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Fourth Quarter and Full Year 2022 First Look

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Joe Gomes

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CoreCivic Inc.

4Q22 Operating Results
CoreCivic&#8217;s results for the fourth quarter were above expectations. The improved results in the quarter were driven by: (1)&nbsp;completion of the transition of contracts at La Palma Correctional Center, with a corresponding increase in utilization to an average 66% in the fourth quarter from 50% in the third quarter, (2)&nbsp;an increase in average facility utilization by ICE, although utilization levels were still below the pre-pandemic levels and occurred despite a reduction in utilization in the final days of December, and (3)&nbsp;continuation of modest improvement in the employment market that has allowed CoreCivic to reduce reliance on registry nursing and various forms of incentive compensation. Although these costs still remain elevated from their pre pandemic levels, salaries and benefits represent approximately 2/3 of the operating expenses, so even modest improvements in the employment market can result in meaningful cost savings for the Company. 
The Company reported revenue of $471.4 million, nearly flat with the $472.1 million reported a year ago and up from $464.2 million in the third quarter. Notably, this was achieved even with the headwinds from the nonrenewal of a contract with the United States Marshals Service in 2021 and a nonrenewal of a contract with Marion County, Indiana for the Marion County Jail effective January 31, 2022. Collectively, these two facilities accounted for a $13.1 million, or 2.7%, reduction in revenue in the fourth quarter of this year versus the prior year quarter.
<div>Total revenue generated by CoreCivic Safety decreased $2.6 million, or 0.6%, from $432.79 million to $430.25 million during the three months ended December 31, 2022. CoreCivic Safety&#8217;s facility net operating income decreased $18.7 million, or 15.2%, from $122.8 million during the fourth quarter of 2021 to $104.2 million during the three months ended December 31, 2022. Operating margins in the CoreCivic Safety segment were negatively impacted during the quarter by increased operating expenses per man-day, which was driven primarily by incremental staffing levels and higher wage rates. Total operating expenses per man day rose to $71.63 in the fourth quarter of 2022, up from $64.56 in the same period a year ago. Overall margin dropped to 24.1% from 28.4% in the fourth quarter of 2021.&nbsp;</div>
Total revenue generated by CoreCivic Community increased $1.7 million, or 6.6%, from $25.3 million during the fourth quarter of 2021 to $27 million during the fourth quarter this year. CoreCivic Community&#8217;s facility net operating income decreased $0.7 million, or 14.2%, from $5.3 million during the three months ended December 30, 2021 to $4.5 million during the three months ended December 30, 2022.
Total revenue generated by CoreCivic Properties increased $162,000, or 1.2%, from $14 million last year to $14.2 million during the fourth quarter of 2022. CoreCivic Properties&#8217; facility net operating income fell $127,000, or 1.1%, from $11.2 million to $11 million during the three months ended December 30, 2022. 
 
 In the fourth quarter of 2022, CoreCivic generated normalized funds from operation, or FFO, of $49.1 million, or $0.42 per share, compared to $57.8 million, or $0.48 per share, in the fourth quarter of 2021. The decline was driven by the nonrenewal of the two contracts previously mentioned, the transition of populations at La Palma Correctional Center, the expiration of a contract with the Federal Bureau Prisons at McRae, and a challenging labor market. 
 
For the fourth quarter of 2022, CoreCivic reported net income of $24.4 million, or $0.21 per share, compared to net income of $28 million, or $0.23 per share, in the same period last year. On an adjusted basis, EPS was $0.22 compared to $0.27 last year.&nbsp; The adjusted and normalized per share results were $0.09 above average analyst estimates, primarily due to lower operating expenses, stemming from moderated staffing incentives and a federal credit. Adjusted and normalized per share amounts exclude a gain on sale of real estate assets, asset impairments, and expenses associated with debt repayments.
Available Capacity and Populations 
 
As we stated in our last quarterly update, CoreCivic continues to have significant excess capacity available to meet the needs of its government partners. One key to achieving higher occupancy levels would be the ending of COVID induced limitations. Currently, most federal facilities are limited to 75% capacity due to the COVID regulations. Removal of these would instantly provide potential upside. It appears there is some movement in easing these restrictions. Although it remains very site specific, CoreCivic has seen relaxation of the COVID restrictions. ICE remains funded for 34,000 beds, but is only using roughly 21,000 at the end of January. Whether it is relaxation of COVID rules or funding, CoreCivic management believes the trend of increasing populations are to continue.
Conditions remain favorable for increasing occupancy, in our view. We have previously noted the ongoing surge at the southwest border and this has occurred during Title 42 enforcement. While the timing of the lifting of Title 42 is up in the air, we believe it could occur in the first half of 2023. When Title 42 is lifted, we expect a large increase in the number of people crossing the border. In the just ended Federal government fiscal year, Southwest Border encounters were nearly 2.4 million, up from 1.7 million in the prior year. 
 
