team for helping to make that possible by continuing to provide outstanding service and high quality operations across each of our facilities.
During the year, we were awarded, or commenced, six new contracts, representing care capacity for over 7,500 people in addition to closing on the acquisitions of eight residential reentry facilities. At the onset of the year, we began operations at our newly constructed Trousdale Turner Correctional Center on behalf of the State of Tennessee, which has the capacity to provide safe housing and reentry program into 2,500 individuals. In May, we entered into a new five year lease agreement with the State of Oklahoma, for our 2,400 person care capacity, North Fork Correctional Facility, which represents the second large scale correctional facility owned by CoreCivic to be leased by a state customer.
In July, we entered into a new contract with the state of California to provide residential reentry services for 120 people at our CAI Boston Avenue facility. We entered into two new contracts with Immigration and Customs Enforcement, 1,100 person care capacity contract at our Cibola County Correctional Center in October, and a contract at our Northeast Ohio Correctional Center to provide safe, humane and appropriate housing for approximately 500 ICE detainees in December.
Also in December, we completed the expansion of our Red Rock Correctional Center to accommodate a new contract with the state of Arizona that was awarded in 2015, which has care capacity for 1,000 people.
Late in the year, we formally announced our intention to rebrand the corporate enterprise as CoreCivic. This announcement represented the culmination of a multi-year strategy to position the Company to effectively complete and grow as a diversified government solutions provider, expanding our real-estate and service offering beyond the traditional corrections and detention focus.
Under the CoreCivic brand, we have three distinct business offerings; CoreCivic Safety; CoreCivic Properties; and CoreCivic Community, each providing differentiated solutions for government organizations. The key to this strategy is for CoreCivic to continue to provide the flexibility to address each customer’s unique challenges while allowing those government organizations to better understand the broad range of our real-estate solutions and service expertise, and ultimately, choose how they prefer to work with us in addressing their needs.
Each business offering presents a compelling value proposition to customers and have large addressable markets that present attractive growth prospects over the long term. In fact, we successfully realized organic growth opportunities, as I previously detailed in each of the three offerings during 2016.
CoreCivic Safety was represented by the two new contracts with ICE, our newly constructed Trousdale Turner Correctional Center and the expansion of our Red Rock Correctional Center. CoreCivic Properties provides a real-estate solution to the State of Oklahoma through the lease arrangement for our North Fork Correctional Facility. And finally, CoreCivic Community grew through the new residential reentry contract with California in addition to the residential reentry facility acquisition that we completed during the year.
We, at CoreCivic, are proud to have successfully developed many unique solutions to address the variety of different needs these government partners have throughout the year, which leads to these new contract awards. We also secured an important contract extension to continue serving key federal partners, including the five-year extension of our contract with ICE at the South Texas Family Residential Center, which we discussed at length at our conference call in October and, again, on the third quarter earnings call in November.
Afterwards, we announced the two-year extension of our contract with the Federal Bureau prisons at our McRae Correctional Facility in Georgia. We appreciate both ICE and the BOP’s continued trust and partnership with CoreCivic through these contract extensions.
Our financial performance in the fourth quarter of 2016 was well above our initial forecast due, in large part, to heightened utilization by ICE across the portfolio. Over the summer, ICE began to experience an increase in their average daily populations as there was an influx of people entering along the Southwest border. Immigration patterns are often difficult to predict, and ICE detention capacity has historically been limited by budget constraints. So, our forecast did not assume that ICE would maintain their elevated detainee levels through the fourth quarter of 2016.
Our updated 2017 financial guidance also does not assume populations from ICE remain at elevated levels we’ve recently experienced. Dave will touch on our updated guidance in more detail following my remarks.
Additionally, the number of people entering along the Southwest border is typically subject to seasonality as the colder winter months reduced the number of illegal entry attempts. The most recent data published by Customs and Border Protection indicated a slight dip in apprehensions in December 2016, but overall migration remained at elevated levels, primarily due to family units and unaccompanied minor children from Central America, also Asian nationals migrated from Brazil and finally, Cuban nationals.
A few weeks ago, the new administration issued two executive orders titled Enhancing Public Safety in the interior of the United States and the other being Border Security and Immigration Enforcement Improvements, which are expected to have significant and nearly immediate impact on the mission and operations of the Department of Homeland Security.
These orders set new enforcement priorities DHS will use moving forward, authorizes the hiring of 10,000 additional immigration officers and hiring 5,000 additional border patrol agents, while also directing the DHS secretary to take appropriate action and allocate all legally available resources to immediately construct, operate, control or establish contracts to construct, operate or control additional detention facilities. When coupled with the above average rate crossings along the Southwest border, these executive orders appear likely to significantly increase the need for safe, humane and appropriate detention bed capacity that we have available in our existing real-estate portfolio, as well as an increased demand for our detention facility design, development and facility maintenance expertise.
