CoreCivic, Inc.
Q2 2021 Earnings Call Transcript

Published: 10 Aug 2021

[Operator:]

Good morning, My name is Cassey, and I will be your conference operator. As a reminder, this call is being recorded. I'd like to welcome you to CoreCivic Second Quarter 2021 Earnings Conference Call. . Thank you. At this time, I would like to now turn the conference over to Cameron Hopewell, CoreCivic's Managing Director of Investor Relations. Mr. Hopewell, you may begin your conference.

[Cameron Hopewell:]

Thanks, Cassey. 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. The call today will focus on our financial results for the second quarter and we will provide you with general business update. 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 and Litigation Reform Act. Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our second quarter 2021 earnings release issued after market yesterday and in our Securities and Exchange Commissions 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 on 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 CEO, Damon Hininger. Damon?

[Damon Hininger:]

Thank you, Cameron. Good morning, everyone, and thank you for joining us today for our second quarter 2021 earnings conference call. Going to our agenda for the call, we will provide you with a breakdown of our second quarter financial performance, discuss business development opportunities and the latest developments with our government partners. We will also provide you with an update of our continued response to the COVID-19 pandemic, particularly relevant due to the emergence of the latest Delta variant. Following my remarks, I will turn the call over to our CFO, Dave Garfinkle, who will review our financial results in greater detail. Our second quarter revenue of $464.6 million represented only a 2% decline over the prior year quarter, despite the continued impact of the COVID-19 pandemic and OCC within our safety and community segments, the sale of 47 noncore real estate assets within our property segment in multiple transactions between December 2020 and June 2021, and our decision to exit 2 managed-only contracts with the local governments in the state of Tennessee. And in the year since we announced the change in our capital allocation strategy, we have meaningfully improved our credit profile, reducing our net debt balance by almost $550 million during a time of unprecedented challenges. We are maintaining our target of reaching a total leverage ratio or net debt to adjusted EBITDA of 2.25x to 2.75x. Using the trailing 12 months ended June 30, 2021, our total leverage ratio was 3.3x. At the same time last year, our total leverage ratio was 3.9x, so we have made significant progress. We continue to believe our capital allocation strategy is the most prudent approach to 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 partners. We continue to see criminal justice related populations decline mostly due to a reduction in new intakes rather than early releases. Governments have acted faster to transfer certain residents assigned to our reentry facilities to nonresidential statuses, such as furloughs, home confinement or releases to create additional space for enhanced social distancing theme within facilities. The year-over-year rate of decline in OCC in our safety and committed facilities has slowed because the prior year quarter was also impacted by the COVID-19 pandemic. Our safety segment's OCC was 72.5% in the quarter, down 330 basis points versus the prior year quarter, and our community segment's OCC was 58.1%, down 420 basis points. However, our safety OCC increased 120 basis points over the first quarter of 2021, and our community segment OCC increased by 650 basis points versus the first quarter of 2021. Normalized funds from operations, or FFO, for the second quarter was $0.46 per share, a decline of 18% compared with the second quarter of 2020. However, this decline was primarily driven by our decision to convert to a taxable C corporation effective January 1, 2021, from a REIT. We have added disclosures in our second quarter supplemental financial information document available on our website, which provides our pro forma results of 2020 reflecting income tax expense by applying our estimated tax rate to pretax income in the prior year. Comparing our second quarter 2021 normalized FFO of $0.46 per share to our pro forma second quarter 2020 normalized FFO of $0.47 per share, it shows a decline of just 2%. Our adjusted EBITDA of $101.7 million was also resilient, increasing 1% compared to the second quarter of 2020. Our GAAP results included some larger than average special items, including $52 million in expenses related to debt repayment and refinancing transactions. These charges were the result of the repayment of our $250 million in unsecured bonds due in October 2022, the partial repayment of our $350 million in unsecured bonds due in May of 2023 and the repayment of nonrecourse mortgage notes associated with the recently sold GSA leased assets previously in our properties portfolio. These charges were partially offset by a $39 million gain we recognized from the sale of 5 GSA leased real estate assets, which we have excluded from our adjusted results. Dave will provide greater details about our second quarter financial results, including reconciling between our GAAP and normalized results following the remainder of my comments. We will start our operational and business development discussion with an update on the impact of COVID-19 pandemic and our ongoing response. Last quarter, I spoke about 2 trends

[David Garfinkle:]

