ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this quarterly report on Form 10-Q, or Quarterly Report. In this Quarterly Report we use the terms, the "Company," "CoreCivic," "we," "us," and "our" to refer to CoreCivic, Inc. and its subsidiaries unless context indicates otherwise.
This Quarterly Report contains statements as to our beliefs and expectations of the outcome of future events that are forward-looking statements as defined within the meaning of the Private Securities Litigation Reform Act of 1995, as amended. All statements other than statements of current or historical fact contained herein, including statements regarding our future financial position, business strategy, budgets, projected costs and plans, and objectives of management for future operations, are forward-looking statements. The words "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "plan," "projects," "will," and similar expressions, as they relate to us, are intended to identify forward-looking statements. These forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from the statements made. These include, but are not limited to, the risks and uncertainties associated with:
•changes in government policy (including the United States Department of Justice, or DOJ, not renewing contracts as a result of President Biden’s Executive Order on Reforming Our Incarceration System to Eliminate the Use of Privately Operated Criminal Detention Facilities, or the Private Prison EO) (two agencies of the DOJ, the United States Federal Bureau of Prisons, or BOP, and the United States Marshals Service, or USMS, utilize our services), legislation and regulations that affect utilization of the private sector for corrections, detention, and residential reentry services, in general, or our business, in particular, including, but not limited to, the continued utilization of our correctional and detention facilities by the federal government, and the impact of any changes to immigration reform and sentencing laws (we do not, under longstanding policy, lobby for or against policies or legislation that would determine the basis for, or duration of, an individual's incarceration or detention);
•our ability to obtain and maintain correctional, detention, and residential reentry facility management contracts because of reasons including, but not limited to, sufficient governmental appropriations, contract compliance, negative publicity and effects of inmate disturbances;
•changes in the privatization of the corrections and detention industry, the acceptance of our services, the timing of the opening of new facilities and the commencement of new management contracts (including the extent and pace at which new contracts are utilized), as well as our ability to utilize available beds;
•general economic and market conditions, including, but not limited to, the impact governmental budgets can have on our contract renewals and renegotiations, per diem rates, and occupancy;
•fluctuations in our operating results because of, among other things, changes in occupancy levels; competition; contract renegotiations or terminations; inflation and other increases in costs of operations, including a continuing rise in labor costs; fluctuations in interest rates and risks of operations;
•the duration of the federal government's denial of entry at the United States southern border to asylum-seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of the novel coronavirus and related variants, or COVID-19, a policy known as Title 42 (On April 1, 2022, the Center for Disease Control and Prevention, or CDC, terminated Title 42, and began preparing for a resumption of regular migration at the United States southern border, effective May 23, 2022; however, on April 25, 2022, a judge issued a temporary restraining order blocking the termination of Title 42 and on May 20, 2022, ruled that the administration violated administrative law when it announced that it planned to cease Title 42.);
•government and staff responses to staff or residents testing positive for COVID-19 within public and private correctional, detention and reentry facilities, including the facilities we operate;
•restrictions associated with COVID-19 that disrupt the criminal justice system, along with government policies on prosecutions and newly ordered legal restrictions that affect the number of people placed in correctional, detention, and reentry facilities, including those associated with a resurgence of COVID-19;
•whether revoking our real estate investment trust, or REIT, election, effective January 1, 2021, and our revised capital allocation strategy can be implemented in a cost effective manner that provides the expected benefits, including facilitating our planned debt reduction initiative and planned return of capital to shareholders;
•our ability to successfully identify and consummate future development and acquisition opportunities and realize projected returns resulting therefrom;
•our ability to have met and maintained qualification for taxation as a REIT for the years we elected REIT status; and
20
•the availability of debt and equity financing on terms that are favorable to us, or at all.
Any or all of our forward-looking statements in this Quarterly Report may turn out to be inaccurate. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy, and financial needs. Our statements can be affected by inaccurate assumptions we might make or by known or unknown risks, uncertainties and assumptions, including the risks, uncertainties, and assumptions described in our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Securities and Exchange Commission, or the SEC, on February 18, 2022, or the 2021 Form 10-K, and in other reports, documents, and other information we file with the SEC from time to time. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof. New risks and uncertainties arise from time to time, and it is impossible for us to predict these events or how they may affect us. We undertake no obligation to publicly update or revise any forward-looking statements made in this Quarterly Report, except as may be required by law. All subsequent written and oral forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the cautionary statements.
OVERVIEW
The Company
We are a diversified government solutions company with the scale and experience needed to solve tough government challenges in flexible, cost-effective ways. Through three segments, CoreCivic Safety, CoreCivic Community, and CoreCivic Properties, we provide a broad range of solutions to government partners that serve the public good through corrections and detention management, a network of residential reentry centers to help address America's recidivism crisis, and government real estate solutions. We have been a flexible and dependable partner for government for nearly 40 years. Our employees are driven by a deep sense of service, high standards of professionalism and a responsibility to help government better the public good.
We are the nation's largest owner of partnership correctional, detention, and residential reentry facilities and one of the largest prison operators in the United States. We also believe we are the largest private owner of real estate used by government agencies in the U.S. As of September 30, 2022, through our CoreCivic Safety segment, we operated 45 correctional and detention facilities, 40 of which we owned, with a total design capacity of approximately 68,000 beds. Through our CoreCivic Community segment, we owned and operated 24 residential reentry centers with a total design capacity of approximately 5,000 beds. In addition, through our CoreCivic Properties segment, we owned 8 properties for lease to third parties and used by government agencies, totaling 1.8 million square feet.
In addition to providing fundamental residential services, our correctional, detention, and residential reentry facilities offer a variety of rehabilitation and educational programs, including basic education, faith-based services, life skills and employment training, and substance abuse treatment. These services are intended to help reduce recidivism and to prepare offenders for their successful reentry into society upon their release. We also provide or make available to offenders certain health care (including medical, dental, and mental health services), food services, and work and recreational programs.