However, any actions to be carried out by DHS and following these executive orders will ultimately be governed by the extent to which Congress provides for additional funding to the department.
The federal government is currently funded through a continued resolution passed in December 2016 through April 28, 2017. The continue resolution included language to allow additional funding flexibility to ICE in order to maintain operational tempo and staffing necessary for immigration enforcement. In essence, the outgoing Congress acknowledged that ICE needed additional funding to work through the increased rate of border crossings and higher-average daily detainee populations that were putting a strain on their current resources.
The new Congress will be tasked with passing a funding bill for the balance of the government’s fiscal year, and we will be closely monitoring whether incremental funding for DHS is part of the funding bill. Should ICE have additional needs, we are well positioned to deliver safe, humane and cost-effective solutions.
Keeping with our federal partners, Bureau of Prison Populations were largely stable throughout the fourth quarter across our three BOP correctional facilities. We are awaiting our announcement from the BOP on the CAR 16 rebid, which includes our 1,400 person care capacity in detention center, as well as capacity for approximately 9,000 people at facilities operated by other service providers. The BOP has conveyed to us that everything is on hold as it relates to this procurement. We think not only because of the pending protect, but also because of the transition. So, we suspect it will be a few weeks before we have clarity on next steps by the Bureau of Prisons.
As a reminder, the current contract at our Eden facility currently runs through April 2017. The United States Marshals Service populations across our portfolio were also stable in the fourth quarter of 2016. Both the BOP and the United States Marshal Service have been operating with our permanent directors for quite some time, and we expect the Department of Justice will look to appoint new directors to lead these agencies in relatively short order.
Looking next to recent developments with our state partners, we substantially completed construction on our expansion of our Red Rock Correctional Center towards the end of the fourth quarter. So the facility can now provide care capacity for 2,000 people. We have two contracts with the State of Arizona, representing a total care capacity of 2,000 people at the facility. And today, we are housing approximately 1,900 offenders.
In California, the governor’s preliminary budget for the state’s fiscal year 2018 was issued in early January, and provided us with the first indication of the anticipated impact of Proposition 57 on the state’s inmate population. The governor expects the new regulations from Prop 57 be implemented by October 01, 2017, and allow the state to remove all offenders from one of the two remaining out-of-state facilities. We will work closely with CDCR as they look to reduce their utilization of out-of-state beds.
The two remaining facilities, housing California offenders, are 3,000 person care capacity, La Palma Correctional Center in Arizona, and our 2,600 person care capacity Tallahatchie County Correctional Facility in Mississippi. These are modern efficient facilities that could be very attractive to another state or federal partner with capacities should they become available.
To that point, we are seeing heightened demand for a number of our idle and underutilized facilities. We currently have nine idle facilities, representing care capacity for approximately 8,700 people. In our portfolio that are well positioned to assist our partners who are in need of modern, safe and efficient correctional or detention bed capacity.
In Oklahoma, the Board of Corrections approved a budget request for fiscal year 2018 that includes $850 million in additional funding to build two new 2,000 person-care capacity medium security correctional facilities in order to manage growing inmate populations and replace old inefficient capacity. While authorization by the state’s legislature could be challenging due to the substantial price tag, we believe a more cost-effective solution is a lease of our 2,100-bed person-bed -- capacity, Diamondback Correctional Facility, a potential transaction that could be similar to the lease of our Nort Folk facility in Oklahoma last May.
We have three idle facilities, representing care capacity for approximately 2,300 people in Kentucky and 1,000 people in Ohio at our Northeast Ohio Correctional Center. Both states have a significant need for additional correctional facility capacity. All of our idle facilities are modern and well maintained, and can be made available to potential state and federal partners without much, if any capital investment or the lead-time required for new construction.
Given the modest amount of available capacity across the country, we are well positioned to be the timeliness, most cost-effective and appropriate solution to government organizations looking for capacity solutions in the near-term. However, our discussions with government organizations extend beyond near-term capacity challenges in their corrections systems. Most corrections systems and the Federal Bureau prisons are facing significant capital investment needs to address severely aging infrastructure, which is both inefficient and potentially dangerous to inmates and staff. They are looking expand their use of alternatives to incarceration and to offer more services and programs to prepare offenders that are incarcerated for the release back to their communities.
Many who want to expand their networks of a mental health or subs-abuse the treatment facilities that states recognize the long-term need and also long-term survival cost and also psychological disorders and drug addictions that are often too often untreated with this population. Even more local jurisdictions are struggling to find room in their budgets to consolidate or replace their aging jails, court houses, police stations and fire stations, among many other properties in which essential government services are provided.