Thank you, Damon, and good morning, everyone. In the second quarter of 2021, we reported net income of $0.13 per share or $0.25 of adjusted earnings per share, excluding special items. We generated $0.46 of normalized FFO per share and AFFO per share of $0.45. Adjusted EBITDA was $101.7 million in the second quarter of 2021 compared with $101.1 million in the prior year quarter. Special items during the second quarter of 2021 include a net gain on the sale of 5 real estate assets, impairment on a managed-only contract, COVID-19 expenses and expenses associated with the shareholder litigation settlement disclosed last quarter. Adjusted amounts also include expenses associated with debt repayments and refinancing transactions for the debt repaid in connection with our April bond issuance as well as the repayment of nonrecourse mortgage debt associated with 2 of the 5 properties we sold during the quarter. Financial results in 2021 reflect a higher income tax provision under our new corporate tax structure compared with the prior year when we elected to qualify as a REIT. For illustration purposes, in our supplemental disclosure report posted on our website, we have duplicated the presentation of adjusted net income, normalized funds from operations and AFFO for each quarter and full year of 2020 calculated on a pro forma basis to reflect such metrics, applying an estimated effective tax rate of 27.5%. Adjusted net income per share in the second quarter of 2021 of $0.25 compares to $0.23 on a pro forma basis, applying the estimated effective tax rate for the second quarter of 2020, while normalized FFO per share in the second quarter of 2021 of $0.46 compares to $0.47 on a pro forma basis for the prior year quarter. And AFFO per share for the second quarter of 2021 of $0.45 compares to $0.48 on a pro forma basis for the prior year quarter. So while there are multiple special items associated with successful transactions completed during the quarter that allowed us to check off several of the goals we established at the beginning of the year, core operating results compared with the prior year quarter can be summarized primarily by an increase in facility EBITDA, excluding COVID expenses, a $4.5 million in higher G&A expenses contributing to a net increase in adjusted EBITDA of $0.6 million. The $4.5 million increase in facility EBITDA was net of a reduction in facility EBITDA of $3.2 million attributable to the sale of 42 GSA leased properties that we sold in the fourth quarter of 2020 and the 5 additional properties sold in the second quarter of 2021. Therefore, excluding these sales, facility EBITDA increased $7.7 million or 6.4% from the prior year quarter. While occupancy in our safety and community facilities continues to reflect the impact of COVID-19 down to 71.6% in the second quarter of 2021 compared to 74.9% in last year's quarter, it is up from 69.9% in the first quarter of 2021. The impact of COVID-19 began in the second quarter last year as populations, primarily ICE, declined sequentially throughout 2020. As the federal and state court systems have begun to return to normal operations, and as the numbers of undocumented people encountered at the Southern border have increased, we have begun to see those populations return. Operating margins were 26.8% in the second quarter of 2021 compared with 23.5% in the prior year quarter. Although we have excluded the impact of COVID-19 expenses on our adjusted per share results, they are included in the operating margins and per mandate statistics presented in our supplemental disclosure report. Excluding COVID-19 expenses, which included $6.3 million of hero bonuses to our facility staff in the prior year quarter, the total facility operating margin for our safety and community segments was 27% for the second quarter of 2021 compared with 25.3% for the second quarter of 2020. Our staffing levels reflect lower occupancy compared with the prior year, and most of our facilities remain on restricted movement because of the pandemic, reflecting the modified services we are able to provide. Turning to the balance sheet. We continue to make significant progress on our debt reduction strategy. During the second quarter of 2021, we successfully completed the sale of 5 noncore properties, generating $125 million of net proceeds after the repayment of non-recourse mortgage notes associated with 2 of the properties and other transaction-related costs, which we used to pay down debt. We reported a gain on the sale of these 5 assets of $38.8 million during the second quarter and the fees and costs on the 2 nonrecourse mortgage notes of $33 million. Including the net proceeds generated from the sale of 42 GSA leased properties in the fourth quarter of 2020, we have generated $152.8 million from the sale of noncore assets after the payment of nonrecourse mortgage notes and transaction costs, exceeding the goal we set in August 2020 when we announced our intention to revoke our REIT election and revised our capital allocation strategy. As mentioned last quarter, in April, we accessed the debt capital markets, issuing $450 million of unsecured notes maturing in 2026. We used the net proceeds of approximately $435.1 million after the original issuance and underwriting discounts and transaction costs to redeem all of the outstanding $250 million of unsecured notes that were scheduled to mature in 2022, including the make-whole amount, extending our weighted average maturities. In addition, we repaid $149 million of the $350 million unsecured notes scheduled to mature in 2023 at an