We are a Maryland corporation formed in 1983. Our principal executive offices are located at 5501 Virginia Way, Brentwood, Tennessee, 37027, and our telephone number at that location is (615) 263-3000. Our website address is www.corecivic.com. We make our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, definitive proxy statements, and amendments to those reports under the Securities Exchange Act of 1934, as amended, or the Exchange Act, available on our website, free of charge, as soon as reasonably practicable after these reports are filed with or furnished to the SEC. Information contained on our website is not part of this Quarterly Report.
We operated as a REIT from January 1, 2013 through December 31, 2020. As a REIT, we provided services and conducted other business activities through taxable REIT subsidiaries, or TRSs. A TRS is a subsidiary of a REIT that is subject to applicable corporate income tax rates and certain qualification requirements. Our use of TRSs enabled us to comply with REIT qualification requirements while providing correctional services at facilities we own and at facilities owned by our government partners and to engage in certain other business operations.
As a REIT, we generally were not subject to federal income taxes on our REIT taxable income and gains that we distributed to our stockholders, including the income derived from our real estate and dividends we earned from our TRSs. However, our TRSs were required to pay income taxes on their earnings at regular corporate income tax rates. As a REIT, we generally were required to distribute annually to our stockholders at least 90% of our REIT taxable income (determined without regard to the dividends paid deduction and excluding net capital gains). Our REIT taxable income did not typically include income earned by our TRSs except to the extent our TRSs paid dividends to the REIT.
21
On August 5, 2020, we announced that our Board of Directors, or BOD, unanimously approved a plan to revoke our REIT election and become a taxable C Corporation, effective January 1, 2021. The BOD also voted unanimously to discontinue our quarterly dividend and prioritize allocating our free cash flow to reduce debt levels. As a result, we are no longer required to operate under REIT rules, including the requirement to distribute at least 90% of our taxable income to our stockholders, which provides us with greater flexibility to use our free cash flow. Beginning January 1, 2021, we became subject to federal and state income taxes on our taxable income at applicable tax rates, and are no longer entitled to a tax deduction for dividends paid. However, we believe this conversion improves our overall credit profile and will lower our overall cost of capital. Following our first priority of reducing debt, we expect to allocate a substantial portion of our free cash flow to returning capital to our shareholders and pursuing alternative growth opportunities. On May 12, 2022, our BOD approved a share repurchase program to repurchase up to $150.0 million of our common stock. On August 2, 2022, the BOD increased the authorization to repurchase under the share repurchase program by up to an additional $75.0 million of our common stock, or a total aggregate authorized amount to purchase of up to $225.0 million of our common stock. For more information about the repurchases made under our share repurchase program, see "Part II – Other Information – Item 2. Unregistered Sales of Equity Securities and Use of Proceeds – Issuer Purchases of Equity Securities." The conversion to a taxable C Corporation also provides us with significantly more liquidity, which enables us to reduce our reliance on the capital markets and enabled us to reduce the size of our Bank Credit Facility, as further described hereinafter. We continued to operate as a REIT for the 2020 tax year, and existing REIT requirements and limitations, including those established by our organizational documents, remained in place until January 1, 2021.
On January 26, 2021, President Biden issued the Private Prison EO. The Private Prison EO directs the Attorney General to not renew DOJ contracts with privately operated criminal detention facilities. Two agencies of the DOJ, the BOP and the USMS utilize our services. The BOP houses inmates who have been convicted, and the USMS is generally responsible for detainees who are awaiting trial. The BOP has experienced a steady decline in inmate populations over the last eight years, a trend that has been accelerated by the COVID-19 pandemic. We currently have one prison contract with the BOP at the 1,978-bed McRae Correctional Facility, accounting for 2% ($40.6 million) of our total revenue for the twelve months ended December 31, 2021, which expires in November 2022. We completed the sale of the McRae facility in August 2022 to the Georgia Building Authority, and entered into an agreement to lease the facility through November 2022 to allow us to fulfill our obligations to the BOP. The Private Prison EO only applies to agencies that are part of the DOJ, which includes the BOP and USMS. U.S. Immigration and Customs Enforcement, or ICE, facilities are not covered by the Private Prison EO, as ICE is an agency of the Department of Homeland Security, or DHS, not the DOJ, although it is possible that the federal government could choose to take similar action on ICE facilities in the future. For the twelve months ended December 31, 2021, USMS and ICE accounted for 23% ($433.6 million) and 30% ($552.2 million), respectively, of our total revenue. For the nine months ended September 30, 2022, USMS and ICE accounted for 22% ($300.7 million) and 29% ($398.0 million), respectively, of our total revenue.
Unlike the BOP, the USMS does not own detention capacity and relies on the private sector, along with various government agencies, for its detainee population. The USMS has been advised by the Office of the Deputy Attorney General not to renew existing contracts, or enter into new contracts for private detention facilities. During the second quarter of 2021, we had direct contracts with the USMS for up to 992 detainees at our 2016-bed Northeast Ohio Correctional Center and for up to approximately 96 detainees at our 664-bed Crossroads Correctional Center in Montana that expired and were not renewed. On May 28, 2021, we entered into a new three-year contract with Mahoning County, Ohio to utilize up to 990 beds at our Northeast Ohio Correctional Center. Mahoning County is responsible for County inmates and federal detainees, including USMS detainees, and the County is using the Northeast Ohio facility to address its population needs. During the third quarter of 2021, we entered into an amendment to the contract with the state of Montana to utilize all of the capacity at the Crossroads Correctional Center, including the space vacated by the USMS, and to extend the existing contract to June 30, 2023, with additional renewal options by mutual agreement through August 31, 2029. We had a direct contract with the USMS to care for detainees at our 600-bed West Tennessee Detention Facility that expired on September 30, 2021 and was not renewed. In addition, we had a direct contract with the USMS to care for detainees at our 1,033-bed Leavenworth Detention Center that expired on December 31, 2021 and was not renewed. We are actively marketing the West Tennessee and Leavenworth facilities to other government agencies. However, we can provide no assurance that we will be able to reach agreements for the utilization of the West Tennessee or Leavenworth facilities.