The CoreCivic brand and our three distinct business lines can bring solutions to all of these complex challenges, and we are sharing that message with a growing number of government organizations. The solutions we can deliver are resonating with potential partners due to the flexibility, the cost savings that we be realized and our ability to finance these infrastructure projects, and our long track record of adhering to construction time line for similar, large-scale projects while delivering high quality facilities.
We are also continuing to actively pursue acquisitions of residential reentry facilities across the country to improve the scale and efficiency of our CoreCivic Community platform. On January 01, 2017, we closed on the acquisition of the Arapahoe Community Treatment Center, a 135 person-care capacity reentry facility in Colorado for $5.5 million. The mission at residential reentry facilities are preparing offenders and providing them with the tools to successfully transition back to their communities is the basis for CoreCivic’s mission. And we believe that continue to pursue additional acquisition to build scale in this market will allow us to better serve our partners through improved service, consistency, and cost-effectiveness.
So, as I wrap up my comments, you can tell from my tone that we are optimistic for these opportunities to grow the Company organically and through accretive acquisitions, which we believe will increase shareholder value in 2017. Let me also say, as we close the book on 2016, I am extremely proud of the CoreCivic team. With all of the challenges of the past year, our team stayed focus on providing high-quality services and programs that make a difference for those who are interested in our care while saving taxpayer dollars.
I’d like to give you a couple of examples of their work last year. One of which, as you saw on our press release, Wheeler Correctional Facility, in Georgia led the state in GED completions. And that is all public or private facilities we are number one in the state with GED completions. In Colorado, the Crowley County Correctional Facility led the states, again public and private, in GED completions two facilities in this CoreCivic portfolio that led those two respective states in GED completions.
Let me give you one more example that I’m really proud of. In fourth quarter, we invested over $4 million in new state-of-the-art program space at two facilities Coffee and Wheeler. These new program areas are going to be able to teach auto diesel and welding to the offenders in those two respective facilities. Great new programs I’m excited about us being serving those populations in the State of Georgia.
The bottom line is as our employees, who are chaplains, nurses, mothers, veterans, et cetera, are really good people and they are doing a great, great job. And I am sincerely honored to serve alongside them.
With that, I’d like to turn the call over to Dave to review our fourth quarter 2016 financial results and provide additional details on our updated 2017 financial guidance. Dave?
Thank you, Damon, and good morning, everyone. In the fourth quarter, we generated $0.52 of earnings per share compared to our guidance range of $0.42 to $0.43, and $0.09 ahead of consensus estimates. FFO totaled $0.72 per share compared to our guidance range of $0.61 to $0.62 and $0.10 ahead of consensus estimates. AFFO totaled $0.65 per share ahead of our prior guidance range of $0.55 to $0.56.
Although, we performed better than our forecast in a number of operating expense categories, per share results exceeded expectations, largely due to stronger revenue driven by higher-than-anticipated inmate populations, particularly from Immigration and Customs Enforcement.
As we discussed in our conference calls, the past two quarters, ICE populations were elevated early in the year and increased sequentially each quarter during 2016, accelerating during the third quarter and even more so in the fourth quarter. Notably, these increases occurred well before the outcome of the presidential election was determined.
Adjusted EPS of $0.52 was 21% higher than the prior year quarter of $0.43, while normalized FFO per share and AFFO per share increased by 14% and 12% respectively from the prior year quarter. The most significant factors affecting fourth quarter results compared with the prior year quarter, include; the activation of our Trousdale Turner Correctional Facility for the State of Tennessee in January 2016; a new lease with the state of Oklahoma at our North Fork Correctional Center effective in May 2016; higher populations from ICE at several facilities, most notably along the Southwest border; and acquisitions totaling $200 million or 19 residential reentry centers from the beginning of the fourth quarter of 2015 through the end of 2016.
The positive impact of these events was partially offset by the previously disclosed renegotiation and extension of the contract for the South Texas Family Residential Center, which took effect in early November and the transition of inmate populations at our Cibola County Corrections facility through new contract with ICE, which commenced upon expiration of a contract with the Bureau of Prisons at the end of October, but had only started to ramp toward its 1,100-bed contracted capacity in December.
Our balance sheet remains strong with leverage of 3.4 times and fixed charge coverage of 6.8 times. 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 3.6 times.
At December 31st, we had $38 million of cash on hand and $456 million of availability on our $900 million revolving bank credit facility and no debt maturities until 2020. Although, we continue to pursue growth opportunities that require capital, we also have 8,700 beds in idle facilities that provide us with growth potential without the requirement to deploy capital to construct new bed capacity.