aggregate purchase price of $151.2 million in privately negotiated transactions. During June, we repurchased an additional $27 million of the 2023 notes at par in a privately negotiated transaction, reducing the outstanding balance of the 2023 notes to $174 million. As of June 30, we had $163 million of cash on hand and $674 million of availability on our revolving credit facility, which matures in 2023. Our leverage, measured by net debt to EBITDA, was 3.3x using the trailing 12 months, down from 3.9x using the trailing 12 months at the end of the third quarter of 2020 when we announced our revised capital allocation strategy and targeted leverage of 2.25 to 2.75x. Including the repayments of the mortgage notes associated with the aforementioned sale of non-core assets, we have reduced our net debt balance by over $300 million in the first 6 months of 2021. During the second half of 2021, we estimate that we will pay down an additional $100 million of debt with cash generated from our operations. We incurred $24.7 million of maintenance capital expenditures during the first half of the year, leaving $40 million to $45 million for the remainder of the year, which is consistent with the estimates we provided last quarter. Without the capital contribution to the Alabama project, as Damon described, we have no other material capital commitments. While we are disappointed with Alabama's decision, without the $100 million of corporate capital we previously modeled for the project, we expect to reach our targeted leverage sooner, at which point we will evaluate opportunities to return capital to our shareholders. The challenges encountered in constructing desperately needed criminal justice infrastructure in the United States exemplified in Alabama further demonstrates the importance of the very valuable real estate portfolio of correctional and detention facilities we own across the country. Beyond capital expenditures and debt repayments, we are not yet reinstating financial guidance because of uncertainties associated with COVID-19, the application of the administration's various executive actions and policies related to immigration and criminal justice as well as the challenging employment market. The country continues to make progress on vaccinations for COVID-19, and our operations were beginning to return to more normal operations. However, we cannot predict the impact of a resurgence in COVID-19 infections caused by the Delta variant, which likely contributed to the extension by the administration of Title 42, the policy causing the Southern border to remain effectively closed to asylum seekers and adults crossing the Southern border without proper documentation or authority in an effort to prevent the spread of COVID-19. Disruptions to the criminal justice and immigration systems, including further extensions of Title 42, create challenges in forecasting our residential populations. Further, recruiting and retaining staff has always been difficult in our industry due to the unique and challenging work. However, like many companies, staffing in the current environment has become increasingly difficult. Even though we provided wage increases effective July 1 for most of our staff at the highest levels we've provided in several years, we could be required to incur additional wage adjustments in certain markets to help ensure sufficient staffing levels. We intend to work with our government partners and follow national and local health standards in enabling us to reinstate programs and normal movement within our facilities, requiring higher staffing levels and impacting our margins, absent higher occupancy. Conversely, our government partners are experiencing the same staffing challenges, which has contributed to some of the per diem increases we were able to achieve, as more budget dollars are allocated to help address rising wages. By successfully signing a new contract with Mahoning County at our Northeast Ohio Correctional Center and expanding the contract with Montana at our Crossroads Correctional Center, we have successfully resolved 2 of the 2021 contract expirations with the U.S. Marshals Service. The remaining 2021 contract expirations with U.S. Marshals Service at our 600 bed West Tennessee Detention Facility and at our 1,033 bed Leavenworth Detention Center in Kansas expire in September and December, respectively. We do not yet know if the U.S. Marshals will vacate these 2 facilities. We continue to work with the U.S. Marshals Service and various government agencies to meet their needs, the solutions of which could be unique for each facility. At this stage of the discussions, it is too early to predict the ultimate outcome or the financial impact to us, if any. We currently estimate our income tax expense to reflect a normalized effective tax rate of 27.5% each quarter, although we estimate our cash taxes to be approximately 20% for the year because of net deductions for special items. Finally, when modeling our financial results for the second half of 2021, it is important to remember the properties we sold in the fourth quarter of 2020 and the second quarter of 2021 generated approximately $30 million of EBITDA in 2020 and $9.3 million of EBITDA in the first half of 2021. As we continue to manage through the impact of COVID-19, return to normal operations and see how the administration reacts to the dynamic situation on the Southern border, it is our current intention to reinstate annual guidance in February 2022. I will now turn the call back to the operator, Cassey, to open up the lines for questions.

