CoreCivic - Q3 2022

Transcript

Operator (participant)

Good morning. My name is Amy, 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 CoreCivic's third quarter 2022 earnings conference call. All lines have been placed on mute to avoid any background noise. After the speaker's presentation, there will be a question-and-answer session. If you'd like to ask a question during this time, simply press star then the number one one on your telephone keypad. You will then hear an automated message advising your hand is raised. 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 begin your conference.

Cameron Hopewell (Managing Director of Investor Relations)

Thank you, Amy. 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. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. On today's call, we will discuss our financial results for the third quarter of 2022, developments with our government partners, and provide you with other general business updates. During today's call, our remarks, including our answers to your questions, will include forward-looking statements pursuant to the safe harbor provisions of the Private Securities 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 2022 earnings release issued after market yesterday and in our SEC 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. On this call, we will also discuss certain Non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data on the investors page of our website, corecivic.com. With that, it's my pleasure to turn the call over to our President and Chief Executive Officer, Damon Hininger.

Damon Hininger (President and CEO)

Thank you, Cameron. Good morning, and thank you for joining us today for our third quarter 2022 earnings call. On today's call, I will provide you with details of our third quarter financial performance, discuss with you our latest operational developments, update you on our capital allocation strategy, and discuss the latest developments with our government partners, including the recent $130 million sale of our McRae facility to the state of Georgia. I will then turn the call over to our Chief Financial Officer, Dave Garfinkel, who will review our third quarter financial results and full year 2022 guidance in greater detail and will update you on our ongoing capital structure initiatives.

Before I give an update on our government partners, let me briefly pan out and give a big picture view of the past two years, but also a peek into 2023 and beyond. As you know, like the rest of the world, we have had to deal with the challenges of COVID-19 and the pandemic. Being a 24/7 operation for nearly 40 years, I am proud of the team having strong systems, processes, and leadership in place to deal with the challenges that the pandemic brought us. There was a challenging journey for sure, and some difficult decisions were made along the way. I am grateful on how the team navigated through this challenge, and it thankfully appears to be more easily managed going forward as the severity of COVID has diminished.

Second, I would note the change in sentiment from the lending institutions in the last two years and how it could have possibly influenced our access to capital needed for growth and maintenance. The quick but proactive work to change our corporate status but also expand existing and establish new banking relationships by our team and supported by our board has been impressive to witness this past year. We have taken a strong balance sheet pre-COVID and made it even stronger with leverage ratio and debt outstanding at levels not seen in nearly a decade. Third, going into 2021 with questions about the value and need of our solutions for our federal partners, notably with the United States Marshals Service and Immigration and Customs Enforcement.

The last 18 months, we have shown multiple times the essential nature of our solutions to our federal partners by new, expanded, and renewal of federal contracts. Fourth, this was not unique to us for sure, but the concerns with the labor market and our ability to fill vacancies that came as a result of pandemic. I'm extremely pleased with the progress our team has made in the last six months on this front. As mentioned earlier this year, we have started leaning forward on raising our staffing levels at certain locations, preparing for higher occupancy rates later this year and going into 2023 while filling vacancies at others. With those goals, we have seen a double-digit decline in our vacancy rate this year.

All the while, as you have seen in our recent ESG report, our programs team are achieving tremendous outcomes with the individuals in our care, and we had a 95% retention rate over the last five years of our management contracts. Finally, before I move on, you have seen strong policy debates from this summer going into the election this fall that has significant focus on immigration and border security, along with crime and criminal justice, among things like the economy and inflation. We obviously will see what next week brings from the election, but nonetheless, we have taken strong steps to be well poised for the likely needs of our existing and possible new government partners.

Now for an update of our government partners and beginning first with our federal customers, which are within the Department of Justice, which is the Federal Bureau of Prisons, or BOP, and the United States Marshals Service. The BOP has experienced significant declines in their populations in the last decade. In response to this long-term trend, we significantly diversified our business solutions over the years to meet the needs of other government partners. In August, we completed the sale of our 1,978-bed McRae Correctional Facility to the state of Georgia for $130 million. The McRae facility is our last remaining prison contract with the BOP, representing less than 2% of our total revenue. Following the expiration of our contract at McRae, we only expect to generate revenue from the BOP through the provision of residential reentry facility contracts.

As a reminder, the sale of our McRae facility is notable for a number of reasons. First, the McRae facility currently has a management contract with the Federal Bureau of Prisons that is scheduled to expire on November thirtieth, a contract that for the last few years was very clearly not going to be renewed by the BOP. Second, the asset sale provided significant after-tax cash proceeds that allow us to more quickly execute on our share repurchase authorization and pay down debt. Third, this is once again a market opportunity resulting from correctional systems seeking to modernize their facilities, not the result of prison population growth. This transaction was a great deal for the state of Georgia, as it will help them take a drastic step to modernize their system.

Finally, and most importantly, this asset sale reinforces the significant underlying value of our correctional and detention real estate assets, which is not reflected in the valuation of our publicly traded debt and equity securities. The sale price for McRae was nearly $66,000 per bed, which when used to approximate the value of our nearly 71,000 company-owned correctional beds, indicates a $4.7 billion value that is nearly triple the price the public markets have applied to our equity. While we do not expect the sale of our correctional or detention facilities to government entities to become a growing trend, we view this as an excellent opportunity to finalize our diversification away from prison contracts with the BOP, recycle capital, and create value due to the dislocation of the pricing of our public securities and our assets' true market values.

