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Geo Group Inc (The) REIT

First Quarter 2023 Operating Results
GEO Group reported results in line with expectations. For the first quarter of 2023, GEO reported GAAP net income attributable to GEO of $28 million on quarterly revenues of $608.2 million. Revenue was up 10.4% year-over-year, while net income attributable to GEO was down 26.7%. Adjusted EBITDA for the first quarter of 2023 increased by 4.6% to $130.9 million. The quarter&#8217;s financial results were driven by year-over-year growth in the electronic monitoring and supervision segment and year-over-year revenue increases in all other business segments, except the managed only segment. Higher interest expenses, a combination of higher rates and the debt restructuring completed last year, negatively impacted the bottom line. Without the impact of higher interest expense, operating results delivered growth during the first quarter of 2023, with the net operating income increasing by 5% to $179 million. 
Looking at GEO&#8217;s segment&#8217;s, Secure Services revenue was $277.1 million, compared to $267.4 million a year ago. During the first quarter, ICE active facilities in this segment experienced a year-over-year increase in compensated occupancy levels of 1 percentage point to 85%, although the occupancy level was down from 88% of capacity in the fourth quarter of 2022. Reentry Services revenue was $39.4 million in the quarter, compared to $38.1 million in the same period a year ago. Managed Only segment revenue totaled $133.8 million versus $135.3 million a year ago. Electronic Monitoring and Supervision Services segment revenue was $132.6 million, up from $87.9 million in the first quarter of 2022. Non-residential Services and Other revenue was $25.3 million compared to $22.4 million. Occupancy rates in the Residential Reentry segment remain well below historic levels, with the quarter at 56%, although this was an improvement from the 45% level in the year ago period. 
 
Operating expense came in at $433.5 million, or 71.27% of revenue, compared to $385.2 million, or 69.88% of revenue last year. D&amp;A expenses were $31.9 million versus $35.9 million. G&amp;A expenses of $50.1 million were 8.24% of revenue in the first quarter of 2023 compared to $48.6 million or 8.81% of revenue last year. Due to the debt restructuring, net interest expense rose to $53.1 million versus $26 million in the first quarter of 2022.
GEO reported first quarter 2023 net income attributable to GEO of $28 million, or $0.19 per share (which includes all potentially dilutive shares). In the first quarter of 2022, GEO reported net income of $38.2 million, or $0.26 per share. The Company reported first quarter 2023 Adjusted Net Income of $28.1 million, or $0.22 per diluted share, compared to $38.2 million, or $0.31 per diluted share, for the same period last year. (Two notes: for adjusted EPS, GEO does not have to include all potentially dilutive securities, i.e. the shares associated with the 6.5% notes and, two, diluted shares outstanding increased from 121.4 million in the first quarter of 2022 to 125.1 million in the first quarter of 2023.)
Fourth quarter adjusted EBITDA totaled $130.9 million, up from $125.2 million in the year ago period.
BI Update 
 
GEO&#8217;s BI electronic monitoring unit posted another quarter of strong performance on a year-over-year basis, but down on a sequential basis. As mentioned above, in the first quarter, GEO&#8217;s electronic monitoring and supervision services unit generated revenue of $132.6 million, up 50.9% year-over-year. But on a sequential basis, segment revenue was down from the $149.8 million achieved in the fourth quarter of 2022 as the number of enrollees under the program have declined from a peak of 377,980 (including all technologies, including no technology), to 281,613 near the end of March. Compensated mandays totaled 41,723,598 in the first quarter, up from 29,488,206 million in the first quarter of 2022 but down from 42,519,499 in the fourth quarter of 2022.
As we have noted previously, the uncertainty surrounding where the enrollee populations go (down, steady state, up) will be a key determinate&nbsp; to GEO&#8217;s 2023 performance. Over the past four-to-six weeks, enrollee levels have stabilized around 250,000 in the SmartLink program and around 280,000 overall. With the ending of Title 42 on May 11 and the significant numbers of people waiting at the southern border to come into the U.S., the potential exists for use of the ISAP program to increase over the back half of 2023.
GEO is rolling out its latest monitoring technology, the VeriWatch. VeriWatch is a wrist-worn GPS tracking device that allows for real-time and discrete monitoring of individuals under community supervision by parole, probation, pretrial release, and other law enforcement agencies. VeriWatch is the first GPS tracking device in community corrections that uses biometric facial comparison technology to authenticate the identity of the individuals wearing the device. VeriWatch runs on a secure, custom operating system and offers multiple layers of tamper detection, an on-device camera, and an optical proximity sensor. VeriWatch also includes a clip-on transfer battery that enables the device to be charged on the go. Supervising officers can also send notifications and messages through VeriWatch, and the individuals wearing the device can read and acknowledge these communications, with a two-way feature that supports engagement and supervision compliance.
VeriWatch has the potential to be a game changer in this space. Already, GEO has been awarded a new five-year contract, inclusive of renewal options, by Santa Clara County, California for the use of VeriWatch, representing the first ever community corrections contract involving this new cutting-edge technology developed by BI. The Company is currently conducting a 30 to 45 day test of the product in the Denver area. According to ICE, the VeriWatch wrist-worn GPS monitoring device would supplement existing capabilities for noncitizens who qualify for the non-detained docket in a less obtrusive manner, increasing compliance for ISAP participants moving through the immigration process. 
New Contract
 GEO&nbsp;entered into a lease agreement with the State of Oklahoma for the use of the previously idle 1,900-bed Great Plains Correctional Facility. The lease agreement will have a term of five years and six months effective May 1, 2023, with subsequent unlimited one-year option periods, and is expected to generate annual straight-line lease revenue for GEO of approximately $8.5 million. It appears, GEO won the contract at the expense of CoreCivic. At 1,900 beds, the GEO facility is smaller than CoreCivic&#8217;s 2,400 North Fork facility but is significantly closer to population centers, which should make staffing challenges easier to overcome.
Client Updates 
 