[Operator:]

. Our first question will be taken from Joe Gomes with NOBLE Capital.

[Joseph Gomes:]

So I kind of want to start off a little bit on the population. It's kind of a running story here on ICE and the guaranteed contract minimum. I mean, if I'm looking at the overall populations for all of your facilities, you could see them starting to increase quarter-over-quarter here. So I was wondering, where do we stand on the ICE and the contract minimum? Have any facilities met those? Where are we - how far below are we in other ones? Any additional detail, that would be great.

[Damon Hininger:]

Joe, thanks for your question. This is Damon, and I'll tag team with Dave a little bit on the answer here. Let me just first talk globally about ICE Marshals and then actual pops for our system. And then Dave will talk a little bit about your question on where we stand relative to our fixed monthly payments based on occupancy levels within those contracts. So at a high level, Marshals Service has been kind of between 66,000 and 64,000 nationwide in their populations, and that's from - that's an increase from where they were last summer of about 56,000, so to give you kind of a sense of where they were versus where they are today. Switching over to ICE, as I mentioned, they've almost doubled. So they were, I think, right around 14,000 towards the end of last year, early this year. Today, they were right around, I think, 28,000 or 29,000 nationwide. And then specifically for CoreCivic, as of the - I guess, it's probably as of Friday of last week, we were about 8,000 within our system with ICE and then about 9,200 with Marshals Service within our system. So again, that gives you kind of high-level numbers for both ICE and Marshals, and then specifically of course of what we've got in our facilities. But I'll let Dave talk a little bit about kind of where that compares to where we are in fixed payments that are tied to OCC levels.

[David Garfinkle:]

Yes. Thanks, Damon. For - during the second quarter of 2021, we were about 3,200 detainees below the guarantee levels. As of Friday, that number had been reduced to about 2,200.

[Joseph Gomes:]

Okay. Great. And on the two facilities on the U.S. Marshals, and hopefully, we were able to work out a solution for them here in West Tennessee and Leavenworth, is there nearby available capacity if they declined to renew there that they could easily switch? Are we back into kind of the same situation where we were in Northeast Ohio, where there really wasn't an excess amount of capacity nearby that facility that they could put the detainees in? I'm just wondering how much capacity available is around those two facilities that if they decided not to renew that they could move inmates, too.

[Damon Hininger:]

Yes. Joe, good question. This is Damon again. And so in both those locations, West Tennessee, which is at Mason, Tennessee in the Western part of the state, and the Leavenworth, which is up in the Northeast part of the state of Kansas, we've been, in both those communities, for about 30 years. And so we have a pretty good sense of what the available capacity is kind of locally, both in Eastern Kansas and Western Missouri for the Leavenworth facility and then West Tennessee for that facility. And our general view is that, yes, capacity is pretty limited for various reasons, one of which is just certain systems maybe just are at capacity or maybe overcapacity, so they don't have additional capacity. But one other kind of reason, and this is - and obvious example, but an important one, and that is COVID, and that's affected a lot of local systems, how they think about kind of OCC kind of near term, not only with the past 18 months, but also how it affected their populations and their OCC with the Delta variant. So our general view continues to be that they are pretty limited alternatives locally where we provide capacity for the Marshals Service in those 2 locations. But I guess, what I'll also say, the review and analysis we did and engagement we did with various partners with both Northeast Ohio and Montana, I mean, we're very pleased about the outcome from both those locations. And as you know, the solutions that we did on both those locations were very different. But we continue to talk to various other partners and also maybe some new partners about that capacity if ultimately the Marshals Service find maybe alternatives in those respective areas that allow them maybe to take the population down or completely out - close both facilities. I don't know if you can add to that, Dave.

[David Garfinkle:]

I don't, Damon. That should cover it.

[Joseph Gomes:]

Great. And so you guys mentioned in your prepared remarks how - let's just take a look at the safety segment, net operating income margin increased 300 basis points in the quarter. I know some of that's less COVID expenses, some is per diem increases. Wondering if you could give us a little more color or detail as to - even though you had declining populations how you're able to show improved net operating margins there.

[Damon Hininger:]

Yes. I'll tag-team with Dave again on this one, Joe. But one thing I would say, and Dave alluded to this a little bit, but we really have been really grateful for our state partners, as they went through their respective legislative sessions around the country where there was deep appreciation, both by the governors and legislators about this labor market and how it's made a challenge, not only for public sector facilities, but also private sector facilities. So with that, there's been pretty meaningful increases that we saw on our per day rates on various state contracts around the country, which we were able to quickly turn around and deliver as salary increases for our employees. So some of that obviously is cost. But also I think there's just a general appreciation to some of the work that we do within our facilities and the value we provide our government partners. So I think just general recognition for all that work was noted around the country. But I guess, I'll let you add to that, Dave.

