CoreCivic (CXW) Virtual Road Show with CEO Damon Hininger & CFO David Garfinkle

Thank you, Damon. I may be going a little bit out of order on the slide, so I'll kind of start on page seven. Although some of these statistics are not on there, I just want to show you the very strong cash flow business. Our business model generates significant cash flows. It's durable during good times and bad, various economic cycles. It's proved resilient during the pandemic, as I'll get to in a moment. As of June 30th, very conservative, largely unencumbered balance sheet. Based on the trailing 12 months June 30th, our leverage was 3.9 times, that's net debt to EBITDA leverage. We've had a historical leverage policy of three to four times in the Safety and Community segments. In our Properties segment, we're more comfortable with a higher leverage level, we've said four to five times of a leverage level for those cash flows. Those cash flows are based on fixed monthly rents, as opposed to the Safety and Community segments, which cash flows are more or less based on populations, so justifying a higher leverage level in that Properties segment. So blended, that all in comes out to probably, as I mentioned, 3.9 times as of June 30th. We've gone a little bit higher than that, we've been a little bit lower than that, but that's been the leverage policy for the past 20 years since I've been with the company. I'll talk about changing that leverage policy in a minute as we talk about the conversion from our REIT to a taxable C corporation. But as of June 30th, tremendous amount of liquidity, very strong cash. We had $364 million of cash on hand, an additional $154 million of availability on a revolving credit facility. That cash balance does reflect a partial draw that we had done at the end of the first quarter once COVID-19 hit, really just out of a pure abundance of caution, we partially drew down that credit facility to maintain that high cash balance. As of June 30th, as I mentioned, $364 million. Subsequent to June 30th, we paid down a little bit. I mentioned on our last earnings call we had paid down $50 million in July. I think we paid down something like $125 million of that since June 30th. Our cash continues to build, and once we went through the announcement of the strategic revocation of the conversion to a taxable C corporation, when we have the ability to retain more cash, we'll be building cash, so not as much need to keep such a large cash balance on hand. Debt maturities: we've got $250 million of unsecured notes maturing in October 2022, we've got $350 million of unsecured notes maturing in 2023. Our credit facility, which is a billion dollar credit facility, also matures in 2023. So, talk just a couple seconds on performance during COVID-19. Coming into this year, we had guided to the street in February, released our full-year guidance in February 2020, with an expectation of lower ICE detainee populations, and that was really because they had reached some unprecedented levels during 2019. So our guidance in 2020 was already reflecting a reduction in those ICE populations. When COVID-19 hit, for us it was toward the end of March when the administration effectively shut down the border to asylum seekers and anybody trying to cross the border without proper documentation. Our ICE populations really began to decline further. So the reductions that I was talking about comparing 2019 to 2020 were really amplified by shutting down the border to protect U.S. citizens from the spread of COVID-19. Nonetheless, with the first quarter relatively unaffected by COVID-19, we reported both FFO and AFFO. We like to use AFFO as a proxy for cash flows after maintenance capital expenditures but before debt repayments. During the first quarter, that number was $70.3 million. So even having gone through a full quarter in the second quarter of 2020 under COVID-19, we nonetheless reported AFFO of $69.3 million. So our cash flow was very stable under the COVID-19 environment during the second quarter compared with the first quarter. That's not to say we have not seen disruptions to the criminal justice system. We did see our occupancy decline from just over 80% down to around 75%. So the biggest impact there was really with a reduction in ICE populations, but we have seen a reduction in some state populations as well, as the criminal justice system has not been functioning normally under normal operation, say pre-pandemic. I like to say the front door has been somewhat disrupted, and we're not seeing as many populations come in the front door, but people continue to serve their sentences and be released, so we continue to see some reductions in prison populations overall. So with such a stable cash flow base and a business model that's very resilient in various economic times, you'd wonder why did we decide to go through the analysis with our board about converting from a REIT to a taxable C corporation. I'd say there are several reasons, but the main one was the trading price of our stock. The multiple, no matter how you measure it, and I like to look at FFO trading multiples more than anything, you could use total enterprise value earnings multiples, but whatever it was, we just have not