We currently have two detention facilities that have direct contracts with the USMS that expire in September 2023 and September 2025. The facility with the contract expiring in September 2023 services a substantial number of USMS detainees that we believe will be challenging to replace, and we intend to work with the USMS to enable it to continue to fulfill its mission. However, we can provide no assurance that this contract will be renewed or replaced upon expiration. It is too early to predict the outcome of the expiration of the contract scheduled to expire in September 2025, and future developments could occur prior to the scheduled expiration date.
In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. As a result, in the first quarter of 2020, the federal government decided to deny entry at the United States southern border to asylum-seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of COVID-19, a policy known as Title 42, continued by the Biden administration. This policy resulted in a reduction to the number of people ICE detained, including in our detention facilities. On April 1, 2022, the CDC issued a Public Health Determination terminating Title 42 with an effective date of May
22
23, 2022. However, on April 25, 2022, a federal judge issued a temporary restraining order blocking the termination of Title 42, and on May 20, 2022, ruled that the administration violated administrative law when it announced that it planned to cease Title 42. If Title 42 is terminated, such action may result in an increase in the number of undocumented people permitted to enter the United States claiming asylum, and could result in an increase in the number of people apprehended and detained by ICE.
In February 2021, President Biden announced plans to allow certain migrants to pursue asylum in the United States while awaiting their proceedings in immigration courts, reversing a policy known as the Migrant Protection Protocols, or MPP, commonly referred to as the "Remain in Mexico Policy," enacted by the Trump administration. The MPP required asylum seekers to wait in Mexico during the pendency of their immigration court proceedings.
MPP has been subject to legal challenges. On August 13, 2021, a federal court ordered the Biden administration to reinstate the MPP finding that terminating MPP would be illegal "until the Department of Homeland Security has the capacity and willingness to detain immigrants." On August 24, 2021, the Supreme Court refused to block implementation of that order. On October 29, 2021, Secretary of Homeland Security Alejandro N. Mayorkas issued a memorandum asserting the termination of MPP, which was structured to be implemented if the decision reinstating MPP is vacated. The memorandum also provides that the Biden administration will continue to comply with the injunction requiring the reinstatement and enforcement of MPP until a final judicial decision, if any, to vacate such injunction is issued. In early December 2021, the Department of Homeland Security began the court-ordered re-implementation of the MPP, and on December 13, 2021, a federal appeals court rejected the Biden administration’s attempts to terminate MPP. On December 29, 2021, the Biden administration appealed this decision to the Supreme Court. On April 26, 2022, the Supreme Court heard arguments on MPP, and on June 30, 2022, the Supreme Court ruled that immigration law gives the federal government the discretion to end MPP. The Supreme Court also indicated that lower courts must now determine whether issuing the memorandum asserting the termination of MPP complied with administrative law, although the Supreme Court found that the order was a proper agency action. The number of people apprehended by ICE could increase if the Biden administration prevails in its efforts to terminate MPP.
We cannot predict government responses to an increase in staff or residents testing positive for COVID-19 within public and private correctional, detention and reentry facilities, nor can we predict COVID-19 related restrictions on individuals, businesses, and services that disrupt the criminal justice system. Further, we cannot predict government policies on prosecutions and legal restrictions as a result of COVID-19 that affect the number of people placed in correctional, detention, and reentry facilities.
COVID-19 notwithstanding, we believe the long-term growth opportunities of our business remain attractive as government agencies consider their emergent needs (including capacity to help mitigate the spread of infectious disease), as well as the efficiency and offender programming opportunities we provide as flexible solutions to satisfy our partners' needs. Further, although disrupted by the COVID-19 pandemic, several of our existing federal and state partners, as well as prospective state partners, have been experiencing growth in offender populations and overcrowded conditions, as well as an increase in violent crime. Governments are now assessing their need for correctional space in light of COVID-19, and several are considering alternative correctional capacity for their aged or inefficient infrastructure, or are seeking cost savings by utilizing the private sector, which could result in increased future demand for the solutions we provide. For example, in December 2021, the state of Arizona awarded us a new contract for up to 2,706 inmates at our 3,060-bed La Palma Correctional Center in Arizona, which commenced in April 2022. We are not aware of a larger prison contract awarded to the private sector by any state in over a decade. In August 2022, we completed the sale of the 1,978-bed McRae Correctional Facility to the Georgia Building Authority in order to update their aged and inefficient public sector correctional infrastructure. We currently have a management contract with the BOP at this facility, which expires November 30, 2022. In connection with the sale, we entered into an agreement to lease the McRae facility from the Georgia Building Authority through November 30, 2022 to allow us to fulfill our obligations to the BOP. The BOP is expected to transfer the BOP inmates to alternative federal capacity prior to expiration of the contract, and the McRae Correctional Facility will convert to a facility owned and operated by the State of Georgia upon termination of our lease with the Georgia Building Authority. Competing budget priorities often impede our customers' ability to construct new prison beds of their own or update their older facilities, which we believe could result in further demand for private sector prison capacity solutions in the long-term.
23
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The consolidated financial statements in this Quarterly Report are prepared in conformity with U.S. generally accepted accounting principles, or GAAP. As such, we are required to make certain estimates, judgments, and assumptions that we believe are reasonable based upon the information available which, by their nature, are subject to an inherent degree of uncertainty. These estimates and assumptions affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. There can be no assurance that actual results will not differ from our estimates. A summary of our significant accounting policies is described in our 2021 Form 10-K. The significant accounting policies and estimates which we believe are the most critical to aid in fully understanding and evaluating our reported financial results include those related to idle facilities and asset impairments, self-funded insurance reserves, and legal reserves. For a discussion of our critical accounting policies and estimates, please refer to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" and "Notes to Consolidated Financial Statements" presented in our 2021 Form 10-K. There were no newly identified critical accounting policies during the first nine months of 2022, nor were there any material changes to the critical accounting policies and estimates discussed in our 2021 Form 10-K.