[David Garfinkle:]

Yes. There are obviously many negative implications for COVID-19, but one of the ones in the correctional setting are, unfortunately, the reduction in the number of services and programs that we're able to provide in order to minimize movement of the inmates and detainees and residents around the facilities. So if you're not having classrooms, for example, you're not - you don't have the teachers on board, and you're not paying their salary well while the programs are not going on. So we've started to see some of that return to normal operations. We continue to see that. We'll see if the Delta variant takes a couple of steps back with that, but we're looking forward to reinstating those services, which will then result in higher staffing levels. And I think you'd see margins, I don't know if they'd return to pre-pandemic levels, but I think, right now, they're probably elevated margins because of the lack of the intensity of services that we're providing to the facilities to restrict the movement and the integration and interaction of the inmates and staff.

[Joseph Gomes:]

Okay. Great. And one more for me, and I'll jump back in the queue. I'd like to go circle back to Alabama. Maybe you could give us a little more color on the process they're looking at. I know this is something the legislature has looked at in the past, but seems to have been unsuccessful in terms of allocating funds for building prisons. We know that Alabama is under a DOJ law suit about their prisons. What other alternatives, at least in the short term, could there be for Alabama? Could they, for instance, make use of some of your idle facilities to at least comply with the lawsuit - the federal lawsuit? Any additional color there on Alabama would be appreciated.

[Damon Hininger:]

Thanks, Joe, for that question. This is Damon again. Let me just first say, we really have been grateful for the dialogue and work that we've had with the Governor and her staff, along with the Commissioner and the Department of Correction staff. I have great appreciation for the difficult situation they have find themselves in. As you know, I worked in a correction facility when I first started the company, so having a new modern facility that is more humane for the residents and safer for staff, it's something very top of mind for me just because I've been there and done that. So I have an appreciation for what they're trying to do in Alabama and continue to be on the sidelines here as a cheerleader for their efforts because, yes, they are still very much in a crisis. They've got a challenge within their facilities. But also, as you noted, they've got continuing pressure from the Department of Justice on pushing them trying to modernize the facilities and make it a much more humane environment. So it'd be hard for me to speculate and say exactly kind of what the Governor and the legislature potentially are going to do in the coming weeks and months. As they reported in the press, they're actively talking, I'd say they being the Governor and legislative leadership, about the kind of the path forward. I am encouraged here in the legislature, there is good appreciation and understanding that they do need to do something where maybe that hasn't always been the case back in Alabama, so that's an encouraging sign. But our position right now is to continue to keep engaged with the department. And as they go kind of down this path, with the Governor and the legislature, while we're trying to figure out potential new alternatives for a more, what I'd say, mid- to long-term solution in the state, I mean, we stand ready to provide any solutions that it may emerge or maybe serve as a bridge to those kind of longer-term solutions. But anything you'd add to that, Dave?

[David Garfinkle:]

Yes. I was going to say the same thing. We stand ready. We can provide a number of solutions for them. I know it's Alabama that wants an Alabama solution. But we do have capacity. We're able to provide out-of-state capacity if that's the direction they take. I don't think that, that's where they're going with it. But we stand ready to help them with whatever solutions they think they need.

[Operator:]

Our next question will come from Marla Marin with Zacks.

[Marla Marin:]

So a couple of questions. I'm trying to put my arms around the situation in Alabama and if we could take that and extrapolate it to the general infrastructure that we see in this country. Could you give us any sense as perhaps in terms of average age of your infrastructure versus what is currently available to government entities? Or directionally, any kind of sense of where the general needs are because it seems that there'll probably pretty extensive needs not only in Alabama, but in other states as well?