As of December 31st, we had a very modest $7 million in capital commitments remaining to complete construction of the Red Rock Facility and programming space at our Northwest, New Mexico facility. In sum, we are in excellent positioned to grow our cash flows in the current environment through the utilization of idle bed capacity and have the flexibility to take advantage of M&A in other growth opportunities that require capital deployment.
Moving next to a discussion of our guidance; as indicated in the press release, EPS guidance for the first quarter of 2017 is a range of $0.37 to $0.39; FFO per share guidance for the first quarter is $0.57 to $0.58; while AFFO per share guidance is a range of $0.55 to $0.56. For the full year, EPS guidance is a range of $1.46 to $1.54, up from $1.40 to $1.50 from our prior guidance; full year FFO per share guidance is a range of $2.22 to $2.30, up from $2.16 to $2.27 from our prior guidance; and full year AFFO per share guidance is $2.13 to $2.21 compared to $2.07 to $2.17 in our prior guidance.
The increase in our annual 2017 guidance is due to higher occupancy assumptions, primarily for our federal populations. Crosswalk, in Q4 2016 to Q1 2017 as you may recall from prior years, Q1 is seasonally weaker because approximately 75% of our unemployment taxes are incurred during the first quarter, resulting in a $0.03 per share decline from Q4 to Q1 for higher unemployment tax expense in Q1. The renegotiation of the contract at our South Texas Family Residential Center results in a decline of $0.06 per share from Q4.
Further, as I previously mentioned, detainee populations from ICE were elevated during the fourth quarter of 2016. Our forecast includes a penny in cost to ramp up to 500 detainees by the end of the first quarter under the new contract with ICE at our Northeast Ohio Correctional Center. Although, our forecast also includes the continued increase in detainee populations under the new contract with ICE at our Cibola facility, our forecast does not assume a continuation of elevated ICE population levels at our other facilities during Q1 due to the ongoing dialogue pertaining to immigration policy and potential funding needs.
If current levels of detainee populations are maintained, therefore, our guidance would prove conservative. Nonetheless, as I mentioned, we have raised our annual guidance to reflect higher detainee populations from ICE throughout 2017 compared with our previous guidance.
We have not changed our assumptions with respect to our BOP contracts since we published our previous guidance. In November, we extended by two years the contract with the BOP at our 1,978-bed McRae Correctional Center. We have two remaining contracts with the BOP expiring, or up for renewal, over the next year including our 1,422-bed Eden detention center, which is part of the CAR 16 rebid, expiring in April 2017 and our 2,232-bed Adams County Correctional Center up for renewal in July 2017.
We do not know when an award will be announced for CAR 16, as the RFP is still under protest. We expect to engage with the BOP on the Adams renewal in the second quarter. Our guidance contemplates a range of potential outcomes associated with these contract renewals. Recall from last quarter’s conference call, however, that we have not assumed the status quo for these two facilities, and would not expect to have to lower guidance following the announcement of the CAR 16 award or as a result of the negotiations to extend the contract at our Adams County facility. These three contracts with the BOP comprise approximately 7% of our total revenue during 2016.
Last month, the state of California released its draft budget for the fiscal year beginning July 01, 2017 and ending June 30, 2018. We currently provide residential and correctional services to inmates from the state of California in two facilities, our 3,060 bed La Palma Facility in Arizona and our 2,672 bed Tallahatchie Facility in Mississippi.
The governor’s draft budget indicated that Proposition 57, which Damon described, is estimated to reduce the average daily adult inmate population by approximately 2,000 inmates during the fiscal year, which would allow the department to remove all inmates from one of our two out-of-the-state facilities. As a result, we have changed our population assumptions to reflect the reduction in California populations, beginning in October, which is when the department expects the impact of Proposition 57 to begin.
However, during the fourth quarter of 2016, the average occupancy at our La Palma and Tallahatchie facilities was 86% and 80%, respectively or about 4,750, in total. Given capacity at these facilities, we believe we will have an opportunity to consolidate populations and maximize utilization to generate operating efficiencies, mitigating the financial impact on 2017 results. We also have some lead-time to market and develop strategies to utilize any available capacity if a decline in California populations occurs. Our 2017 guidance includes a penny per share generated for the acquisition of the Arapahoe Community Treatment Center completed effective January 01st.
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. 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 at the both federal and state-level 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 on new contracts is always difficult to predict. Any new contract awards would also come with start-up costs that are not included in our guidance either.
The EBITDA guidance in our press release enables you to calculate our estimated effective income tax rate of 4% to 6%, and provides you with our estimate of total depreciation and interest expense for the first quarter and full year of 2017. We expect G&A expenses to be between 5.5% and 5.75% quarter percent of total revenue for each period.
I will now turn the call back to the operator, Catherine, to open up the lines for questions.