had a fair trading multiple. We don't believe the marketplace has assigned a proper value to the cash flows, the durable cash flows that we generate. When we converted, we originally converted to a REIT in 2013. It was the right decision at the right time. We did see an expansion of our multiple to around 15 times FFO trading multiple. As time went by, that multiple declined. In 2015, we started seeing a decline in that multiple. We kept our head down, we said we'll just continue to perform, deliver on the business, and the stock price will take care of itself. For various reasons, it just has not. As we continued to assess what we can do within our control to turn that around, it led us to the evaluation of corporate structure alternatives. We had our own internal analysis, we engaged Moelis as a financial advisor to help us think through that, we engaged Latham & Watkins, who's been our long-time REIT advisors, to help think through what are the various structural alternatives that might potentially be a catalyst for improving the trading multiple. We looked at the REIT structure. When the REIT structure requires you to pay out 90% of your taxable income in the form of dividends to shareholders, we paid out 100% of our taxable income, so a substantial portion of our cash flow is being paid out to the shareholders. That limits the things we can do. When you're at a very low trading multiple, one of the tools companies take advantage of is buying back stock because it's the highest returning investment that you can make with your capital, and obviously capital allocation is a very important part of management strategy. Without the ability to buy back large amounts of stock, having to pay out such a large dividend, that really creates an impediment for creating a catalyst to increase the stock price. Damon mentioned ESG, helping people get their lives back on track, helping 30,000 to 35,000 people get GEDs and industry trade certificates. We think we've got a great ESG story, but unfortunately the market, we believe, has mischaracterized us as a non-ESG investment, and we've seen some political pressure on the large banks as the immigration policies have been perceived as being harsh to the United States. That put a lot of the immigration advocates, a lot of special interest groups, putting pressure on the large banks not to bank the industry. All that's kind of translated into a higher cost of capital. Before the analysis with our board on corporate structures, our dividend was yielding 15%. That's just not sustainable. That's a cost of capital that's not sustainable for our business. The trading price of our bonds reflects higher yielding investments, which implies that when we go to refinance those notes, the interest expense, the rate, the face rate on those bonds is going to go up. So we just looked at the business and said, 'What can we do to improve that situation, rely less on the capital market so that we can grow the business, get a lower cost of capital, improve the credit profile of the company?' All that led us to a decision to revoke the REIT election. We plan on doing that effective January 1st, 2021. We believe we've paid enough dividends to satisfy the requirements already in 2020, so we'll enjoy the rest of the year not having to either pay a dividend or pay taxes. That will enable us to pay down a significant amount of debt in the second half of the year. Then next year, without the dividend requirement, we'll also be able to continue to pay down debt, even though we will have a cash tax obligation beginning next year. So in consultation with the board, certainly the cash flows, what we're going to do with the cash flow is prioritize debt reduction. The revocation of the REIT election, converting to a taxable C corporation, provides numerous benefits. One, as I mentioned, improvement of the credit profile. Just having the ability to retain cash flows makes you a better credit. Lenders are going to be more willing to lend to companies that have a better ability to repay that debt, so that should translate into a lower cost of capital. When that debt comes up, and we actually believe we're going to be able to repay the 2022 maturities that I mentioned and the 2023 maturities with cash flow from operations, but should the capital markets be available to us at the cost of capital that we've enjoyed for so long, we'll certainly be able to take advantage of those capital markets, but we don't have to is the important part. We'll have less dependence on the capital markets, we'll have less dependence on the size of the credit facility. We've got a billion dollar credit facility that matures in 2023. It's grown over the years because it's been cheap capital and it's been readily available, with the big banks making the decisions we believe for political purposes and not to continue to provide credit to the industry. Well, we won't need that capital as much, so we can shrink the size of the credit facility. We'll focus in on super regional banks and community banks, banks where we already do business, and believe we'll be able to get an adequate size credit facility to continue to operate the business effectively, but again we won't be dependent on the capital