As for the United States Marshals Service, their prisoner populations have remained very consistent in recent years, so their need for capacity around the country remains unchanged and significant due to their reliance on contracted detention capacity. The Marshals were impacted by the executive order signed by President Biden and issued in January 2021 that directed the Attorney General to not renew Department of Justice contracts directly with privately operated criminal detention facilities. In 2022, we have no direct contracts with the Marshals that are set for expiration and now have only two total remaining direct contracts with the Marshals that are set to expire in later years. Both facilities provide significant capacity to the Marshals that we believe would be very challenging to replace, but we likely will not have resolution on potential contract extensions until we are closer to the existing contract's expiration dates.

We continue to work closely with the Marshals to ensure their capacity needs are being met in order to support their critical public safety mission. ICE is our third federal partner and is within the Department of Homeland Security. Of any of our government partners, their operations and capacity utilization needs were and continue to be the most significantly impacted by COVID-19. Notably, ICE implemented occupancy restrictions at their facilities to improve the ability for resident populations to social distance. These occupancy restrictions remained in place during the third quarter of this year. Nationwide, ICE detainee populations remained well below the historical levels since the spring of 2020, and that trend remained unchanged in the third quarter. As a result, our facility utilization levels continue to remain materially below historical averages.

Current utilization levels are also well below the number of beds funded through the annual budget appropriation process. Although the agency has nonetheless experienced budget challenges because of COVID-related and other unplanned expenditures outside of their control, which impacted detention levels and actions on new contract awards. Taking this into account, at the end of September, ICE detained approximately 26,000 individuals nationwide. Their new fiscal year started on October first, and ICE was funded at 34,000 beds under a continued resolution that funds the federal government to December 16. We obviously will be watching what their funding will be once the full year budget is enacted in December.

Today, we are experiencing increases in utilization by our federal partners, particularly ICE, across multiple facilities where they are up nearly 26% quarter to date, and we expect this trend to continue. This is a result of ICE slowly beginning to relax their pandemic-related occupancy restrictions. While this trend is occurring too late in the year to have a material impact on this year's financial results, we believe this is a notable trend following three years of utilization levels well below historical norms. We also continue to pursue opportunities to provide ICE with non-residential alternative detention or ATD programs. During the third quarter, a different provider was awarded a procurement for young adults, which was issued this January. While we were not awarded the new contract, we remain engaged with ICE as we believe additional ATD programs could be developed.

We also know these case management services are similar to the type of case management services we already provide in our community segment. The elevated rates of apprehensions on the southwest border continue to create challenges, which are expected to increase the government's demand for both residential detention capacity and non-residential ATDs. Should new needs arise, we believe we are well-positioned to deliver solutions to ICE.

Moving now to the results of the third quarter of this year, we generated revenue of $464.2 million, which was a decline of only 1.5% compared to the prior year quarter, despite the non-renewal of contracts with the United States Marshals Service at our Leavenworth Detention Center and our West Tennessee detention facility in 2021, and the non-renewal of a contract with Marion County, Indiana, at the managed-only Marion County Jail, effective January 31st of this year. Collectively, these three facilities accounted for $19.8 million or 4.2% reduction in revenue in the third quarter of this year versus the prior year quarter.

In the third quarter of this year, we generated normalized funds from operations or FFO of $33.9 million or $0.29 per share, compared to $58.6 million or $0.48 per share in the third quarter of 2021. Now, the decline was driven by the non-renewal of the three contracts that I just mentioned, the transition of populations at our La Palma Correctional Center pursuant to a new contract with the state of Arizona, and a challenging labor market. Dave Garfinkel will provide more detail regarding the financial impact of these items.

I would add that while we have spent considerable amount on incentives to recruit and retain our valuable frontline staff and on increasing staffing levels that were unsustainable in the prior year, these investments have positioned us to take advantage of increased demand from our government partners that we believe will occur once occupancy restrictions imposed by our government partners during the COVID pandemic are relaxed. As mentioned earlier, we are also poised to enter into new contracts and accept additional residential populations from our government partners that are unable to manage existing population levels because of their staffing challenges. We believe these needs could manifest as early as this quarter.

In April of this year, we commenced transitioning populations at our La Palma Correctional Center in Arizona from ICE populations to Arizona state populations pursuant to a new contract we were awarded by the Arizona Department of Corrections, Rehabilitation & Reentry late last year. We expect the transfer process to be completed near the end of this year. Upon achieving normalized utilization based on the contract, we expect to generate approximately $75 million-$85 million in annualized revenue. However, because of the preparation to receive the Arizona inmates, including a reduction in the average daily population of ICE detainees at the facility whose contract expired at the end of the third quarter, facility net operating income decreased nearly $12 million during the third quarter of this year compared with the third quarter of 2021.

The La Palma facility currently supports the mission of the State of Arizona by caring for approximately 1,900 inmates. We continue to actively collaborate with Arizona Department of Corrections, Rehabilitation, and Reentry to ensure we successfully complete the transition by the end of this year. I would like to briefly discuss our updated full-year 2022 financial guidance. We are now forecasting full-year normalized FFO per share in the range of $1.28-$1.32, and adjusted funds from operations or AFFO per share in the range of $1.18-$1.22.

The increase in our guidance are reflective of our third quarter financial results being in line with our internal forecast, the expectation of completing the transition at all the facilities sooner than estimated in the prior quarter, and the expectation of increased utilization by federal partners starting in the fourth quarter. Dave Garfinkel will provide greater details about our third quarter financial results, as well as the financial impact of the more significant assumptions included in our updated full-year financial guidance following the remainder of my comments. Finally, during the third quarter, we had multiple important milestones that continue to strengthen our balance sheet. First, as I mentioned earlier, we completed the sale of our McRae Correctional Facility to the State of Georgia for a sales price of $130 million, which generated a $77.5 million gain on the sale.