Thank you [Operator Instructions]. Our first question will come from Tobey Sommer with SunTrust.
My first question is how might the business and the mix look different in 24, 36 months in terms of its diversification? Thank you.
Good morning, Tobey, this is Damon. Appreciate your question. I think that the next 24 months, we could see meaningful movement on one front. We’ve already had a lot of progress on the other front. So, the CoreCivic Community, as you know over the last three years, we’ve gone from zero facilities now to 26 with the acquisition we disclosed last month. And what we’ve tried to convey to investors is that our goal is to do about $20 million, $25 million a quarter.
So, during the course of the year, we could close on three or four transactions. So, it is the effort on the Company’s behalf is that we’re going to try to continue down that path over the next 24 months. That gives you a view to what that looks like over the next couple of years. On the CoreCivic Properties it's harder to look, give little more definition there. I’m very optimistic that we will close, or at least sign a contract, I should say, on a new development project. So, as you know, we’ve gotten a lease in California City, California. With California they operated we lease it to them, and of course, Oklahoma. But we have not closed on opportunity where we’re developing a brand new facility in the CoreCivic Properties portfolio.
And we’ve got about seven jurisdictions that we’re talking to right now that are very intrigued by this idea where we can come in and build a new facility, let me say, next door to an existing facility and replaces the old outdated facility, and get some efficiencies, both from staffing and other costs. So, that’s a little hard to predict to what that looks like in two years. I think if we get one or two of those across the finish line new development projects, then I think we could see substantial demand from large jurisdictions from the federal state and the local level.
Thank you. And then it’s been a while since we’ve seen idle capacity decline substantially. But could you remind us, if some of these conversations turn into contracts and soak-up a decent proportion of your idle capacity. What is the corresponding impact been on the pricing environment and per diems? Thanks.
From a historical perspective, if you look at 2002 to 2007, I think during that period of time of that five-six years we went from utilization I think, in the mid-80s and to almost 95%, 96% utilization. And during that period of time, I remember that we did see some improvement on pricing, either for existing contracts or up for renewal or new contracts. So it would be my expectation that we would have the same dynamic. If we were successful to your points on the nine idle of facilities, and I’d say probably six or seven of them we’ve actually have active conversations going on for that capacity that you’d see a similar dynamic over a period of time on the pricing front.
And then my last question is when we look at the margin profile of the Company, do you think that that changes materially or kind of over the medium term? How should we think about the Company’s margins over the next few years? Thanks.
I’d say over the next few years, it’s going to be pretty consistent. We’ll see maybe a little from here and there. But since we’ve got some utilization capacity and we can increase occupancy of the facilities that are maybe half of 75% current occupancy. But that could improve a little bit on the margins, overall, for the Company. If we continue down the path, like I said on CoreCivic properties, real-estate only solutions where we’re just leasing. And so we don't have a lot of surface flowing through the agreement, and those would be higher margins. And over time, that obviously will impact the overall enterprise. But in the near-term, I’d say that we’re going to be pretty consistent where they’re at today.
One other question I wanted to ask if I could sneak one in. If ICE starts to enforce border protection in more strictly, could you refresh me on the potential implications on detainee and inmate populations for all three federal customers? Thank you.
Tobey, I think, I’m following your question, in addition to ICE and what potential happens with more enforcement on the Southwest border, which we’ve talked about already. What impact would that have with the Marshal Service and Bureau Prisons, is that your question?
Yes, correct. The relationship, between and among, those agencies by such an action…
So historically, if there is more effort on the Southwest border on detainees that typically are in the custody of ICE if they have, say, several federal offenses, not only coming in the country illegally, but if they have been smuggling drugs or they are smuggling any fire alarms, then it could be the case then they do would turn their custody over to the Marshal Service. So to your point, it could have an impact, if there’s more effort of the Southwest border, which our indication there is, there could be impact on the Marshal Service. And then over a period of time, that also would have an impact on the Federal Bureau of Prisons.
I’ve been -- I heard a recent number of days, but I think in the Federal Bureau of Prisons, the number of criminal aliens, I think, is in the range of about probably 30,000, maybe a little higher. So, it’s not the majority of the population. But it’s a meaningful amount of overall population. So, if you do see more effort by ICE and that’s the same impact to the Marshals, then that could increase the need out of your prison for additional criminal alien capacity.
Thank you. And we’ll continue on to Michael Kodesch with Canaccord Genuity.