RESULTS OF OPERATIONS
Our results of operations are impacted by the number of correctional and detention facilities we operated, including 40 we owned and five owned by our government partners (CoreCivic Safety), the number of residential reentry centers we owned and operated (CoreCivic Community), the number of facilities we leased to other operators (CoreCivic Properties), and the facilities we owned that were not in operation. The following table sets forth the changes in the number of facilities in operation for the periods presented:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective |
|
CoreCivic |
|
|
|
|
|
|
Date |
|
Safety |
|
|
Community |
|
|
Properties |
|
|
Total |
|
Facilities as of December 31, 2020 |
|
|
|
|
47 |
|
|
|
27 |
|
|
|
15 |
|
|
|
89 |
|
Termination of contract and lease of a
Colorado reentry center |
|
January 2021 |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Sale of an idled government-leased
property in Missouri |
|
May 2021 |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
Sale of two leased properties in
Florida and Ohio |
|
May 2021 |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
Sale of a government-leased
property in Maryland |
|
June 2021 |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
Sale of an idled property in Pennsylvania |
|
June 2021 |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
Termination of GRES partnership (Detroit, Michigan) |
|
Sept 2021 |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
(1 |
) |
Lease of Northwest New Mexico Correctional
Center |
|
November 2021 |
|
|
(1 |
) |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
Facilities as of December 31, 2021 |
|
|
|
|
46 |
|
|
|
26 |
|
|
|
10 |
|
|
|
82 |
|
Expiration of a managed-only contract in Indiana |
|
January 2022 |
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
Sale of a residential reentry facility in Colorado |
|
February 2022 |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Sale of a residential reentry facility in Colorado |
|
March 2022 |
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Sale of two leased community corrections facilities
in California |
|
July 2022 |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
(2 |
) |
Facilities as of September 30, 2022 |
|
|
|
|
45 |
|
|
|
24 |
|
|
|
8 |
|
|
|
77 |
|
Three and Nine Months Ended September 30, 2022 Compared to the Three and Nine Months Ended September 30, 2021
Net income was $68.3 million, or $0.58 per diluted share, for the three months ended September 30, 2022, compared with net income of $30.0 million, or $0.25 per diluted share, for the three months ended September 30, 2021. Net income was $97.9 million, or $0.82 per diluted share, for the nine months ended September 30, 2022, compared with a net loss of $79.9 million, or $0.67 per diluted share, for the nine months ended September 30, 2021. Financial results for the three months ended September 30, 2022 reflected an $83.8 million gain on the sale of real estate assets, $0.8 million of expenses associated with debt repayments and refinancing transactions, as well as $3.5 million of asset impairments. Financial results for the nine months ended September 30, 2022 reflected an $87.1 million gain on the sale of real estate assets, $7.6 million of expenses associated with debt repayments and refinancing transactions, $3.5 million of asset impairments, and $1.9 million associated with shareholder litigation expense. Collectively, these special items were partially offset by an income tax expense of $21.0 million and $19.5 million during the three and nine months ended September 30, 2022, respectively, associated with these special items.
24
Financial results for the three and nine months ended September 30, 2021 reflected $5.2 million and $9.4 million, respectively, of asset impairments. Financial results for the nine months ended September 30, 2021 also reflected $52.2 million of expenses associated with debt repayments and refinancing transactions, $54.3 million of charges related to the settlement agreement reached during April 2021 in connection with shareholder litigation, and $2.4 million of incremental expenses directly associated with COVID-19 (reflected in operating expenses), partially offset by a gain on the sale of real estate assets amounting to $38.8 million. Collectively, these special items were partially offset by an income tax benefit of $1.4 million and $19.7 million during the three and nine months ended September 30, 2021, respectively, associated with these special items. In addition, financial results for the nine months ended September 30, 2021, included an income tax charge of $128.7 million, including $114.2 million for income taxes associated with the change in corporate tax structure and other special tax items.
Our Current Operations
Our ongoing operations are organized into three principal business segments:
•CoreCivic Safety segment, consisting of the 45 correctional and detention facilities that are owned, or controlled via a long-term lease, and managed by CoreCivic, as well as those correctional and detention facilities owned by third parties but managed by CoreCivic. CoreCivic Safety also includes the operating results of our subsidiary that provides transportation services to governmental agencies, TransCor America, LLC, or TransCor.
•CoreCivic Community segment, consisting of the 24 residential reentry centers that are owned, or controlled via a long-term lease, and managed by CoreCivic. CoreCivic Community also includes the operating results of our electronic monitoring and case management services.
•CoreCivic Properties segment, consisting of the 8 real estate properties owned by CoreCivic for lease to third parties and used by government agencies.