During the third quarter, we also sold two residential reentry centers in California and a parcel of undeveloped land for an aggregate sale price of $16.3 million. The cash generated from these asset sales has helped accelerate our capital allocation strategy. During the quarter, we also repurchased an additional $3.6 million principal amount of our outstanding 4.625% senior unsecured notes, which are scheduled to mature in May of 2023 and have a remaining balance of only $166 million. Following the maturity of those notes, our next bond maturity isn't until April of 2026, and we have less than $100 million in variable rate debt.

With our debt maturity schedule in a comfortable position, significant cash on hand, and resilient positive cash flow generation, we also repaid $33.5 million principal amount of our 8.25% senior notes, reducing the outstanding balance to $641.5 million. So far this year, we have reduced our outstanding debt balances by nearly $250 million, significantly reducing our future interest expense and improving our long-term cost of borrowing. We remain committed to our targeted total leverage ratio or net debt to adjusted EBITDA range of 2.25x-2.75x. We have made meaningful progress in reducing our overall leverage due to the strong cash flows the company generates, and we expect our leverage to continue to decline over time.

Understanding that recently our EBITDA has been negatively impacted by the short-term transition of contracts at our La Palma facility in Arizona, mathematically increasing leverage through debt levels have declined. As the transition nears completion, we expect our leverage to naturally decline. During the third quarter, we continue to execute on our stock repurchase program of, on the $225 million stock repurchase authorization approved by our board of directors earlier this year. Since commencing the program in May of this year, we have repurchased 6.6 million shares of our common stock at an aggregate purchase price of $74.5 million, or approximately 5% of our total outstanding shares.

The remaining share repurchase authorization of $150.5 million would allow us to repurchase an additional 12% of our outstanding shares based on recent trading price of our equity. Our capital allocation strategy has enabled us to remain flexible, and in future quarters, it's expected to include a combination of share repurchases and debt repayments, taking into consideration factors such as the price of our securities, progress towards achieving our targeted total leverage ratio, and potential returns on other opportunities to deploy capital. We continue to believe our capital allocation strategy has been prudent for positioning the company to generate long-term value through a stable capital structure and continue to cost-effectively meet the needs of our government customers with less reliance on outside sources of capital.

Before I turn it over to Dave, let me acknowledge what is being seen and reported in corporate America on a daily basis, and that is the warning signs of a recession for U.S. economy and the impact it is having on companies and industries, both near term and going forward. As we have seen in previous recessions, our industry has been resilient during previous downturns in the economy. This is in large part because we are an essential government service. As the economy slows down and we watch the labor market coming off its unprecedented demand cycle, we are actively hiring employees for anticipated growth, and we have plenty of capacity to meet the demand of our partners. No need to spend CapEx in this environment of rising interest rates.

To be clear, we won't turn a blind eye toward the current and forecasted macro trends in the economy. History has shown that our business can be stable and growing during a recession. I'll now turn the call over to Dave to provide a more detailed look at our financial results in the third quarter, discuss in detail our updated full-year financial guidance, and provide additional financial updates. Dave?

David Garfinkle (CFO)

Thank you, Damon, and good morning, everyone. In the third quarter of 2022, we reported net income of $0.58 per share or $0.08 of adjusted earnings per share, $0.29 of normalized FFO per share, and AFFO per share of $0.25. Adjusted and normalized per share amounts exclude a gain on sale of real estate assets of $83.8 million, asset impairments of $3.5 million, and expenses associated with debt repayments and refinancing transactions of $0.8 million. The gain on sale of real estate assets includes a gain of $77.5 million on the previously disclosed sale of the 1,978-bed McRae Correctional Facility for a gross sales price of $130 million, which was completed on August 9th.

The decline in normalized FFO per share of $0.19 compared to the prior quarter included an EBITDA decline of $11.8 million or $0.08 a share due to the earnings disruption at our 3,060-bed La Palma Correctional Center, the second-largest facility in our portfolio, as we continue to transition to populations from the state of Arizona pursuant to a new management contract that commenced in April for up to 2,706 inmates.

We previously had a contract with ICE at this facility, and during the prior quarter through the beginning of this year, we cared for an average daily population of approximately 1,800 ICE detainees at the La Palma facility, which declined to zero by the end of September. Last quarter, we temporarily suspended the intake process for Arizona to ensure our pace of hiring would meet staffing needs to manage the full capacity under the new contract. After revamping and expanding our hiring efforts, we resumed intake during the third quarter, and as of last night, cared for 1,896 inmates from Arizona, and now expect the ramp to be complete by the end of next month.

Our financial results have also been impacted by a challenging labor market and occupancy restrictions implemented during the COVID-19 pandemic that largely remained in place during the third quarter for most federal facilities. While we are experiencing inflation in many expense items like utilities and food, the most impactful increases were wages and other expenses related to labor. Our investments in wage increases and other expenses related to labor were necessary to help address depressed staffing levels we experienced in 2021, and to prepare for increased occupancy levels once occupancy restrictions caused by the pandemic are removed. We have begun to see improvement in the labor market and our same store staffing levels increased 6.4% from the end of the third quarter of 2021 to the end of the third quarter of 2022.

We have been successful in obtaining per diem increases from many of our government partners that are experiencing the same staffing challenges to cover the incremental salaries that help ensure adequate staffing levels. Notwithstanding that success, we incurred $5.6 million or $0.04 per share more in temporary incentives than in the prior-year quarter to attract and retain facility staff. We also incurred substantial travel expenses in order to supplement staffing at facilities that were particularly challenged, which increased $5.3 million or $0.03 per share from the prior quarter. As the labor market continues to improve, which will take some additional time, we expect to reduce reliance on these temporary incentives and travel expenses.