Management also highlighted the potential of adding more state populations. According to management, many state corrections departments are finding it difficult to attract and retain personnel in this tight labor market. As a nationwide employer with the ability to offer pay incentives, CoreCivic is in a little better position to attract new employees. Management has been fielding inquiries from interested parties about possible solutions to staffing shortages at government operated facilities.
On the negative side of the ledger, in early December, the California Department of Corrections and Rehabilitation (CDCR) informed the Company that it intends to terminate the lease at CoreCivicâ€™s 2,560-bed California City Correctional Center (CCCC) by March 31, 2024, citing declining inmate populations. Given the early notice, CoreCivic has significant lead time to enter into discussions with CDCR and potentially other entities to replace occupancy at that facility, in our view. On the call, management sounded optimistic about this initiative, given the advanced age of CDCRâ€™s facilities. We would note the lease agreement at CCCC is fully funded through June 30, 2023, after which time funding beginning July 1, 2023 will be determined during the California legislatureâ€™s annual budget process. The CCCC facility generated an estimated rental revenue of $34 million from the CDCR for 2022 and an estimated $25 million of operating income. 
 
Debt, Liquidity and Capital Allocation 
 
As of year-end, CoreCivic had $149.4 million of cash-on-hand and an additional $233 million of borrowing capacity on the revolving credit facility, providing the Company with total liquidity of $382 million. During the fourth quarter of 2022, CoreCivic purchased $12.8 million of the 4.625% senior notes in open market purchases, reducing the outstanding balance of these notes to $153.8 million. CoreCivic also repurchased $27.4 million of its 8.25% senior notes, reducing the outstanding balance of these notes to $614.1 million.&nbsp;During the year ended December 31, 2022, CoreCivic reduced its debt balance by $287.4 million, or by $137.2 million net of the change in cash.&nbsp;
 On February 1st, CoreCivic repaid the remaining balance of the 4.625% notes, using cash on hand and available capacity under its revolving credit facility.&nbsp;We would note that beyond the 4.625% senior notes, the Company has no maturities until the 8.25% senior notes mature in 2026. 
 
Buyback
As we have noted previously, on August 2, 2022, CoreCivic&#8217;s Board of Directors authorized an increase in the share repurchase program of up to an additional $75.0 million. As a result of the increased authorization, the aggregate authorization under the share repurchase program increased from the original authorization of up to $150.0 million to up to $225.0 million.
During the fourth quarter, CoreCivic did not repurchase any shares, as management had alluded to during the third quarter conference call as the leverage ratio had creeped back up above management&#8217;s 2.25x-2.75x goal.&nbsp;The leverage ratio increase reflected a drop in trailing twelve month EBITDA rather than an increase in debt levels.
During the conference call, management noted that so far in the first quarter of 2023, an additional $10 million worth of shares have been repurchased, leaving approximately $140.5 million of authorization, which, at today&#8217;s stock price, would reduced outstanding shares by an additional approximate 12%. With the leverage ratio ending the year at 3.2x, we would expect a more opportunistic approach to share repurchases in 2023 rather than an ongoing type program we saw during the summer of 2022 until the leverage ratio once again declines below the 2.75x level.&nbsp;In any case, we believe management will continue to look to return capital to shareholders through the repurchase program.&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
Updated Projections 
 
CoreCivic updated guidance for the full year. For the full year 2023,&nbsp;guidance calls for diluted EPS in the $0.50-$0.65 per share range, FFO per diluted share in the $1.35-$1.50 range, AFFO in the $1.29-$1.45 range, and adjusted EBITDA in the $298.5 million to $313.5 million range. While the Company&#8217;s guidance is below our prior forecasts, we believe this reflects a measure of conservatism on the part of management. Recall, last year, management had included in guidance a belief Title 42 would end; this did not happen causing management to lower guidance as 2022 went forward. In the current guidance, management appears to be taking the worst case scenario as when Title 42 may end and is no longer projecting a surge in ICE populations but a more measured increase, mostly in the second half of the year. In addition,&nbsp;the ramp in staffing in anticipation of rising occupancies will lead to short-term increases in costs prior to generating incremental revenue.
Notwithstanding the above, management is encouraged about future operating improvements. While ICE occupancies fell at the end of the last year, they are improving once again, and with the ongoing increases in Southwest Border encounters, we believe populations will continue to rise. ICE is funded for 34,000 beds in this fiscal year, well above the current occupancy level. The normalization of expense levels at La Palma also could be a positive bump. We believe increases in per diems will be achieved this year, providing additional positive momentum for operating results. And any new contracts will be additive to existing guidance.
For the first quarter, we are projecting revenue of $469.1 million, reflecting the decline in ICE populations that have occurred since mid-December. Adjusted EBITDA is forecast at $76.4 million for the quarter. Net income will be negatively impacted as compared to the just completed fourth quarter by the absence of a tax credit, about a $0.02 per share negative, the decline in ICE populations, about a $0.02-$0.03 per share negative, and the payment of the majority of payroll taxes in the quarter, another $0.03 per share negative impact. We are projecting first quarter EPS of $0.14. For the full year, we are projecting revenue of $1,895.7 million, adjusted EBITDA of $313.1 million, FFO of $1.46, and EPS of $0.61

CoreCivic Inc. (CXW)

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Fourth Quarter and Full Year 2022 First Look (CXW)

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