I guess, so I’m just starting with guidance. Dave, you gave a lot of good color on how you built those guidance assumptions. But just help us bridge the gap year between your previously announced range and the new one. I mean, you guys beat by $9 million or so in the quarter on your guidance range. The midpoint of guidance, 2017 went up by $1 million. For the most part, it sounds like you guys have -- you’re assuming were occupancy, I meant ICE. There’s some substantial cost saves in the quarter. I guess, just help us kind of bridge -- and then also the lower -- the high-end of the range actually came down. So, just walk us through maybe what your thought is there and some of the underlying assumptions that might have changed? Thanks.
The major changes from the last guidance we have were I guess, on the upside, or obviously on the downside. The downside, we had about $0.03 decline for slower ramp at our Cibola facility. So, they are around 400, I think, detainees today. And we had expected them to be higher at this point in the year. And so, that ramp is going a little bit slower than we expected. California populations, as I mentioned in my remarks, we are assuming lower populations in the fourth quarter, that’s about a penny drag.
And then mostly offsetting and more than offsetting those are higher detainee populations from ICE; so on the upside, you’ve got higher ICE populations, as well as we’re expecting higher populations from Hawaii. There’s a small -- and that’s on the EBITDA line. We did increase our forecast for lower depreciation and income taxes as well for a couple of pennies.
Anything else on the expense side, maybe that was -- maybe outside of savings in 4Q that we’re not going to see continue in 2017?
No, I guess, what I’d say with respect to the expense savings, we did beat the forecast on expenses. But our revenues increased more than our expenses increase. As you’re getting those last inmate populations or detainee populations, and those are higher-margin populations, the offset occurs when you’re declining population. So I’d say most of the expense beat is results in higher margins, because of the revenues exceeding the incremental expenses as you got fixed cost already in place.
My next question, I guess, is on the BOP trends that we’ve been seeing. We’ve actually been seeing them reverse. They decelerated at the end of the year, but then they’re starting to go back up again. And I think you guys mentioned specifically with regards to family and minor apprehensions increasing. Has the BOP approached you guys at all about additional family residential capacity and what would be your appetite for that?
Michael, to make sure I'm following your question. You mentioned the BOP. Are you referring actually to ICE?
Yes, ICE, apologies…
So, we have not. We’ve had a lot of conversations with ICE on just general detention needs around the country. We haven’t had a recent conversation with them about additional needs for families. Of course, we’re well suited if there is an increased need, we can accommodate that. We’re seeing through some existing capacity we’ve got in our system, or may be new capacity. But haven’t had any recent conversations, specifically with families but a lot of conversations that relates to detention capacity overall.
And then in terms of your residential reentry, it sounds like you guys will be maybe a little bit more aggressive going forward. Maybe just considering where things are today. Could you talk a little bit about the pipeline that you guys have and what the opportunity is there?
So right now, I’d say we’ve got on our list, probably about dozen companies and each company has one, maybe a couple of facilities, in a certain location that would be interesting to us that we could either tuck-in into an existing part of the portfolio, operationally or maybe gets our foot in the market that we’re currently not in. And so, I would go back to the goal we have is one a quarter. And again, the size of those per quarter again is not going to be perfect, because each one is a little different relative to size and operations. But $20 million to $25 million a quarter, we think is a pretty good marker for investors to think about.
And then just one more, if I could, sneak one last one in here. Saw an article the other day regarding Kansas', the State of Kansas’ interest in a potential sale-leaseback. Wanted to get your guidance idea of like whether or not you’d participate in something like that, and what your level of interest is there?
We would be interested and we want to see, of course, what the actual RFP is. But I think if it’s consistent with what we’ve been talking about, which is a opportunity for us and a CoreCivic property portfolio that come in do a new facility, replace their old facility, then I think that would be something of interest to us.
And then the time line on the RFP you guys think?
The article I saw said that may get it out, I think, in the next 30 maybe 60 days. And of course, don’t know exactly the timing of how long they'll give on their evaluation. But sounds like in a couple of months.
And we’ll continue on to Kevin McClure with Wells Fargo.
I wanted to drill down on your business and a lot of talk because everyone is so interested in immigration; U.S. Marshals. How many U.S. attorney positions do you estimate are currently vacant across the country? How quickly you think those positions can be filled? And then to follow on that, if filling those positions results in more prosecutions, what’s the potential upside for your U.S. Marshal business? Thanks
Thank you for your question, this is Damon again. There is approximately 90, 94 or 95, U.S. attorney positions around the country. I do not have the good estimate on how many are currently vacant. I have seen a lot of articles indicating that nominations are moving forward, people are being identified for different positions around the country. So, it sounds like that process is off and running. And I think that now that -- now attorney general sessions who got confirmed last night, I think that’ll be probably one of the top things on his list, and his staffs list to go ahead and get those through the confirmation process. They’ve got a lot to do, not only for the U.S. attorneys there’s also U.S. Marshals that they have to appoint, again about same number about 93, 94, I don’t have a good number as it relates to how many are vacant. But again, I have seen on that front also a lot of names have been move forward by those respective senators and those respective districts for consideration by the Department of Justice and also the administration.