markets or the banks. Our focus is on paying down debt. We published in our press release that our target leverage is going down. As I mentioned earlier, from three to four times, the new target leverage will be two and a quarter to two and three quarters. So the focus of the cash flow in the interim will be paying down debt, getting toward that net debt to EBITDA target leverage. Once we get that, we'll have the ability to buy back stock. When we were a C corporation last, as I mentioned we converted to a REIT in 2013, but in 2009 to 2011 when we were last a taxable C corporation, we bought back $500 million of stock. Think about what was going on in 2009 through 2011. The country was going through a financial crisis and you had the Great Recession, yet the durability of our cash flows was so strong we bought back a half a billion dollars worth of stock. So we expect to be in that same position, continue to generate significant cash flows, pay down debt, and if the stock price doesn't respond, we'll be in great position to execute another stock buyback program, maximizing value to the shareholders. We'll also have the ability to self-fund our growth. As a REIT, you're dependent on the capital markets to fund your growth and all those growth opportunities. Well, as we're retaining that cash flow, we can use that cash flow to continue to grow the business. In fact, we'll be able to grow in some areas that aren't eligible under the REIT structure. Finally, my last point, we've announced that we're placing certain properties in the Properties segment for sale. As a taxable C corporation, those properties probably don't make sense for us to own. They're more appropriately owned by REITs and other organizations that don't pay federal income taxes. So we're looking at properties not in the corrections portfolio, so government leased assets such as an IRS field office, a Social Security building, Social Security field offices, DEA, and so forth. We're marking those properties as a portfolio and believe that we can generate approximately $150 million in net proceeds, and that's after the repayment of non-recourse debt on those properties and any other obligations. So generating $150 million in net proceeds will enable us to further accelerate the capital allocation strategy, pay down debt, and get to that leverage target of two and a quarter to two and three quarters times faster than we would if we weren't selling those properties. In fact, it could potentially present a unique opportunity where we're actually selling properties and delivering the business accretively, so increasing earnings and FFO per share, because those properties are very attractive properties, particularly if you look at those properties in this environment, leased to the federal government, in some cases state government, but government agencies that have double-A credit rating. So properties are in high demand. Cap rates can be anywhere from 5.5% to say 8%. So if we're paying down debt that's at a higher rate than that, you actually increase your per share earnings at a time when we're de-risking the balance sheet, lowering the risk profile of the company. So we'll see what the ultimate proceeds are. We hope to complete that sale toward the end of this year, potentially could slip into 2021, but we're charging ahead with our goal to try to sell those properties by the end of calendar year 2020. So with that, Joe, I don't know if I want to open up some questions that you've been accumulating either pre-call or during the call. We're happy to answer any questions that you've been receiving.

Yeah, you checked off most of the boxes that I have in response to that very important question because it is a good one. Two additional points I think I would make on ICE. Immigration and Customs Enforcement meets performance-based national detention standards, or standards commonly referred to as PBNDS, that a lot of the local jails that Damon referred to that also care for ICE detainees just can't meet those requirements because of the physical plant. Our detention facilities, which we've constructed purpose-built for this population, are able to meet those standards. So as during the Obama administration, which included wanting to make sure that their populations were following or were governed by these standards, we're able to meet them probably a lot easier than the local jails can, mostly because of the physical plant. The second point I think I'd make, Damon mentioned the family residential facility we have in Texas. That was also a purpose-built facility for this population, for families, particularly mothers and children who are held together. It enables us to keep those families together. They're not separated. We don't house unaccompanied minors. We never have, have no intentions of housing unaccompanied minors. That facility looks nothing like a prison facility. It does not have razor wire, does not have locks, does not have the things that you typically find in a correctional setting because it's meant for a softer population, a mother with their children. We could house them together, and again, that was put up in 2014. Those are the only two points I really wanted to add to Damon's comments.