For the three and nine months ended September 30, 2022 and 2021, our total segment net operating income, which we define as facility revenue (including interest income associated with finance leases) less operating expenses, was divided among our three business segments as follows:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, |
|
|
For the Nine Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Segment: |
|
|
|
|
|
|
|
|
|
|
|
|
Safety |
|
|
82.5 |
% |
|
|
86.8 |
% |
|
|
83.5 |
% |
|
|
85.0 |
% |
Community |
|
|
4.4 |
% |
|
|
3.8 |
% |
|
|
4.0 |
% |
|
|
3.2 |
% |
Properties |
|
|
13.1 |
% |
|
|
9.4 |
% |
|
|
12.5 |
% |
|
|
11.8 |
% |
Facility Operations
A key performance indicator we use to measure the revenue and expenses associated with the operation of the correctional, detention, and residential reentry facilities we own or manage is expressed in terms of a compensated man-day, which represents the revenue we generate and expenses we incur for one offender for one calendar day. Revenue and expenses per compensated man-day are computed by dividing facility revenue and expenses by the total number of compensated man-days during the period. A compensated man-day represents a calendar day for which we are paid for the occupancy of an offender. We believe the measurement is useful because we are compensated for operating and managing facilities at an offender per diem rate based upon actual or minimum guaranteed occupancy levels. We also measure our costs on a per compensated man-day basis, which is largely dependent upon the number of offenders we accommodate. Further, per compensated man-day measurements are also used to estimate our potential profitability based on certain occupancy levels relative to design capacity. Revenue and expenses per compensated man-day for all of the correctional, detention, and
25
residential reentry facilities placed into service that we owned or managed, exclusive of those held for lease, and for TransCor were as follows for the three and nine months ended September 30, 2022 and 2021:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, |
|
|
For the Nine Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
Revenue per compensated man-day |
|
$ |
93.20 |
|
|
$ |
90.02 |
|
|
$ |
92.86 |
|
|
$ |
89.74 |
|
Operating expenses per compensated man-day: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed expense |
|
|
53.10 |
|
|
|
47.70 |
|
|
|
51.62 |
|
|
|
48.08 |
|
Variable expense |
|
|
22.18 |
|
|
|
17.84 |
|
|
|
21.47 |
|
|
|
17.96 |
|
Total |
|
|
75.28 |
|
|
|
65.54 |
|
|
|
73.09 |
|
|
|
66.04 |
|
Operating income per compensated man-day |
|
$ |
17.92 |
|
|
$ |
24.48 |
|
|
$ |
19.77 |
|
|
$ |
23.70 |
|
Operating margin |
|
|
19.2 |
% |
|
|
27.2 |
% |
|
|
21.3 |
% |
|
|
26.4 |
% |
Average compensated occupancy |
|
|
70.1 |
% |
|
|
72.1 |
% |
|
|
70.1 |
% |
|
|
71.2 |
% |
Average available beds |
|
|
73,246 |
|
|
|
75,052 |
|
|
|
73,363 |
|
|
|
75,058 |
|
Average compensated population |
|
|
51,355 |
|
|
|
54,106 |
|
|
|
51,404 |
|
|
|
53,442 |
|
Revenue
Total revenue consists of management revenue we generate through CoreCivic Safety and CoreCivic Community in the operation of correctional, detention, and residential reentry facilities, as well as the revenue we generate from TransCor and our electronic monitoring and case management services. Total revenue also consists of lease revenue we generate through CoreCivic Properties from facilities we lease to third-party operators. The following table reflects the components of revenue for the three and nine months ended September 30, 2022 and 2021 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
Management revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
248.4 |
|
|
$ |
266.2 |
|
|
$ |
(17.8 |
) |
|
|
(6.7 |
%) |
State |
|
|
172.1 |
|
|
|
155.2 |
|
|
|
16.9 |
|
|
|
10.9 |
% |
Local |
|
|
9.0 |
|
|
|
13.2 |
|
|
|
(4.2 |
) |
|
|
(31.8 |
%) |
Other |
|
|
20.1 |
|
|
|
22.5 |
|
|
|
(2.4 |
) |
|
|
(10.7 |
%) |
Total management revenue |
|
|
449.6 |
|
|
|
457.1 |
|
|
|
(7.5 |
) |
|
|
(1.6 |
%) |
Lease revenue |
|
|
14.6 |
|
|
|
13.9 |
|
|
|
0.7 |
|
|
|
5.0 |
% |
Other revenue |
|
|
— |
|
|
|
0.2 |
|
|
|
(0.2 |
) |
|
|
(100.0 |
%) |
Total revenue |
|
$ |
464.2 |
|
|
$ |
471.2 |
|
|
$ |
(7.0 |
) |
|
|
(1.5 |
%) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, |
|
|
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
|
$ Change |
|
|
% Change |
|
Management revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
748.3 |
|
|
$ |
784.3 |
|
|
$ |
(36.0 |
) |
|
|
(4.6 |
%) |
State |
|
|
488.7 |
|
|
|
445.3 |
|
|
|
43.4 |
|
|
|
9.7 |
% |
Local |
|
|
26.3 |
|
|
|
38.2 |
|
|
|
(11.9 |
) |
|
|
(31.2 |
%) |
Other |
|
|
66.8 |
|
|
|
67.5 |
|
|
|
(0.7 |
) |
|
|
(1.0 |
%) |
Total management revenue |
|
|
1,330.1 |
|
|
|
1,335.3 |
|
|
|
(5.2 |
) |
|
|
(0.4 |
%) |
Lease revenue |
|
|
43.7 |
|
|
|
54.9 |
|
|
|
(11.2 |
) |
|
|
(20.4 |
%) |
Other revenue |
|
|
0.1 |
|
|
|
0.3 |
|
|
|
(0.2 |
) |
|
|
(66.7 |
%) |
Total revenue |
|
$ |
1,373.9 |
|
|
$ |
1,390.5 |
|
|
$ |
(16.6 |
) |
|
|
(1.2 |
%) |
26
The $7.5 million, or 1.6%, decrease in total management revenue for the three months ended September 30, 2022 as compared with the same period in 2021 was primarily a result of a decrease in revenue of approximately $22.8 million driven primarily by a decrease in the average daily compensated population from 2021 to 2022. The decrease in management revenue in the three-month period was partially offset by an increase in revenue of $15.0 million driven primarily by an increase of 3.5% in average revenue per compensated man-day. The $5.2 million, or 0.4%, decrease in total management revenue for the nine months ended September 30, 2022 as compared with the same period in 2021 was primarily a result of a decrease in revenue of approximately $49.9 million driven primarily by a decrease in the average daily compensated population from 2021 to 2022. The decrease in management revenue in the nine-month period was partially offset by an increase in revenue of $43.8 million driven primarily by an increase of 3.5% in average revenue per compensated man-day. The increase in average revenue per compensated man-day in both periods resulted from the effect of per diem increases at several of our facilities. We believe the impact of these per diem increases will provide further benefit to our operating margins as residential populations recover from the impact of COVID-19 and will help offset the wage and employee benefit increases we have been incurring, as further discussed hereinafter. Revenue generated from our electronic monitoring and case management services during the three and nine months ended September 30, 2022 increased $0.3 million (from $8.9 million during the three months ended September 30, 2021 to $9.2 million during the three months ended September 30, 2022) and $0.9 million (from $26.0 million during the nine months ended September 30, 2021 to $26.9 million during the nine months ended September 30, 2022), respectively.
