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CoreCivic Inc.

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Operating Results for the Second Quarter of 2023 
 
Second quarter came in at $463.7 million, up 1.5% over $456.7 million in the year ago period. Higher populations and increased per diem rates positively impacted revenue, partially offset by the absence of the McRae facility sold last November which contributed $10.3 million of revenue in the second quarter of 2022, along with a portion of the population increase going into guarantee minimum facilities.&nbsp;During the second quarter of 2023, revenue from ICE was $136.7 million compared to $129.6 million in the year ago period. Revenue from ICE increased at facilities other than the La Palma facility by $16.0 million due to increased occupancy and the impact of per diem increases at certain facilities. During the second quarter of 2022, the La Palma facility contributed ICE revenue of $8.9 million. Recall, this facility was transitioned from an ICE population to the state of Arizona throughout 2022.
Safety segment revenue rose 1.3% to $421.7 million in the quarter. Occupancy increased to 70.8% from 70.2% a year ago, but still remains below the 80%-plus levels seen pre-COVID. Revenue per compensated man-day rose to $98.62 from $95.31 in the second quarter of 2022. CoreCivic has been successful in renegotiating per diem levels to reflect higher costs, helping to drive revenue per man-day higher.
The Community segment had a solid quarter, with revenue up 10.0% to $28.4 million, again reflecting a return to a more normal operating environment, post-COVID. Segment occupancy rose to 62.8% from 59.3% in the year ago period. Pre-COVID, occupancy rates in the Community segment were closer to 75%. Revenue per compensated man-day increased to $70.77 from $63.59 in the second quarter of 2022.
Properties segment revenue declined to $13.6 million in the second quarter of 2023 from $14.5 million a year ago.
While operating costs remain elevated compared with pre-pandemic levels, during the quarter, CoreCivic experienced a continuation of modest improvements in the employment market, a trend that began to develop in the second half of 2022.&nbsp;Compared with the prior year quarter, operating expense improvements in the portfolio, combined with a reduction in interest expense and the impact of the share repurchase program, were offset by a reduction in EBITDA of $2.4 million from McRae. Safety segment operating margin declined to 20.4% from 22.1% a year ago, while Community segment operating margin improved to 25.9% from 24.2% in the second quarter of 2022. Facility net operating income for the Safety segment in the quarter totaled $86 million, down from $92.1 million in the year ago quarter. Community segment operating income was $5.5 million, up from $4.5 million, while Properties operating income was $10.3 million compared to $11.1 million last year.
G&amp;A expenses rose to $32.6 million from $31.5 million, partially offset by a decline in D&amp;A expenses to $31.6 million from $32.3 million in the year ago period. Second quarter 2023 operating income was $37.4 million, down from $42.0 million a year ago, reflecting the above and the absence of McRae. Net interest expense was $18.3 million, compared to $21.7 million last year.
CoreCivic reported net income for the quarter of $14.8 million, or $0.13 per diluted share, on an average share count of 113.9 million. In the second quarter of 2022, net income was $10.6 million, or $0.09 per diluted share, on an average 121.3 million shares. Adjusted EPS was $0.12 compared to $0.13 last year. FFO was $39.0 million, or $0.34 per share, versus $34.3 million, or $0.28, NFFO totaled $37.8 million, or $0.33 per share, versus $40.7 million, or $0.34 per share, and AFFO was $36 million, or $0.32 per share, versus $39.8 million, or $0.33.
Adjusted EBITDA for the quarter was $72.1 million for the second quarter of 2023, compared to $78.8 million in the year ago period.
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/revbreakdownCXW.jpg" style="width: 441px;height: 265px" /> 
 
The $8.0 million, or 1.8%, increase in total management revenue for the second quarter was primarily a result of an increase in revenue of approximately $15.8 million driven primarily by an increase of 3.7% in average revenue per compensated man-day. The increase in management revenue was partially offset by a decrease in revenue of $8.2 million driven primarily by a decrease in average daily compensated population from 2022 to 2023. The increase in average revenue per compensated man-day resulted from the effect of per diem increases at several of the facilities, as mentioned. We believe the impact of these per diem increases will provide further benefit to operating margins as residential populations continue to recover from the impact of COVID and will help offset the wage and employee benefit increases that have been incurring.
Average daily compensated population decreased 967, or 1.9%, to 49,926 during the second quarter of 2023 compared to 50,893 during the second quarter of 2022. The decrease in average daily compensated population was primarily a result of the contract expiration at the 1,978-bed McRae Correctional Facility effective November 30, 2022. This was partially offset by an increase in average population at the 3,060-bed La Palma Correctional Center and by an increase in occupancy at ICE facilities. 
 