As noted in our year-end update, during the first quarter, the U.S. Marshals exercised the 5-year option period under direct contract for the 768-bed Robert Dayton facility in Georgia, which is now effective through February of 2028. This is the second of GEO&#8217;s three direct contracts to have its option periods exercised. Last year, the 770-bed San Diego facility had an option period exercised through September of 2023, with additional option periods through September of 2027. The final direct contract with the U.S. Marshals is the 1,900-bed Rio Grande facility in Texas, which is operating under a current option period that runs through September of 2023 and has an additional 5-year option period through September of 2028.
In the State of Arizona, the recent 2-year renewal of the 3,400-bed Kingman correctional and rehabilitation facility contract became effective during the first quarter. Internationally, GEO is preparing operationally for the start of the&nbsp;new health care contract in Australia for the delivery of primary health services across 13 public prisons in the state of Victoria. This new contract, which will commence on July 1, 2023, is expected to generate approximately $33 million in annualized revenues for GEO. 
 
Capital Structure 
 
GEO reduced net debt in the quarter by $70 million, with the net leverage ratio now at 3.5x. GEO closed the quarter with net debt of approximately $1.9 billion. The Company&#8217;s goal is to continue to focus on reducing debt each year by approximately $175 million to $200 million. Doing so would allow GEO to achieve net leverage below 3.5 times adjusted EBITDA. We would expect the Company to reduce net debt by an additional $175 million to $200 million and reach net leverage below three times adjusted EBITDA by the end of 2024, assuming annual net interest expense of approximately $175 million.
Potential Leveraging of Core Capabilities
Interesting to us was management&#8217;s comments on the call outlining some core competencies that could be&nbsp;new areas of growth, both with existing agencies and in service lines where GEO has historically operated as well as with new clients and/or service lines that are adjacent to or complementary with the existing business. For example, GEO has&nbsp;core competencies in multiple diverse difficult-to-operate areas that are hard to find under the same corporate umbrella, including managing large operationally complex facilities, housing populations with unique needs in a safe and humane manner, providing world-class rehabilitative care to individuals looking to successfully transition from the criminal justice system to becoming positive contributors to society, offering comprehensive case management services to underserved individuals, including psychological counseling, substance abuse treatment, vocational training, job placement and housing relocation services, securely electronically monitoring individuals going through various stages of the immigration processing system or the pre-trial and post-release criminal justice system, delivering high-quality 24/7 health care services to patients with a variety of medical needs, ranging from routine day-to-day examinations to chronic illnesses and serious acute conditions requiring life-saving treatment and professionally, safely and securely transporting individuals. While these opportunities are future focused, they present the opportunity to further diversify both the client and funding base.
Updated Projections 
 
Due to the uncertainty regarding the impact of the ending of Title 42 (May 11th) and the challenge in estimating the electronic monitoring populations, management continued to provide a wider than usual range of guidance for the full 2023 year. Management expects full-year 2023 net income attributable to GEO to be between $105 million and $125 million and annual revenues of approximately $2.38 billion to $2.46 billion. The GAAP net income guidance for 2023 reflects an expected increase in net interest expense of approximately $67 million due to rising interest rates and the debt restructuring transactions completed in August of 2022. Management expects full-year 2023 adjusted EBITDA to be between $507 million and $537 million. The full-year 2023 guidance provides a range of assumptions for the electronic monitoring and supervision services segment, with the low end of guidance reflecting a continued reduction in the number of participants in the ISAP program and the high end of guidance reflecting a steady rate based on the current participant level. Full-year guidance also reflects no assumption for the potential reactivation of any other idle facilities, which total approximately 9,000 secure services beds and 2,000 reentry beds.
Nonetheless, when Title 42 expires on May 11th, it is expected that the federal government likely will have to process a significantly larger proportion of individuals encountered by Border Patrol. It also is widely expected that the expiration of Title 42 may result in an increase in Border Patrol encounters at the Southwest border at a time when there is already an unusual seasonal increase in border activity due to the warmer weather in the summer. If these occur, it could recently result in higher counts in the ISAP program and/or in higher ICE processing center populations, both a positive for GEO.
For the second quarter of 2023, GEO management expects net income attributable to GEO to be between $24 million and $26 million on quarterly revenues of $585 million to $590 million, with second quarter 2023 adjusted EBITDA to be in a range of $124 million and $129 million.
We lowered our second quarter estimates, back-end loading 2023. For the second quarter, we lowered our revenue estimate to $587 million, from a prior $610 million. Net income declines to $25.2 million, or EPS of $0.20, from a prior $29.6 million, or EPS of $0.24. Our adjusted EBITDA estimate is now $124.1 million, compared to $131 million previously. In the second quarter of 2022, GEO reported revenue of $588.2 million, net income of $53.7 million, or EPS of $0.37, and adjusted EBITDA of $132.3 million. Our full year projections call for revenue of $2.43 billion, net income of $117.2 million, or $0.94 per share, and adjusted EBITDA of $521.6 million.

Geo Group Inc (The) REIT (GEO)

Solid First Quarter Results

Fundamental Analysis:

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Second Quarter Results Released (GEO)

Meetings With Management (GEO)

Solid First Quarter Results (GEO)

NYC NDRS (GEO)

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