Yeah, I guess talking about the growth opportunities, Joe, you mentioned Alabama. Alabama is a good opportunity right now. Alabama is looking to construct three brand new facilities in the state to be operated by the state, so these properties would fit in our Properties segment. We would just be the landlord and providing maintenance of that real estate as well. That's a near-term opportunity. We think that despite COVID-19, Alabama has charged forward on that opportunity, and we believe an award could be made by the end of the year. I think it's down to a couple teams. CoreCivic is on one of those teams, so we like our chances. We've done a very similar solution for the state of Kansas that actually just came online at the beginning of this calendar year in January. I think we're competitively positioned to win one or more of the opportunities in Alabama. There are other states in that same situation. Damon mentioned the outdated infrastructure throughout the country. We think there's an opportunity of $15 to $20 billion of outdated correctional infrastructure that's going to have to be replaced. Even now, or more so now I should say, with state budgets getting tighter and tighter because of COVID-19 and lost tax revenues, they're going to be looking to the private sector to come up with a solution where they don't have to raise taxpayer dollars to appropriate $100 million, $200 million or more for a brand new correctional facility. So we see opportunities. Alabama is a near-term opportunity. We think other states could follow that same solution because of the outdated infrastructure. They're going to have to do something on the state side. You mentioned Idaho. Idaho has a very good contract. We're real happy to resume business with Idaho. We stopped doing business with Idaho years ago, but happy to have them back in the portfolio. They've begun the intake at our Saguaro facility in Arizona, so very humbled by their decision to utilize CoreCivic again to help them manage their population beginning of this year. Mississippi, they were in a very challenging situation in their correctional system. Had some untimely deaths and some dangerous situations that, with a relief capacity that Damon mentioned at the beginning of the presentation, we provide that relief capacity. We were able to quickly come up with a solution for Mississippi. In fact, it was an in-state solution for Mississippi because we had capacity in state. Came up with a solution for them. They expanded that contract from 350 beds to 1,000 beds in the second quarter, so just one quarter after they initially contracted with us, expanded it from 350 to 1,000. Haven't quite utilized that 1,000 yet because of COVID-19, but I think there could be an opportunity to help them continue to solve some of their issues within their correctional system, providing them with additional capacity once things get kind of back to normal. So I think there are particularly opportunities on the Alabama-type, Kansas-type projects where we're just the landlord of the correctional facilities to the state, and some other state opportunities as we've got some idle correctional facilities and capacity within existing facilities. With that, Damon, I'll turn back to you.

Yeah, very little disruption. The facility operations wouldn't even know if they weren't reading the news or reading our announcements on what we're doing. Their day-to-day jobs don't change one bit. We'll have some changes in the finance area as we'll now be required to prepare a much more material income tax provision. But on the other hand, we won't be required to comply with the REIT requirements. There's a lot of work, back office work, associated with making sure we maintain all the requirements to maintain REIT status. We'll obviously continue to do that through the end of this year, but then once the turn of the calendar to 2021, there's tax consulting and other tax-related issues that we'll have to deal with. But most of that's in the finance department. It won't have any disruption to the operations whatsoever, so it should be a pretty seamless transition. Our organizational structure will pretty much stay intact from what entities we have holding contracts and so forth. There's very little effort involved in converting from or revoking that REIT election effective January 1st, 2021. We'll begin recording an income tax provision in the first quarter of next year and begin paying quarterly tax estimates in April of 2021, I think it is. So it should be pretty straightforward. We'll take cash flows, like I said earlier, a unique position where we can take cash flows for the rest of the year not paying a dividend or income taxes, and just focus in on repaying debt. That will be the priority for the rest of this year.