State revenues from contracts at correctional, detention, and residential reentry facilities increased $18.3 million, or 11.3%, from the second quarter of 2022 to the second quarter of 2023. State revenues increased primarily as a result of the new management contract with the state of Arizona at La Palma Correctional Center for up to 2,706 inmates. CoreCivic began receiving inmates from the state of Arizona in April 2022 and as of June 30, 2023, the Company cared for approximately 2,300 inmates from the state of Arizona at this facility. State revenue at the La Palma facility increased by $14.6 million in the second quarter of 2023, compared to the same period in the prior year. State revenues also increased as a result of per diem increases under a number of state contracts. 
 
The $0.9 million, or 6.2%, decrease in lease revenue from the second quarter of 2022 to the second quarter of 2023 primarily resulted from the sale of two actively leased properties during the third quarter of 2022. 
 
Business Update 
 
As expected, with the ending of Title 42 and other COVID-related restrictions in May, ICE experienced a significant increase in demand for detention capacity.&nbsp;Since the end of Title 42, the number of individuals in the custody of ICE increased 43%. CoreCivic experienced a similar increase in ICE populations within facilities under contract with ICE experiencing an increase of 2,573, or 45%, as of July 31, 2023. While a portion of the increase was in facilities under minimum guarantees so the increase in revenue was muted, most such facilities are now at or above the minimums which would indicate additional population increases should more favorably impact revenue.
Further increases in populations will partly depend on funding. Already, DHS has reprogrammed existing funds, estimated to be around $500 million, from other programs and into ICE and other border control units.&nbsp;DHS also is expected to ask Congress in the coming weeks for around $2 billion in supplemental funds to address shortfalls related to border security, according to press reports. The additional funds, if approved, are expected to&nbsp;fund detention spaces, alternative-to-detention tracking programs, and transportation work. Such an increase should benefit CoreCivic, in our view.
Although the ICE population has increased significantly since the end of Title 42, it still remains below the 34,000 funded beds for the 2023 government fiscal year. In late July, the Homeland Security bill for fiscal 2024 was approved by the full committee in the House. The bill provides $3.55 billion for custody operations, which is more than ever previously appropriated, to fund an average daily ICE detainee population of 41,500, a significant increase from the 34,000 level. Obviously, the Senate and House will need to hash out any differences in funding before an exact bed funding level is determined. Nonetheless, the higher House committee figure provides the potential of, if not an increase in funded beds, hope that the funded bed level does not dip below the current 34,000, in our opinion. The potential for another Continuing Resolution, like in many recent years, likely would keep the 34,000 level through the end of calendar 2023.
As we also have highlighted in past reports, CoreCivic also has seven idled Safety correctional facilities that could be re-opened to help with demand from ICE, or other government agencies. The following table provides an overview of the facilities. Not included in the following table is the 2,400-bed North Fork facility which was idled in the third quarter of 2023. On the call, management noted that they have been in recent conversations with ICE regarding at least one of the idle facilities.
<img decoding="async" src="https://www.noblelinx.com/x/research/images/reports/CXWIdle.PNG" /> 
 
CoreCivic has two remaining direct contracts with the Marshalls. One of those contracts is the 4,128-bed Central Arizona Florence Correctional Complex in Arizona that has a contract expiration in September of 2023. While negotiations with the USMS about a contract extension have yet to begin, historically, the USMS would have already begun to transfer out populations if the contract was not going to be renewed, which we view positively. Both facilities provide significant capacity to the Marshals that we believe would be very challenging to replace. 
 