Lastly, contract terminations since the end of the second quarter of last year at our West Tennessee, Leavenworth, and the managed only Marion County Jail, contributed to an EBITDA reduction of $2.7 million or $0.02 per share from the prior year. Occupancy in our safety and community facilities continues to reflect the impact of COVID-19, and decreased to 70.1% in the third quarter of 2022 from 72.1% in the prior year quarter. Although the decline from the prior was attributable to contract terminations at the West Tennessee facility on September 30th, 2021, and our Leavenworth facility on December 31st, 2021, and due to the transition of populations at La Palma.

Occupancy increased from 69.5% in the second quarter of 2022, largely due to the transition at La Palma, where populations increased by 125 residents compared with the second quarter, driven by the intake of Arizona populations, as well as an overall increase in U.S. Marshals offenders in multiple facilities. Our overall ICE detainee populations remain well below historical levels as the southwest border has effectively remained closed to asylum seekers and adults attempting to cross the southern border without proper documentation or authority in an effort to contain the spread of COVID-19 under a policy known as Title 42. On April 1st, 2022, the CDC issued a public health determination terminating Title 42 with an effective date of May 23rd, 2022.

However, on April 25th, a federal judge issued a temporary restraining order blocking the termination of Title 42, which the judge affirmed on May 20th. That ruling is under appeal by the administration. Whenever Title 42 is terminated, such action may result in an increase in the number of undocumented people permitted to enter the United States claiming asylum, and could result in an increase in the number of people apprehended and detained by ICE. With depressed occupancy levels, we are in a position to significantly grow earnings whenever the impact of COVID-19 restrictions subsides. Turning next to the balance sheet. As of September 30th, we had $185 million of cash on hand, an additional $233 million of borrowing capacity on our revolving credit facility, which remains undrawn, providing us with total liquidity of $418 million.

During the third quarter of 2022, we purchased $3.6 million of our 4.625% senior notes in open market purchases, reducing the outstanding balance of these notes to $166.5 million. These notes mature in May 2023, which we currently expect to repay with cash on hand in early 2023. We also repaid $33.5 million of our 8.25% senior notes, reducing the outstanding balance of these notes to $641.5 million. Beyond the 4.625% senior notes, we have no maturities until the 8.25% senior notes mature in 2026.

Also during the quarter, during the third quarter, we purchased 3.6 million shares of our common stock for $37 million under our share repurchase program. Since our board authorized the repurchase program in May, we have repurchased over 5% of our outstanding shares for a total of 6.6 million shares at a cost of $74.5 million, and have remaining authorization for over 150 million more of our shares. Following these purchases, leverage measured by net debt to EBITDA was 3.0x using the trailing twelve months ended September 30th, 2022. Even with these repurchases, during the third quarter, we repaid $109.1 million of debt, net of the change in cash.

Going forward, we expect to continue to use our liquidity as well as cash flow from operations to repurchase a combination of our stock and bonds, taking into consideration a number of factors, including the amount authorized under our repurchase plan, liquidity, share price, progress toward achieving our targeted leverage of 2.25x-2.75x, and potential returns on other opportunities to deploy capital. After the repayment of our Term Loan B earlier this year and the pay down of our previous Term Loan A, we have significantly reduced our exposure to rising interest rates. Our only variable rate debt outstanding consists of a new smaller Term Loan A obtained in May in connection with our new bank credit facility, which comprises only 7% of our total outstanding debt.

Our balance sheet is in great position not only to weather, but to opportunistically take advantage of volatility in the capital markets, with no need to access the capital markets in the near term. Moving lastly to a discussion of our 2022 financial guidance. For the full year 2022, we expect to generate adjusted EPS of $0.47-$0.50, normalized FFO per share of $1.28-$1.32, and AFFO per share of $1.18-$1.22. Our per share results were in line with our internal forecast for the third quarter, but we are now expecting to complete the transition at our La Palma Correctional Center sooner than estimated last quarter. We are also expecting higher federal populations and slightly lower interest expense than previously estimated.

These favorable updates are partially offset by a continuation of higher levels of incentives, including travel expenses to help address a difficult labor market. Our guidance contemplates a continuation of an inflationary environment, including particularly for food, utilities, and interest rates. As mentioned, we also expect demand for our space and services to increase in the fourth quarter, particularly at the federal level, as occupancy restrictions are expected to be relaxed beginning in the fourth quarter, even though we do not expect Title 42 to be reversed this year. Our 2022 forecast reflects a decrease in EBITDA at La Palma of approximately $20 million from pre-pandemic levels and an even larger decrease from 2021.

Although we expect the facility transition to be complete near the end of next month, we do not expect the expense structure to completely normalize by the end of the year. Once the expense structure normalizes, we are confident EBITDA at La Palma will return to pre-pandemic levels, providing meaningful growth to our 2023 financial results compared with 2022. Our forecast contemplates the expiration on November thirtieth of our contract with the Federal Bureau of Prisons at the McRae facility. Our full year 2022 forecast includes EBITDA of $7.6 million for this facility that will partially offset the growth in EBITDA in 2023 from the La Palma facility.

The 2022 full year EBITDA guidance in our press release enables you to calculate our annual effective income tax rate of 25%-26% and provides you with our estimate of total depreciation and interest expense. We expect G&A expenses for the fourth quarter to be comparable to the prior three quarters. During 2022, we expect to incur $63.5 million-$66 million of maintenance capital expenditures in line with 2021 and unchanged from our previous guidance. We also expect to incur $19 million-$20 million for facility renovations, including $4 million-$5 million at La Palma for the new Arizona contract, almost all of which has been spent through the third quarter. We remain focused on managing our leverage target.

We remain focused on managing to our leverage targets and are not forecasting any share repurchases in the fourth quarter, but will remain flexible and opportunistic. I will now turn the call back to the operator, Amy, to open up the lines for questions.