[Damon Hininger:]

Yes. It's a great question. This is Damon again. And yes, our sense, based on our research, there are thousands of beds around the country that are kind of in a similar situation where they're old, they're antiquated. Maybe unfortunately, they haven't gotten the dollars to appropriate for preventive maintenance. So in some locations, we find that facilities are maybe only 30 or 40 years old, but maybe there has not been much, if any, dollar has been spent to maintain them. So unfortunately, their kind of useful life has been accelerated just because those maintenance programs have not been in place. So our average age - and keeping honest here, Dave, I think our average age of our portfolio for our correction facilities is about 20 years on average. I mean, you compare that with various states that they - by most states, have an average age of probably in the range of 75 to 50 years in age for their system. Some a little younger, some a little older. But I mean, there are thousands of beds in the United States today that are - facilities that are well over 100 years old. And I mean, we're well positioned in providing solutions, not only for either existing capacity within our system where they maybe could take an older facility offline and use our facility and move into it or we could develop a new solution like we did in Kansas a couple of years ago. So finally, I'd just say just kind of put a dollar amount and kind of in the global discussion you mentioned with the infrastructure, we've estimated that there's probably about $15 billion to $20 billion in development opportunity in the United States today to replace old antiquated correctional facility assets in the various 50 states. But anything you'd add to that, Dave?

[David Garfinkle:]

Yes. You mentioned Kansas, but that was exactly the situation in Kansas. In 2018, when we won the award there to construct a new prison for the state, their oldest prison was over 150 years old. We affectionately said that, that was constructed during the Lincoln administration. So a lot of states are in a situation where they don't have modern correctional facilities to provide safe, humane conditions for inmates and staff. It is also what's driving Arizona to go out with their RFP for 2,700 inmates. They're closing another large facility in the state and need alternative, more modern correctional infrastructure for those populations. That's what's driving, Damon mentioned in his script, Hawaii in Oahu replacing their largest jail on the Hawaiian island. So yes, there's many, many correctional systems throughout the country that have old, outdated correctional infrastructure. And there's going to have to be something done, whether it's - and we can provide the solution, whether it's constructing a new facility or providing bed capacity. We've got over 7,000 beds of idle capacity that could be utilized to accommodate those populations at probably less expensive than what they're currently spending, considering that it's a government-run facility, that it's old incurring deferred maintenance and all kinds of operational utilities expenses and so forth. So we can provide a more cost-effective solution with more modern capacity.

[Damon Hininger:]

And one thing I'll add to it, I was just checking my notes, but of existing state partners with CoreCivic, we've got 4 of our existing state partners that have 6 facilities that are over 100 years old. And then all of our state partners, except for 2, have facilities that are over 50 years old. So again, there's unfortunately a lot of kind of kicking the can down the road on out of systems that just have not been able to get the dollars to modernize their correctional systems.

[Operator:]

We'll take our next question from Ben Briggs with StoneX Financial Inc.

[Benjamin Briggs:]

Most of my questions have been answered, but I had a follow-up to the one on margins. So margins were obviously - or operating margins were obviously improved this quarter. I wanted to know what it's going to look like as some of those programs that you guys that rolled off, as those come back online, what costs are going to be associated with actually bringing those back online? And then how are higher population levels in a kind of a post-COVID universe going to help offset some of those costs to get you guys back to historical margins?

[David Garfinkle:]

Thanks, Ben, for that question. This is Dave. There won't be any activation expenses associated with bringing those programs back online. It's really just bringing the staff back into the facility. So obviously, that's the incremental expense. We are not paid incremental dollars to reinstate those programs, and that would be the negative impact on margins. Keep in mind also, if you're looking at the second quarter of 2020, we had $6.3 million or 6.2 - I think, $6.3 million in the hero bonuses that I mentioned in my opening remarks that are included in the margins reported in the prior year. So if you excluded those hero bonuses, I think the margin in the prior year would have been 25.3%. So it was dragged down by those $6.3 million in hero bonuses. And I think I missed the part of your question. Did I cover everything?

[Benjamin Briggs:]

Yes. You covered most of it. I was just asking if increased populations...

[David Garfinkle:]

Population, yes. Yes. Sorry about that. Yes. I mean, it is - we have a leveraged operating model, so we have fixed and variable expenses. But typically, you're not incurring incremental fixed expenses with increases in residential populations. So that does typically result in incremental margins when you're topping off a facility. It's the opposite when you're - when the facility is experiencing a reduction in population. So yes, it's quite possible and maybe even probable that the reduction in margins attributable to bringing the staff back into the facility to reinstate the programs will be offset by higher populations if we experience those higher populations.

[Operator:]

We'll take our next question from Henry Coffey with Wedbush.

[Henry Coffey:]

If we think about it in percentage terms or something that's easy to grasp, how close are you - given that most of your contracts have a floor, so how close are you to that floor? Or put differently, how - what would be the percentage growth in population until the additional revenue kicks in? And obviously, given that it's a facility-by-facility issue, it's difficult to be precise, but...