I think your last part of your question is that once all those positions get filled, they get settled, likely there are probably some vacancies below the U.S. attorney, the deputy and U.S. attorneys in those offices, or probably some vacancies there. I think once that all gets filled and again my sense is that there’s going to be a pretty high priority to do that quickly, then I think you could see renewed activity all around the country, not just on the Southwest border once those get stacked up.
Got it. And then, one housekeeping item for me. How much cash rent do you expect to receive in 2017 related to the North Fork lease? If I recall correctly, the rent, the cash rent phased in over five years, there was no cash flow impact in year one, but I'm wondering what effect will be in 2017 ex?
I’ll have to double check that, but I think it’s between -- it’s around $4.5 million of cash rent in 2017.
Got it. And would you expect to -- you mentioned that North Fork could be a template for the Diamondback discussion. Would you expect kind of a similar structure with that lease?
Well, I think it’s early on in the discussions with Oklahoma, so it’d be hard to say. But it would probably be a good model for us to follow. They’ve gotten comfortable with it, we’ve gotten comfortable with it. We think it’s a good solution for them long term.
Our next question comes from Jordan Hymowitz with Philadelphia Financial.
Hi, guys. Thanks for great quarter. I was just wondering, if I try and add up all the contracts that you’re currently bidding on, forgetting acquisitions, it seems like FFO could be increased by another $0.70 to $1. Is that out of the range if everything you’re bidding on closes, not that it will, and excluding acquisitions?
Yes. Hey Jordan, it's Dave. I think on an annual basis, we’ve got an investor presentation that kind of mathematically calculates the impact on FFO per share, if we were to fill all of our idle beds at margins that we -- the average margin for the facility that's around $1 per share. I think as you look at the opportunities and the idle capacity we have, I wouldn't assume that they're all going to be as high as the average, given the locations, who the potential customer would be. So yes, I think your number is too far off. And that would be obviously on a full year basis after start up, and you’re into a normalized results.
Super. And my other question is, is there any talk at this point about -- you mentioned GEDs, but it wasn’t that long ago that prisons were actually workplaces as well. And is there any talk of that anymore at this point from anyone in the Trump administration? Are you suited for that and could that potentially work into something, I mean, forgetting GEDs, if we could teach people how to be welders or more -- because the unions have stopped enabling some commercial utilizations that used to happen?
Yes. Great question and the short answer is there has been good conversation at the state level for several years. And I suspect there are probably going to be some conversation at the federal level. Again, we are through a transition where you just got Attorney General sworn in last night. And we are still waiting for the appointment of the Director for the Federal Bureau of Prisons. So, more to come on that front. But, I’d go back to Georgia. So, the facilities that I mentioned earlier that just -- we just cut the ribbon on, two very nice program buildings that are split in half, one side is going to be a welding program, so teach individuals to be certified as a welder, and then the other site going to teach them to be familiar with auto diesel repair. Those are going to be great, great programs. And those programs, as you know, have been talked about a lot, not just in correctional systems, but there really is a dire need for people that have those skills and special training for those types of locations. So, the state opportunity has been there.
And I would say it’s actually picking up where partnering states say, okay, what is your needs labor-wise within respective states, need more welders, we can help you there. We build this program space, we’ll get them certified and help you with that gap in your labor market. So that conversation has I’d say escalated on state level and my suspicion is, it’s probably going to be picking up on the federal level.
The last thing, which I think is part of your question is that there has been historically at the state and federal level, partnering with facilities where you may have an outside employer or manufacturer or some type of other industry where they partner with facility, and they stand and maybe products are different, materials [ph] and to the facility and allow the inmates to repair or build whatever that product is. That’s kind of gone in and out of favor over the last decade. But I’d say there are sometimes, Arizona is probably one of them, it’s notable, there are some times where the states want to explore that and our reaction and our responses absolutely, we’d love to have an opportunity to partner with say an outside company that’s looking for a specialized service that may be can’t be done in another location in the country. It’s a good service for the inmates and it’s also helpful for the state and also whoever the outside company is. So, again, that’s been kind of hit and miss over the last 10 years, but if there’s a conversation and need, then we’ll always open that conversation.
And it seems like that’s at least going a little more potential, is that the fair word now?
Yes, I’d say so. Yes, I’d say so, a little more potential. And I’d say that’s right just because it's another nice part of the overall discussion nationally about criminal justice reform. And again, if you can help an individual with that type of program, be better prepared for release, and that’s a nice way to do that. So, yes, I’d say that conversation’s been picking up a little bit.