Operator (participant)

Thank you. As a reminder to ask a question, you will need to press star one on your telephone. Please stand by while we compile the Q&A roster. Our first question comes from the line of Joe Gomes with Noble Capital Markets. Your line is open.

Joe Gomes (Senior Research Analyst and Chartered Financial Analyst)

Good morning, Damon and David. Thanks for taking the questions.

Damon Hininger (President and CEO)

Absolutely.

David Garfinkle (CFO)

Good morning, Joe.

Joe Gomes (Senior Research Analyst and Chartered Financial Analyst)

The first one's kind of a multi-part question here, but you know, you talked about your hiring in advance of some population increases you think are gonna occur. Just wondering, you know, A, what kind of gives you the confidence in that those population increases will occur. Also, you know, you mentioned, Damon, some staffing shortages of other people, other you know, government agencies. I was wondering if you might be able to give us a little more color on that and how you think, you know, CoreCivic can take advantage of that.

Damon Hininger (President and CEO)

Absolutely. Thank you so much, Joe, for those questions. For the first part of your question, your first question I should say, give you a little more color there. As I've noted, probably the best example I can give you is what I gave a little bit of color on relative to ICE in my prepared remarks. We had assumed, and now we're starting to see play out a little bit, a couple of things happening with ICE. One, they're into a new fiscal year, so they've got now kind of a full funding or full funded budget relative to getting their capacity nationwide at 34,000 beds. As you know, in a previous year, they were funded at that level, but a lot of money was diverted out of that budget for other expenses related to COVID.

We think that probably impacted their total contracted amount nationwide. Again, at the end of the year, at the end of the fiscal year, they were at about 26,000 beds. That'd be number one, that new fiscal year kind of fully funded budget and can get maybe back to a more historical level at 34,000 beds. The second thing somewhat related is, we are starting to see steps. It's not completely universal yet. Depends on, kind of conditions on the ground in certain locations, but we are starting to see a little bit of pulling back of restrictions.

That were put in place around COVID because of social distancing requirements within our facilities. We are starting to see that then in or we had some caps in certain locations for ICE that being relaxed a little bit. As I mentioned in my prepared remarks, you know, with the start of the new fiscal year on October first, our quarter to date increase in population's about 26%. That's a notable increase. Again, it won't materially impact this year, but obviously it will have some impact going into next year for sure. I think to answer the first part of your question, I'll tag team with Dave here in a minute to add anything additional on that. To the second question, we have gotten a couple calls.

In fact, I got a call directly from one commissioner from the Department of Corrections here in the United States about a year ago saying that they were having a difficult time staffing the facility within their state in a really rural part where they couldn't find the labor, and actually asked if we could help them with the staffing front. We talked to them about some maybe different solutions we could do with them in that state. More recently, and again, it's kind of the same issue, several states here in the United States that maybe have facilities in either rural locations or even facilities that maybe are somewhat near metropolitan areas, really difficult challenges to staff those facilities.

Unlike us, where we are a nationwide employer, they're somewhat limited on where they can pull labor from that either jurisdiction or from that respective state. We've got a few states that have knocked on our door saying, we're looking to close maybe units, maybe looking to close the entire facility just because they can't staff those facilities because of the labor market. We do feel like we've got a couple of states that are kind of circling right now where we could potentially provide capacity in our system because of those challenges. Anything you'd add, I guess, to both those, Dave?

David Garfinkle (CFO)

Nothing to add on the confirmation. You know, other than, you know, we've seen, as Damon said, 25%-26% increase in ICE populations so far this month. One month does not a trend make, but it's certainly a good sign and kind of makes logical sense given the turn of the fiscal year of the federal government. October 1st was the beginning of their new fiscal year, so refreshing that budget helps as well as the strong demand that continues on the southwest border. The only thing I'd add to the populations, particularly state populations, I'd say, where there could be opportunities to take additional populations because of states having challenges with their staffing levels is our ability to provide those incentives. They were expensive.

I mentioned $5.6 million of incentives that we paid to our employees, higher 2022 over 2021. Our government partners really don't have that kind of flexibility. They have to go to the legislature to get more funds. We can be more nimble and more flexible and can provide those temporary incentives to staff up to levels to enable us to take on those populations.

Joe Gomes (Senior Research Analyst and Chartered Financial Analyst)

Thanks for that. In talking about those incentives, I'm looking through the supplemental information there, by looking solely at the safety segment, you see expenses as a percent of revenues for the quarter were 80.9%, up from the high seventies, call it 77%, 78% in Q1 and Q2. Is that mostly a reflection of some of these incentives you talked about and some of this hiring in advance that drove up the safety segment expenses as percent of revenues?

David Garfinkle (CFO)

Yes. It's exactly that. You know, we said last year we were at unsustainably low staffing levels, doing everything we can to increase staffing levels. I'd say, you know, the prior quarter was probably lower than it could have been or lower than it, you know, ideally would have been. There were some reasons for that. We were still, you know, deep in COVID, and some of the programs and services had been suspended temporarily that are now reinstated for the most part this year. That contributed to it. Then of course, the biggest impact on the margins overall is the decline in occupancy.

Now, that's not necessarily true from last year's quarter to this year's quarter, but as you bring on those staffing levels, get back to normalized levels, you do have this dip in margins until the occupancy levels return.

Joe Gomes (Senior Research Analyst and Chartered Financial Analyst)

Okay. On, you know, the alternatives to detention that you spoke about, Damon. You know, obviously, you know, electronic monitoring and ATD has been a big driver this year, for some of your competitors out there, or your key competitor out there, I guess I should say. You know, what are you kind of you guys doing to try and garner some more of that business? You know, what kind of investment do you need to make in that segment, to hopefully capture more business there?