[Damon Hininger:]

Yes. Thank you for that question. So yes, Dave talked through a little bit on kind of what the number is, I guess, on a per day basis or a manned population basis. But I'll let you do a little bit of the math there, Dave.

[David Garfinkle:]

Yes. I guess, trying to think how to answer that question, in terms of occupancy, it does because most of our federal facilities are the facilities that have those occupancy guarantees or the fixed monthly payments to - and again, it's for their benefit to ensure that they have capacity in the event that they have a surge in the future or need higher populations. So as I mentioned, it was about 3,200 that they are currently below that. That's probably out of, say, close to 15,000 beds that have that minimum fixed payment, if that helps.

[Henry Coffey:]

Yes. That does help a lot. Sort of a similar question about debt levels, if we wanted to put an absolute number to it, at about what level of corporate debt are you going to sit back, can be satisfied with the situation and then start looking at other return on capital measures? I know you've given us the ratio, but I was wondering if you could box it in a little bit in terms of what that - maybe based on LTM, what that dollar number would look like? And then the second related question is, well, what - besides cash flow from operations, what's going to be available to get you all to that dollar level?

[Damon Hininger:]

Yes. I'll answer the second question first. So yes, I'd say, probably, now that we've really taken advantage of all the opportunities to sell assets that we've done here in the last 6, 7 months, there may be a couple more kind of 1 to 2 of these, but they're probably pretty small dollar amount. But yes, the vast majority we think of the debt repayment is going to come from cash from operations. So...

[David Garfinkle:]

Yes. I'd say that's probably - just real rough numbers, I haven't run a calculator on, it's probably $300 million to $400 million worth of debt that maybe not even that much that we would have to reduce in absolute terms. Again, we don't have guidance, so just kind of going by a trailing 12 months, like you said, before we get to our targeted leverage ratio. So in terms of timing, that's probably a few quarters. I'd estimate, again, we don't have guidance out there, but real ballpark, I'd say, the end of 2022 is when we hit that targeted leverage ratio. Give or take, a quarter. So a few quarter...

[Henry Coffey:]

That's when you give - that's the advantage of actually having a number in mind when - because it's not that far away. It's 12 months. A year from now, we'll be talking about this. Or maybe 9 months from now, we'll be talking about this.

[Damon Hininger:]

Yes, yes. That's exactly, yes. I'm going to say second half of '22 I think is probably a pretty good estimate. And again, going back to kind of the capital needs, I mean, we've got the normal kind of maintenance CapEx we'll have for the enterprise, so that's normal course of business. But business development-wise, with Alabama now on the sidelines, and we've got the Arizona opportunity, we don't see any kind of near term, and I'd say near term, at least next 12, 18 months, any near-term kind of visible activity that's going to require any kind of major capital need.

[David Garfinkle:]

Yes. And let's be clear, today, sitting here, we believe our stock is undervalued. So if it doesn't move, we're going to be disciplined in getting down to that targeted leverage ratio. But once we hit that targeted leverage ratio, without the external capital needs because we've got 7,000, it's close to 8,000 idle beds for growth opportunities. It's really using all of our cash flow to buy back stock. If we're not - if the stock hasn't responded to what we see as an undervalued stock price, and if it has, we'll look for other ways like dividend. It's returning capital to shareholders. So I think your point - my point is we're not that far off from getting a return of capital to shareholders.

[Henry Coffey:]

So in Alabama, okay, not to - the problem - initial problem besides the politics was the inability or the unwillingness of the New York money center firms to get the bond deal done. How much actual municipal capital would need to be raised, say, whether be it Alabama, Arizona or some theoretical situation? And are there other non-New-York-based firms that have a strong presence in Alabama, firms that have a strong presence in Arizona that would be committed to getting this kind of municipal finance done? Or is it just a shutdown market and the institutions aren't willing to play at all?