At the state level, CoreCivic continues to hear that state correctional systems&#8217; largest challenge remains the tight labor market. The Company has had conversations with an increasing number of states to help address their challenges in the near to long term. The Company has discussed available capacity that could assist those states in dealing with their operational challenges. For example, the State of Montana has taken steps during their recent legislative session to possibly place 120 individuals out of states. CoreCivic has been actively talking to the state for quite some time about their needs and expects to see an RFP shortly.
Management also highlighted increasing discussion at the county level, an area in which CoreCivic has historically not been a big player. County jail populations have increased by some 24%, or 130,000 people, over the past two years as courts have resumed normal activity following COVID. This is the largest increase in some 20-plus years. In addition to potentially providing detention capacity to counties, as these cases are adjudicated it could result in a significant increase in state prison populations, potentially increasing demand for capacity on the state level. Too early to say, but another possible growth avenue for CoreCivic.&nbsp;&#8212;&#8212;&#8212;- page break &#8212;&#8212;&#8212;-
Returning Capital to Investors 
 
CoreCivic continued to reduce both outstanding and net debt during the second quarter.&nbsp;During the second quarter of 2023, CoreCivic reduced the total debt balance by $34.1 million, or $24.5 million, net of the change in cash, increasing the total debt repaid for the first six months of 2023 to $72.7 million, net of the change in cash. During the quarter, the Company purchased $21.0 million of the 8.25% Senior Notes in open market purchases, reducing the outstanding balance of the 8.25% Senior Notes to $593.1 million. CoreCivic does not have any debt maturities until the 8.25% Senior Notes mature in April 2026.
Stock repurchases were muted in the second quarter. During the three months ended June 30, 2023, CoreCivic repurchased 0.1 million common shares at an aggregate purchase price of $0.7 million. In the first six months of the year, a total of 2.6 million shares have been repurchased at a cost of $25.6 million and, since the program was authorized, CoreCivic has repurchased a total of 9.2 million shares at an aggregate price of $100.1 million. As of June 30, 2023, there remained $124.9 million outstanding under the share repurchase program authorized by the Board of Directors.
Management has expressed the likelihood of a more tempered, opportunistic approach to future share repurchase, although if the shares remain at these levels, and operating results remain solid, we believe it is possible shares could be repurchased at a faster cadence. 
 
Management remains committed to a targeted leverage ratio or net debt to adjusted EBITDA range of 2.25 to 2.75 time. At the end of the second quarter, net leverage was 3.2x, level with the end of 2022. 
 
As of June 30, CoreCivic had $41.8 million of cash on hand and zero drawn down under the revolving credit facility, providing the Company with total liquidity of $274 million.
Updated Projections 
 
Given the better than internally expected second quarter, the lease of Davis, and some positive labor cost trends, management raised full year 2023 guidance, although the raised guidance just brings the low end of the range back to the original guidance issued in the fourth quarter earnings call. The Company expects to generate adjusted diluted EPS of $0.50-$0.65, up from a prior $0.46 to $0.57 and normalized FFO per share of $1.37-$1.45, up from a prior $1.31 to $1.42.
Not included in the updated full year financial guidance is any increased utilization from ICE.
We pretty much maintained our projections for the third quarter and full year, with just minor tweaks. For the third quarter, we are projecting revenue of $472.1 million, compared to $464.2 million in the same period last year. Net income is estimated at $15.3 million, or EPS of $0.13 per diluted share, compared to $68.3 million and EPS of $0.58 in the second quarter last year which benefitted from the sale of the McRae facility. Adjusted EPS is projected at $0.13, compared to $0.08 last year.&nbsp; We are projecting FFO of $0.35 per share and AFFO of $0.33 per share compared to $0.28 and $0.25, respectively, in the third quarter last year. Our adjusted EBITDA is $75.1 million, compared to a prior year&#8217;s $68.4 million.
For the full year, we are projecting revenue of $1.876 billion, net income of $60.3 million, or EPS of $0.53 per share, adjusted EPS of $0.54, and adjusted EBITDA of $299.3 million. FFO is projected at $1.38 per share, NFFO at $1.39 per share, and AFFO at $1.32 per share.

CoreCivic Inc. (CXW)

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Updated Model (CXW)

A Significant Loss – Moving to Market Perform (CXW)

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Best Revenue in 18 Quarters (CXW)

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