Average daily compensated population decreased 2,751, or 5.1%, to 51,355 during the three months ended September 30, 2022 compared to 54,106 during the three months ended September 30, 2021. Average daily compensated population decreased 2,038, or 3.8%, to 51,404 during the nine months ended September 30, 2022 compared to 53,442 during the nine months ended September 30, 2021. The decrease in average daily compensated population in both periods was a result of the contract terminations at our 600-bed West Tennessee Detention Facility effective September 30, 2021, at our 1,033-bed Leavenworth Detention Center effective December 31, 2021, and at the 1,030-bed managed-only Marion County Jail effective January 31, 2022, all as further described hereinafter. In addition, the decrease in average daily compensated population in both periods also resulted from the three-year lease agreement we entered into with the state of New Mexico under which the state of New Mexico began leasing our 596-bed Northwest New Mexico Correctional Center on November 1, 2021. We previously operated the Northwest New Mexico facility in our Safety segment under a contract with the state of New Mexico. Further, a decrease in ICE populations at our La Palma Correctional Center was partially offset by an increase in state populations as the state of Arizona continues to ramp-up populations pursuant to a new management contract that commenced in April 2022. We expect the transition to the state residents from the state of Arizona to be completed in the fourth quarter of 2022. These factors, which contributed, in the aggregate, to the decrease in average daily compensated population in both the three- and nine-month periods, were partially offset by increases in other state populations as states continue to recover from COVID-19 and operations of criminal justice systems continue to return to pre-COVID-19 operations.
The solutions we provide to our federal customers, including primarily ICE, the USMS, and the BOP, continue to be a significant component of our business. The federal customers in our Safety and Community segments generated approximately 54% and 56% of our total revenue for the three months ended September 30, 2022 and 2021, respectively, decreasing $17.8 million, or 6.7%, during the three months ended September 30, 2022 as compared with the same period in 2021. The federal customers in our Safety and Community segments generated approximately 54% and 56% of our total revenue for the nine months ended September 30, 2022 and 2021, respectively, decreasing $36.0 million, or 4.6%, during the nine months ended September 30, 2022 as compared with the same period in 2021.
The decision near the end of the first quarter of 2020 by the federal government to deny entry at the United States southern border to asylum-seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of COVID-19, a policy known as Title 42, resulted in a reduction in people being apprehended and detained by ICE. The financial impact was somewhat mitigated by fixed monthly payments from ICE at certain facilities, to ensure ICE has adequate bed capacity in the event of a surge in the future. During 2021, revenue from ICE was $552.2 million compared to $542.0 million during 2020, and compared to $579.5 million during 2019, prior to the implementation of Title 42. During the three and nine months ended September 30, 2022, revenue from ICE was $129.7 million and $398.0 million, respectively, compared to $140.3 million and $411.5 million during the three and nine months ended September 30, 2021, respectively. Revenue from ICE for the three- and nine-month periods declined as a result of a decrease in detainees at our La Palma facility, where we are transitioning populations from an ICE population to a population of residents from the state of Arizona, pursuant to a new management contract that commenced in April 2022. The transfer process at our La Palma facility is expected to be completed during the fourth quarter of 2022. During the three and nine months ended September 30, 2022, revenue from ICE at the La Palma facility was $6.2 million and $33.2 million, respectively, compared with $19.6 million and $58.5 million for the three and nine months ended September 30, 2021, respectively. Upon full utilization of the new contract, we expect to generate approximately $75.0 million to $85.0 million in annualized revenue at the La Palma facility. On April 1, 2022, the CDC issued a Public Health Determination terminating Title 42 with an effective date of May 23, 2022. However, on April 25, 2022, a federal judge issued a temporary restraining order blocking the termination of Title 42, and on May 20, 2022, ruled that the administration violated administrative law when it announced that it planned to cease Title 42. If Title 42 is terminated, such action may result in an increase in the number of undocumented people permitted to enter the United States claiming asylum, and could result
27
in an increase in the number of people apprehended and detained by ICE. The number of people apprehended by ICE could also increase if the federal government prevails over its attempt to reverse the MPP implemented by the Trump administration. As previously described, litigation over MPP is ongoing. On April 26, 2022 the Supreme Court heard arguments on MPP, and on June 30, 2022, the Supreme Court ruled that immigration law gives the federal government the discretion to end the program. The Supreme Court also indicated that lower courts must now determine whether issuing the memorandum asserting the termination of MPP complied with administrative law, although the Supreme Court found that the order was a proper agency action.
State revenues from contracts at correctional, detention, and residential reentry facilities that we operate increased $16.9 million, or 10.9%, from the third quarter of 2021 to the third quarter of 2022. State revenues increased $43.4 million, or 9.7%, from the nine months ended September 30, 2021 to the comparable period in 2022. State revenues increased in both periods primarily as a result of the new management contract with the state of Arizona at our 3,060-bed La Palma Correctional Center for up to 2,706 inmates, as the state continues to transfer inmate populations from public sector facilities into our La Palma facility. We began receiving inmates from the state of Arizona in April 2022 and expect the transfer process to be complete in the fourth quarter of 2022. Before the new award, the La Palma facility supported the mission of ICE by caring for approximately 1,800 detainees. State revenues also increased in both periods because of an amended contract with the state of Montana to utilize all of the capacity at the Crossroads Correctional Center, including the space vacated by the USMS, as previously discussed herein. In addition, state revenues increased in both periods as a result of higher state inmate populations at other facilities, and from per diem increases under a number of our state contracts, as certain states have recognized the need to provide additional funding to address increases in the wages of our employees. The increase in state revenues was partially offset by the effect of the new lease agreement between us and the state of New Mexico at our Northwest New Mexico Correctional Center effective November 1, 2021. We previously operated the facility in our Safety segment under a contract with the state of New Mexico; however, as a result of our new lease agreement, the Northwest New Mexico facility is now a part of our Properties segment. Excluding state inmate populations at the Northwest New Mexico facility, average daily state inmate populations increased from 27,283 during the third quarter of 2021 to 28,240 during the third quarter of 2022, and increased from 26,877 during the nine months ended September 30, 2021 to 28,079 during the nine months ended September 30, 2022, an increase of 3.5% and 4.5%, respectively.