Damon Hininger (President and CEO)

Yeah. It's a great question. Couple of answers there. One of which is, I mean, we have, you know, a great relationship with ICE. As you know, it's actually our longest partner, relationship-wise. We've had almost a 42-year relationship. We know them really, really well. They know us really well. We know what their needs are, and we've been able to adjust our solutions kind of nationwide depending on, you know, changing needs they have, you know, globally based on challenges on the southwest border, but also from a policy perspective. We've been actively talking to them for a couple of years.

Also, we participated in the most recent procurement that led to the contract that GEO has to date, and they're well aware of our capabilities, not only just because our relationship with them over 40 years, but also, I mean, we have demonstrated operational record with our community segment that we've been doing for years not only for, you know, residential reentry but also community-based programs like home confinement, case management, electronic monitoring, whatnot. So we've got a whole suite of services that we can provide but also a track record where we've had great outcomes or great performance. Anything you'd add to that, Dave?

David Garfinkle (CFO)

Nothing to add at this time. It's, you know, other than it's an opportunity we see. It's a growing opportunity. It's obviously grown for our main competitor, and it's attractive business, so, we are focused in on it.

Joe Gomes (Senior Research Analyst and Chartered Financial Analyst)

Okay, great. Then maybe we could just talk a little bit on the stock buyback. Maybe you can kind of give us in the third quarter the cadence there. Were you buying throughout the quarter or is it more front-end loaded, and then you took advantage of the bond market to pay down some of the debt or repurchase some of the debt there? Why no forecast in the fourth quarter for additional stock buybacks?

David Garfinkle (CFO)

Yeah, Joe, it's Dave. I'll take that one. I'd say our pace was probably heavier earlier in the quarter as we knew we had $130 million of sales proceeds coming from McRae. So that kind of impacted the timing of share repurchases early in the quarter. With respect to Q4, as I mentioned in my script, we're not forecasting any repurchases in Q4. I'm not saying that. That doesn't mean we won't be opportunistic. If we see opportunities, disruption in the price, something like that, we could execute on it. Our repurchase program is not really formulaic, but it is colored by our leverage. We closed the quarter using the trailing twelve months at 3.0x.

We're mindful of our target of 2.25x-2.75x, and we'll be disciplined. The challenge here in the short term, as Damon mentioned previously in his script, you know, we've got this short term earnings decline because of La Palma and now we see occupancy going up. If we continue to see those trends improving, particularly with high occupancy levels, we could gear that program back up and accelerate repurchases. Until we see real evidence of that and see leverage going down, I'd be a little bit more conservative.

You know, the challenge we have also, you know, we've got. It's a trailing twelve months past four quarters, so, our debt does continue to go down, but the leverage is impacted more by the decline than EBITDA. As we get through that, you know, cycle of four quarters, we see that naturally increasing and therefore leverage naturally decreasing, and would then be able to ramp that share repurchase program back up.

Damon Hininger (President and CEO)

Maybe a little color on the bonds too.

David Garfinkle (CFO)

Oh, yeah. Yeah, so bonds. Yeah, thanks, Damon. With constraints on leverage and still plenty of liquidity, and a very volatile bond market, we thought it made sense to utilize our cash to pay off not just the 4.58% bonds. Those bonds mature in May of next year. As I mentioned, we expect to pay them off early 2023 anyway. If we can get them at par or below par, why not just take them out now, avoid the interest expense that we would incur between now and when we redeem those notes? Same kind of thought process on the 8.25%. You know, that's more market driven, though, I would say. It's a higher rate.

That is an expensive tranche of debt, $675 million at 8.25%. While we had plenty of liquidity, and again, that covenant on leverage, we think it just makes total sense to save on interest expense and chip away at that maturity because it is a chunky maturity. It's not till 2026, but nonetheless, it's a little bit of a chunky maturity, so something we'll monitor going forward. I don't know if we'll continue to buy back at the pace we did in the second quarter, but it's a good use of our cash while we're constrained on the leverage side.

Joe Gomes (Senior Research Analyst and Chartered Financial Analyst)

Great. Thanks for the color on that. I'll step aside and let someone else ask a couple questions.

David Garfinkle (CFO)

Thanks so much.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from the line of M. Marin with Zacks. Your line is open.

Marla Marin (Senior Analyst)

Thank you. I've a couple of questions on a different topic. You've announced pending divestitures of, you know, some smaller facilities. Contracts were either, you know, coming up or you had idled one of the facilities. How far in advance do you start conversations to renew or extend contracts?

Damon Hininger (President and CEO)

Yeah, great question. This is Damon. It really depends on the customer and the circumstances around the contract. You know, in the case with McRae, I mean, we kind of saw the kind of signs of potentially them decreasing the utilization of private sector almost a decade ago. We really got in a room and looked at all of our contracts we had with the BOP, looked at kind of expiration dates for those respective contracts and determined kind of the best course of action of those facilities once those contracts did expire. Nothing changed during that period of time from the BOP's perspective that they were gonna change course or potentially renew one or multiple of those contracts.

In the case of McRae, it was probably a couple of years ago that we, you know, started actively thinking through, you know, what the alternative is for McRae. You know, kind of obvious point, but we thought the most likely kind of scenario would be somehow a solution for the state of Georgia. Started putting on paper some various proposals to the state of Georgia, and ultimately ended up with a really good transaction for us and a great solution for the state of Georgia. Again, depends on the circumstance. If we've got another contract coming up and the customer's clearly saying, "Hey, we wanna renew this contract, maybe expand it or change the scope of services or programs," then again that may be a year or two out.

We start thinking through kinda what that all looks like and starting the negotiation process for that contract. Anything you'd add to that, Dave?