[Damon Hininger:]

It's a great question, and I'll tag team again with Dave on this. Let me answer the second half first, and that is absolutely, yes, there's been a lot of folks who have been knocking on our door with all the news coming out in the last 6, 7 months with Alabama, saying, "Hey. Sign us up. We know a way to get the transaction done. We've done it before. We've had great success with this project or that project." So yes, we've actually been pleasantly surprised on the amount of inbound interest with all the noise coming out Alabama about firms that we could partner with to do transactions. Now it could be a municipal bond financing. It could be - there's obviously a lot of different markets we could take advantage of. So we're encouraged by that. So we have not lost our appetite or our pace to go ahead and develop new opportunities with various states that want to modernize their infrastructure just because they can't, for whatever reason, get it done themselves or having difficulties doing it themselves, I should say. And then the final thing I'd just say is going back to Kansas, as I think you know, we did a private placement transaction on that facility for $160 million. We had $1 billion in interest. So there clearly is a strong investor appetite to finance this type of projects. So we - like I said, we're very encouraged by that, not only that transaction, but also some of the stuff that we've gotten in from inbound interest from various firms who want to work with us that, to your point, maybe are not in the kind of New York area, maybe other parts of the country that feel strongly now on by these projects, but also a tremendous ESG opportunity. I mean, just think about a New York firm in the team picture of modernizing a correctional system that is safer, more humane for residents, more program space, more medical and mental health space and safer for staff. I mean, who wouldn't want to be in that team picture to show what we've been able to do in a certain jurisdiction. So we've got to be thinking people are kind of lined up who want to be part of that process and be part of that solution. But I'll let you add to that, Dave.

[David Garfinkle:]

Yes, we did. We had Alabama-based investment banks. We had other investment banks not based in Alabama. We had publicly traded investment banks, privately held investment banks. We had an investment banking team lined up to replace the banks that decided not to do the Alabama project who actually visited facilities of ours. They did their due diligence. They did their homework. They understood the project, the situation that Alabama is in with the Department of Justice lawsuit and all the things that were going to be rectified through the Governor of Alabama's plan, and they were ready. So that was not an inhibitor. It disrupted the project mid-project, which we're frustrated about as is Alabama, but we did have replacement bankers ready to go to pick up the project.

[Henry Coffey:]

So the capital doors are open, and the challenge is having the sort of dialogue required with the community to understand this - no new prisons. This is not - just to really understand what's going on, and I assume that process is going on in Alabama now.

[Damon Hininger:]

Yes. Absolutely, yes. So the key thing here is in Alabama, it's the same case in Kansas, too, is that this is about modernizing their system, so not necessarily looking to increase. In fact, that's not the case. It was just more we've got old and antiquated facilities that are 50, 100 - 100-plus years old that they've got to modernize.

[Operator:]

Our final question comes from Jordan Sherman with Ranger Global.

[Jordan Sherman:]

Yes. I wanted to confirm something. I apologize if I missed the commentary around the West Tennessee facility. Does that contract expire end of September? What is that expectation? What happens if we get to the end of September and we haven't finalized things? Or will we definitely finalize things before that?

[Damon Hininger:]

Great questions. So yes, short answer is that it will come to some conclusion, just like it did in Montana and Ohio. So I see it playing out pretty similar as it did in those two locations, which is probably during the month of August. And then going into September, we'll continue our dialogue not only with the Marshals Service, but to other jurisdictions that are interested in that capacity. Along a parallel path, the Marshals Service will still continue to kind of evaluate their alternatives, either where they could use maybe federal capacity with one of their partner agencies or maybe local county facilities. So it's still underway, and we're actively engaged with all the various parties.

[Jordan Sherman:]

Okay. And then separately, this seems like a century ago that we've had conversations about this and Puerto Rico. What if anything is happening, has happened, will happen there?

[Damon Hininger:]

Yes. Great question. I tell you what. I have not heard anything recently. But as you probably know, I mean, this a system that has been very challenged in the past, not only with old antiquated facilities, but also some of the challenges they've had with some of the recent hurricanes. So we definitely keep the lines of communication open. Interestingly, not to your question, but on kind of recent activity, we have been marketing employment opportunities with the folks on the island that maybe want to work for CoreCivic. We have a pretty good amount of folks that work in our system from Puerto Rico when we had operations down there back in the '90s. So that's a long way of saying, with that initiative, along with some other activity, we're keeping the line of communication open and staying ready to meet kind of if they need either emerging needs or kind of long-term opportunities where they want to modernize their system.

[Jordan Sherman:]

Got it. So it's good thing that wasn't going to save them any money, so I could see why they put that off. Anything else on this Arizona obviously live? Anything else? I sense there were few other state opportunities percolating. Is there anything that you can mention?

[Damon Hininger:]

Nothing I can mention. But yes, great question. Yes. We've got a couple of other states that are engaging us on either increased capacity and then maybe 1 or 2 new states, but nothing public at the moment.

[Operator:]

This concludes today's question-and-answer session as well as today's call. Thank you for your participation, and you may now disconnect your phone lines.