Local revenues from contracts at correctional, detention, and residential reentry facilities that we operate decreased $4.2 million, or 31.8%, from the third quarter of 2021 to the third quarter of 2022. Local revenues decreased $11.9 million, or 31.2%, from the nine months ended September 30, 2021 to the nine months ended September 30, 2022. The decrease in local revenue in both periods is primarily a result of the contract termination at the 1,030-bed managed-only Marion County Jail on January 31, 2022. This facility contributed to the reduction in local revenues of $5.1 million and $13.7 million during the three- and nine-month periods, respectively.
The $0.7 million, or 5.0%, increase in lease revenue from the third quarter of 2021 to the third quarter of 2022 was primarily a result of the lease revenue generated from the commencement of the lease of the 596-bed Northwest New Mexico Correctional Center to the state of New Mexico effective November 1, 2021, which was previously operated as a facility in our Safety segment but is now part of our Properties segment. The increase in lease revenue in the three-month period was partially offset by the decrease in revenue that resulted from the sale of two actively leased properties during the third quarter of 2022, as further described hereinafter. The $11.2 million, or 20.4%, decrease in lease revenue from the nine months ended September 30, 2021 to the comparable period in 2022, was primarily a result of the sale of three actively leased properties during the second quarter of 2021 and two actively leased properties during the third quarter of 2022, all as further described hereinafter. The decrease in lease revenue in the nine-month period was partially offset by the lease revenue generated from the commencement of the lease at our Northwest New Mexico facility.
Operating Expenses
Operating expenses totaled $368.2 million and $338.2 million for the three months ended September 30, 2022 and 2021, respectively, while operating expenses for the nine months ended September 30, 2022 and 2021 totaled $1,061.8 million and $1,004.1 million, respectively. Operating expenses consist of those expenses incurred in the operation and management of correctional, detention, and residential reentry facilities, as well as those expenses incurred in the operations of TransCor and our electronic monitoring and case management services. Operating expenses also consist of those expenses incurred in the operation of facilities we lease to third-party operators.
Operating expenses incurred by CoreCivic Safety and CoreCivic Community in connection with the operation and management of our correctional, detention, and residential reentry facilities, as well as those incurred in the operations of TransCor and our electronic monitoring and case management services, increased $29.5 million, or 8.8%, during the third quarter of 2022 when compared with the same period in 2021. Operating expenses incurred by these segments increased $62.5 million, or 6.3%, during the nine months ended September 30, 2022, when compared to the same period in 2021. Operating expenses increased in both periods primarily as a result of wage and employee benefits increases and related incremental expenses resulting from labor shortages and wage pressures, as further described hereinafter. We achieved higher staffing levels and, during the three and nine months ended September 30, 2022, we incurred $5.6 million and $18.0 million, respectively, more in temporary incentives than in the prior year periods to attract and retain facility
28
staff in this challenging labor market. We believe these investments in staffing are preparing us to manage the increased number of residents we anticipate at our facilities once the remaining occupancy restrictions caused by the COVID-19 pandemic are removed. As the labor market improves, which we believe will take some additional time, we expect to reduce our reliance on these temporary incentives. Additionally, operating expenses increased as a result of expenses incurred as we transition inmate populations at our La Palma Correctional Center as a result of a new contract with the state of Arizona. The increase in operating expenses was partially offset by the contract terminations at our 600-bed West Tennessee Detention Facility effective September 30, 2021, at our 1,033-bed Leavenworth Detention Center effective December 31, 2021, and at the 1,030-bed managed-only Marion County Jail effective January 31, 2022. In addition, the increase in operating expenses was partially offset by the three-year lease agreement we entered into with the state of New Mexico at our 596-bed Northwest New Mexico Correctional Center effective November 1, 2021. We previously operated the Northwest New Mexico facility in our Safety segment.
Total expenses per compensated man-day increased to $75.28 during the three months ended September 30, 2022 from $65.54 during the three months ended September 30, 2021, and increased to $73.09 during the nine months ended September 30, 2022 from $66.04 during the same period in the prior year. Fixed expenses per compensated man-day increased to $53.10 during the three months ended September 30, 2022 from $47.70 during the same period in the prior year, and increased to $51.62 during the nine months ended September 30, 2022 from $48.08 during the same period in the prior year. We have experienced labor shortages and wage pressures in many markets across the country, and have provided customary inflationary wage increases to remain competitive, including increases to most of our facility staff during July of the last three years since the COVID-19 pandemic started. Recruiting has been particularly challenging during the pandemic due to the front-line nature of the services we provide, and the shortage of nursing staff across the country has intensified as a result of the COVID-19 pandemic, resulting in a significant increase in registry nursing expenses. The challenges of recruiting and retaining staff, including nursing, has been and could continue to be exacerbated by actions taken or contemplated to be taken by government authorities intended to mitigate the spread of COVID-19 such as health and safety directives or other requirements that apply to us and our facilities. Further, we have incurred, and expect to continue to incur, incremental expenses to help ensure sufficient staffing levels under unique and challenging working conditions. Incremental expenses include, but may not be limited to, incentive payments to our front-line and field staff, temporary employee housing expenses and other travel related reimbursements, additional paid time off, off-cycle wage increases in certain markets to remain competitive, further increases in registry nursing expenses, as well as expenses to procure personal protective equipment and other supplies. The increase in fixed expenses per compensated man-day also resulted from leveraging our fixed expenses over lower compensated populations, as well as expenses incurred during the aforementioned transition of populations at our La Palma facility.