Jordan, just one point of clarification on the number you threw out. My number was including all beds, not just idle capacity, but where we have occupancy...
Okay. I have a follow-up but I’ll go back into queue.
And we have a follow-up from Michael Kodesch with Canaccord Genuity.
Hey. Thanks again, guys. Just kind of talking a little bit about some of the opportunities in RFPs that went silent as we approach the election. I was wondering if conversations have picked up again on the Ohio state prison sale, Hamilton County RFP, I knew Alabama is also out there with trying to address the three mega prison deal again. Have you guys heard anything on that, and any updated timelines for some of those?
Yes, great question. So on Ohio, the sale of a government owned asset; that has gone silent; we haven’t really seen any activity on that since before the election. Not to say, it picked up again this year again. Again, I think the most pressing thing that you’ve heard us talk about and also talk about publicly with the state of Ohio is additional capacity need quickly. And again, we think we are well suited with our facility up in the Youngstown, Ohio.
Nothing really to add on Alabama. There has been a lot of conversation about up to $1 billion they need to deploy for new facilities to replace old integrated facilities. Again, the CoreCivic property solution that we have been shows that demonstrates real value in Oklahoma, California, we think that could be an option as I think about kind of the alternatives in the state of Alabama. And then finally, Hamilton County, it is, as we see it, really under active consideration. They have had bids received, and we’ve had a fair amount of back and forth on clarifications on our proposal. So, we haven’t really gone the clear sense on their action on that procurement. But my suspicion is that probably sometime this summer is when they act on it.
Great. That’s really helpful color. And then, just one more on the list. The Houston ICE RFP or the rebid, has there been any progress on that, has that changed at all considering ICE’s recent needs, what have you guys been seeing there?
Yes. No real action, really since before the election. I think that’s just naturally because of the transition and new leadership both with the sector home security, and then they’re also moving forward on trying to find a new assistant secretary that will lead ICE. But I think all that transition has probably put a lot of hold on lot of procurement activity. Houston, we think, is very, very compelling, it’s a great occasion, it’s really big hub for a lot of ICE operations where they consolidate a lot of their resources in that location around the kind of mid to southeast sector of the country. And so, we think the capacity there is going to be very compelling, very attractive as they evaluate the proposal. So, my hope is probably the next, probably next 30 days, maybe 60, we will get some clarity on the timing, but we think we are really, really well positioned there; it’s a great facility, got a great track record and a good location strategically.
And we have a follow-up from Jordan Hymowitz with Philadelphia Financial.
I don’t know if you know about the Treatment Advocacy Center recently put a very good note, report card of bed instead that talks about the decline in psychiatric beds in this country since 1950. And I’m sure you all know, there’s a huge and increasing amount of psychiatric patients in jails. With the recent passage of the Murphy Bill at the end of the year, is there some possibility for partnerships, new business ventures in some ways to start segregating that population better or getting them the help they need in other ways and start segmenting your population?
Short answer is absolutely. We have great partnerships with several other providers that really provide that type of specialty care for those unique mission facilities. And we haven’t really talked about it much in this form, but we do know that some of our partners who, again, are very specialized, have great track records of providing this very unique service for these type of populations, since it’s mental health or medical facilities, dealing with chronic care. What we’ve said to them is that they should go after that business kind of full steam ahead and we could be good partner for them on the real estate side and provide a CoreCivic Properties solution where we’d be the owner, lease it to them as the source provider and then they would have the contract directly with the jurisdiction, if that’s the state or at the local level. So yes, there’s a lot of -- but I would say lot of interest right now to your point on filling a lot of those gaps where there’s needs and some not only local jurisdictions but also the state level.
And one quick follow-on that. Do you think there’s any chance that we start -- any chance is a poor term but is there some chance that we start constructing psychiatric facilities again because no one has been built for at least 20 years at this point?
Yes. What I know today, and again, talking to some of our strategic partners who are doing these type of services, there’s a fair amount of activity going on around the country; it’s not just one location, it’s kind of all over the country. So yes, I think there’s a good chance where you see maybe those types of facilities really moving forward, you see the jurisdiction moving forward to go ahead and work with the provider, and then again, we could be the real estate partner on those type of facilities.
Thank you. And with no additional questions, I’d like to turn the floor back over to Mr. Damon Hininger. Please go ahead, sir.
Thanks so much. And thank you for everybody on the call for your time and attention today, more importantly to our investors, really thank you so much for your investment in CoreCivic. As you could tell, your management team is focused on executing on another good quarter and strong year, and we look forward to reporting on our progress during the course of this year. Thank you again for calling in.
Thank you. Ladies and gentlemen, again, that does conclude today’s conference. Thank you all again for your participation.
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