David Garfinkle (CFO)

None other than, you know, last year when the executive order was issued, when we had our Leavenworth contract and contract with U.S. Marshals at West Tennessee, those conversations began immediately. They probably wouldn't have, you know, probably would have been except for the executive order, would have been a routine extension of those contracts without a lot of advanced discussion. Because of the executive order, I think those conversations began a little bit earlier in earnest for both, you know, parties. For us, we wanted to try to ensure we could retain the contracts and on the U.S. Marshals side, trying to figure out what capacity was available if they couldn't use our facilities. Those were probably a little bit unusual because of the executive order.

Marla Marin (Senior Analyst)

Okay, thanks. We've also seen you come up with a solution in one facility where you sort of created a hybrid model with two distinct populations. Is that something you might be able to replicate at other venues?

David Garfinkle (CFO)

Make sure I follow your question there. What facility are you referring to?

Marla Marin (Senior Analyst)

you were able to take in one population to take up some of the idle beds that you had in that facility, and I'll look for it and come back and queue.

David Garfinkle (CFO)

I know. No, we're with you. We're with you.

Damon Hininger (President and CEO)

I'm with you. Yep, I'm following you now. Yeah, it's our Montana facility up in Shelby, Montana. It's our Crossroads facility.

Marla Marin (Senior Analyst)

Okay.

Damon Hininger (President and CEO)

Yeah, that was a win-win-win. Yeah, we worked it out with Montana, where they had an increased need for capacity and in a more, you know, kind of environment that we have at our facility where we've got more programs versus being backed up in local jails. The local jails then were happy to take the Marshals Service that were likely not be able to continue to stay at our facility because of the direct contract. Yeah, that was a great solution, again, for all parties, Marshals Service, Montana and CoreCivic. That's definitely a play in the playbook that we're always considering in those situations.

Marla Marin (Senior Analyst)

Okay, great. Last question is, we haven't really been talking a lot about COVID because COVID, you know, or vaccines, boosters, but is that something that's sort of still on your radar screen in terms of variation in cases within the facilities?

Damon Hininger (President and CEO)

Absolutely. Yeah, we're monitoring very closely still. You know, our team here within Brentwood, Tennessee, are monitoring kind of federal, state, and local public health authorities' guidance and direction. We're taking that into account accordingly and implementing it into our operational plan as appropriate, along with kind of feedback from our government partners. Kind of an obvious point, but you know, all jurisdictions are a little different relative to kind of the virus levels and you know, people that are impacted by the virus, and so we're monitoring that closely locally. Can't say it's completely in the rearview mirror, but I think we all agree that the risk has diminished.

Obviously the vaccine helped dramatically and significantly both the public and public sector and private sector and our employees and our residents. We're grateful for that too.

Marla Marin (Senior Analyst)

Thank you.

Damon Hininger (President and CEO)

Thank you for your questions.

Operator (participant)

Thank you. One moment for our next question. Our next question comes from line of Kirk Ludtke with Imperial Capital. Your line is open.

Kirk Ludtke (Managing Director)

Hello, everyone. Thank you for the presentation and the question. A couple topics.

Damon Hininger (President and CEO)

Hi, Kirk.

Kirk Ludtke (Managing Director)

Hi. First, there's an election next week. I was curious. I think people probably would view Republican control of either the House or the Senate as a positive. Are there any state level elections that might impact the outlook?

Damon Hininger (President and CEO)

Good, great question. It's Damon. A lot of state level elections that we're watching closely, and depending on you know, the outcome of those various state elections, you know, could have you know, some impact on potential solutions that we could provide in their respective states.

I guess I'd say this way, though, the states where we operate today, either in state or maybe provide a solution for an out-of-state population, you know, I feel very good with saying that we just have had a 40-year track record where regardless of who's in, who's the governor or who's in leadership within the legislature, as long as we continue to do a good job from a quality perspective and be cost effective and show good outcomes in our programs, we've had great success regardless if there's change in leadership or political affiliation within those states to continue to have really strong contracts and also great relationships with those respective partners. Anything you'd add to that, Dave?

David Garfinkle (CFO)

Yeah, I'd say we've added to our toolbox, too. You've seen us convert facilities that are owned and operated to facilities where we just provide the real estate. For political reasons or whatever the case may be, a governor prefers to employ state employees to operate a facility. We're very comfortable turning over the operations to the state government to operate, where we're just become the landlord and lease the facility to the partner. Either solution works for us. Economics can vary. It can be better, it can be worse, depending on the particular economics of an individual contract. It is a new tool in the toolbox that we've utilized the past few years when the politics have got in the way of the ownership and operations of a facility.

Kirk Ludtke (Managing Director)

Got it. That's very helpful. Thank you. With respect to La Palma, Eloy, I apologize if I missed this, but how many ICE detainees were at La Palma at the end of the ICE contract?

Damon Hininger (President and CEO)

Well, help keep me honest here, Dave. I think at the beginning of the year, you know, right after we got the contract, we were probably 2,000 ICE detainees.

David Garfinkle (CFO)

Yeah, about 1,800 ICE detainees.

Damon Hininger (President and CEO)

About 1,800 ICE detainees in the facility. Then after that, we kind of ramped down. We worked out a ramp plan with ICE, overlaying that with a ramp plan that Arizona wanted to achieve, in going into the facility. Kind of overlay those two ramp plans together. Then I think they were completely sorted out by mid-September, I think ICE was. Hopefully that answered your question? Anything to add to that?

David Garfinkle (CFO)

No, that's it. Yeah, they're out mid-September, which I think was what you're asking. They were out completely by the end of the quarter.

Damon Hininger (President and CEO)

Yeah.

Kirk Ludtke (Managing Director)

Got it. Okay. I'm just, you know, looking at the occupancy level at Eloy. It looks like you have room technically for 800 ICE detainees there, but is there an occupancy cap at Eloy?

David Garfinkle (CFO)

There was there and all over the country with ICE. There was an occupancy cap, and that probably kept us where we had at least 500 beds, if not more, probably 600 beds-700 beds that were vacant. More you wanna know, we give you a little more color on how that's impacts the total capacity. Most, if not all, of our ICE facilities have male and female, and then also have different levels of custody. If you think about maybe six or seven different variations of population facility, and then you've got to overlay that with restrictions, then you've got a lot of capacity that was not able to be utilized during COVID. That adds also a little bit to the total amount.

Say a different way, if that facility was just all male, one custody level, then you probably have a little higher utilization during COVID. Since we had multiple, you know, both genders and multiple levels of security, then that does impact a little bit the capacity that's unable to be used during COVID.

Kirk Ludtke (Managing Director)

Got it. Okay. Thank you. With respect to the.

Operator (participant)

Sorry, one moment for our next question.

David Garfinkle (CFO)

Sorry about that, Kirk Ludtke.

Operator (participant)

If you can reach me, do star one one.

David Garfinkle (CFO)

Yeah.

Operator (participant)

Our next question comes from the line of Brian Violino. Your line is open.

Speaker 7

Thanks for taking the question.

David Garfinkle (CFO)

Hi, Brian.

Speaker 7

Morning. Just a quick two-parter on the expenses. I guess, just in general, you know, you've been ramping up expenses on the staffing side for a few quarters now. Could you just frame for us, you know, in terms of your expectations of where occupancy levels go, where you are in that ramp up? Then sort of secondarily, on the sort of bonus and incentive payments, how should we think about those if we were to go into a more recessionary environment? Just the general sort of expense line, you know, going into next year and beyond, how should that be trending with bonuses? Then also ramp up staffing, just trying to get a better idea of where that could go.

David Garfinkle (CFO)

Yeah. Thanks for the question, Brian. I'll tag team with Damon on this one. I'd say, you know, we are, unlike probably most companies, we would welcome a little bit of a recession. Obviously, you don't want it to be a deep recession, but a recession could result in a better employer's market. And so we would be able to reduce the amount of incentives that we pay our staff. We already see things like registry nursing. The rates are coming down. Our need for hiring registry nursing has come down throughout this year. We're still paying some. I would say if the economy continues to decline, and particularly the labor market loosens up a bit, that would be a positive for us because we would be able to reduce our expenses.

On the occupancy trajectory, you know, we're doing our 2023 budgets right now. Not ready to put out guidance. We'll do that in February as we normally do. It would seem like occupancies would trend upward from here, particularly if we get through the La Palma transition, ICE populations, depending on if and when Title 42 gets reversed, that could be a positive for occupancy levels. Of course, the relaxation of the occupancy restrictions, as we've already begun to see some, would all point toward higher occupancy levels. The magnitude is just hard to gauge at this point.

I would say, you know, we would have to get back probably to that 80%-82% occupancy level before we see our margin percentages return to pre-pandemic levels. We have run that exercise to see that, yes, despite the fact that we've got higher wages today, we also have higher per diems today. Unfortunately, we're not getting the total revenue from those higher per diems because the volumes are still down. Once we see those occupancy levels get to pre-pandemic levels, the 80%-82% level, we remain confident that margins would be at the same pre-pandemic percentages.

Damon Hininger (President and CEO)

Yeah, that's perfect. The only thing I would add to Dave's comments is, you know, kind of going back to, you know, kind of the general mood of the economy and likely falling into a recession. I mean, we have as I said in my remarks, you know, last six months, we've made great progress on lowering our vacancy rate, but I'd say it's really accelerated probably the last 90 days, so pretty much the quarter. I think if we go into, you know, next year, as Dave says, and still see a little bit of a tailwind from the labor market perspective, then we can taper down those incentives as appropriate.

I think you would also find interesting, our HR team have shared with us that our pipelines for 2022, so this year, have exceeded the levels. These are people that have applied for jobs for CoreCivic, throughout the company. Our pipeline for this year, you know, 10 months into the year, have exceeded the levels that we had in 2020 and also 2021. We're pretty close back to 2019 levels on pipeline, people applying for employment with the company. Tons of credit for our HR team and the incentives that we've put in place, along with our operations team. I think we are starting to see a little bit of a tailwind, too, with the economy softening and, maybe labor softening also with that.

Speaker 7

Great. Thanks. One more quick one if I could. On your competitor recently won a legal case related to AB 32 in California. Just any comment on how that could impact your current operations and, you know, how you might think about operating in California going forward?

Damon Hininger (President and CEO)

Yeah, great question. The short answer is that obviously we're watching that very closely. We do have that one facility in California that is in Otay Mesa with ICE and Marshals Service. Obviously that case positively impacted the viability of that contract going forward. Again, we're watching that closely. Relevant to kind of behavior going forward or kind of business opportunities or things we maybe do differently based on the result of that case, I'd say no. Again, that was the only really kind of notable contract that we were, you know, thinking about that potentially could be impacted by that case. Anything to add to that, Dave?

David Garfinkle (CFO)

Just that it's the Otay Mesa Detention Center, and it was only at 67% occupancy during the third quarter. It's nice to get the AB 32 favorable ruling there, where we'll be able to renew. The contract expires December 2024. At this point, it seems like that should be a renewal without any issues at this point.

Speaker 7

Great. Thank you.

Damon Hininger (President and CEO)

Thank you.

David Garfinkle (CFO)

Thank you.

Operator (participant)

Showing no further questions at this time. This concludes today's conference call. Thank you for participating. You may now disconnect.