We continually monitor compensation levels very closely along with overall economic conditions and will adjust wage levels necessary to help ensure the long-term success of our business. Further, we continually evaluate the structure of our employee benefits package and training programs to ensure we are better able to attract and retain our employees. Salaries and benefits represent the most significant component of our operating expenses, representing approximately 58% and 60% of our total operating expenses during the nine months ended September 30, 2022 and 2021, respectively. As mentioned, recruiting and retaining staff has become particularly challenging in the current employment market for us and for the corrections and detention industry as a whole. An inability to attract and retain sufficient personnel could prevent us from caring for additional residential populations for government agencies in need of additional capacity due to an increase in inmate populations or an inability to adequately staff their facilities. An inability to attract and retain sufficient personnel in our existing facilities could also cause our government partners to assess liquidated damages, reduce our residential populations, or in extreme circumstances, cancel our contracts. We have also been subjected to increasing staff vacancy deductions as a result of the labor shortages, which are reflected as reductions to other management revenue. Estimating vacancy deduction amounts can be complex and subject to management judgment and estimations. Some of our government partners have granted waivers for vacancy deductions in recognition of the unique and challenging labor market, while others have discretionarily adjusted such deductions based on our extraordinary costs, efforts and incentive programs implemented to attract and retain staff.
Variable expenses per compensated man-day increased to $22.18 during the three months ended September 30, 2022, from $17.84 during the same period in the prior year, and increased to $21.47 during the nine months ended September 30, 2022, from $17.96 during the same period in the prior year. The increase in variable expenses per compensated man-day in the three- and nine-month periods was primarily a result of an increase in registry nursing expenses of $4.0 million, or $0.89 per compensated man-day, and $15.5 million, or $1.14 per compensated man-day, respectively, due to the shortage of nursing staff across the country. In addition, we experienced an increase in travel expenses from the same periods in the prior year as we supported our staff who are temporarily deployed across the Company to help address the labor shortages we are experiencing in certain regions. Travel expenses increased $5.8 million, or $1.26 per compensated man-day, and $13.8 million, or $1.01 per compensated man-day, in the three- and nine-month periods, respectively.
Operating expenses incurred by CoreCivic Properties in connection with facilities we lease to third-party operators increased $0.5 million, or 15.4%, during the third quarter of 2022 when compared with the same period in 2021, and decreased $4.8 million, or 31.1%, during the nine months ended September 30, 2022 when compared with the same period in 2021. The increase in expenses in this segment in the three-month period was primarily a result of the commencement of the lease of the 596-bed Northwest New Mexico Correctional Center effective November 1, 2021, as further described hereinafter. The decrease in expenses in this segment in the
29
nine-month period was primarily a result of the sale of three actively leased properties during the second quarter of 2021, as further described hereinafter, partially offset by the operating expenses incurred as a result of the commencement of the lease of the Northwest New Mexico facility.
Facility Management Contracts
We enter into facility management contracts to provide bed capacity and management services to governmental entities in our CoreCivic Safety and CoreCivic Community segments for terms typically ranging from three to five years, with additional renewal periods at the option of the contracting governmental agency. Accordingly, a substantial portion of our facility management contracts are scheduled to expire each year, notwithstanding contractual renewal options that a government agency may exercise. Although we generally expect these customers to exercise renewal options or negotiate new contracts with us, one or more of these contracts may not be renewed by the corresponding governmental agency. Further, our government partners can generally terminate our management contracts for non-appropriation of funds or for convenience.
Additionally, the Private Prison EO issued by President Biden on January 26, 2021, directs the Attorney General to not renew DOJ contracts with privately operated criminal detention facilities. Two agencies of the DOJ, the BOP and the USMS utilize our services. The BOP houses inmates who have been convicted, and the USMS is generally responsible for detainees who are awaiting trial. The BOP has experienced a steady decline in inmate populations over the last eight years, a trend that has been accelerated by the COVID-19 pandemic. We currently have one prison contract with the BOP at our 1,978-bed McRae Correctional Facility, accounting for 2% ($40.6 million) of our total revenue for the twelve months ended December 31, 2021, which expires in November 2022. During the three and nine months ended September 30, 2022, we generated management revenue of $10.3 million and $31.0 million, respectively, from this contract with the BOP. We do not expect this contract to be renewed upon its expiration in November 2022. As further described hereinafter, we completed the sale of the McRae facility in August 2022 to the Georgia Building Authority, and entered into an agreement to lease the facility through November 2022 to allow us to fulfill our obligations to the BOP. The Private Prison EO only applies to agencies that are part of the DOJ, which includes the BOP and USMS. ICE facilities are not covered by the Private Prison EO, as ICE is an agency of DHS, not the DOJ, although it is possible that the federal government could choose to take similar action on ICE facilities in the future. USMS and ICE accounted for 22% ($300.7 million) and 29% ($398.0 million), respectively, of our total revenue for the nine months ended September 30, 2022, and 23% ($433.6 million) and 30% ($552.2 million), respectively, of our total revenue for the twelve months ended December 31, 2021.
Unlike the BOP, the USMS does not own detention capacity and relies on the private sector, along with various government agencies, for its detainee population. The USMS has been advised by the Office of the Deputy Attorney General not to renew existing contracts, or enter into new contracts, for private detention facilities. We currently have two detention facilities that have direct contracts with the USMS that expire in September 2023 and September 2025. The facility with the contract expiring in September 2023 services a substantial number of USMS detainees that we believe will be challenging to replace, and we intend to work with the USMS to enable it to continue to fulfill its mission. However, we can provide no assurance that this contract will be renewed or replaced upon expiration. It is too early to predict the outcome of the expiration of the contract scheduled to expire in September 2025, and future developments could occur prior to the scheduled expiration date.
Based on information available as of the date of this Quarterly Report, other than the previously mentioned contract with the BOP at our McRae facility, we believe we will renew all other contracts with our government partners that have expired or are scheduled to expire within the next twelve months that could have a material adverse impact on our financial statements. We believe our renewal rate on existing contracts remains high due to a variety of reasons including, but not limited to, the constrained supply of available beds within the U.S. correctional system, our ownership of the majority of the beds we operate, and the cost effectiveness of the services we provide. However, we cannot assure that we will continue to achieve such renewal rates in the future.
CoreCivic Safety
CoreCivic Safety includes the operating results of the correctional and detention facilities that we operated during each period. Total revenue generated by CoreCivic Safety decreased $8.3 million, or 1.9%, from $431.5 million during the three months ended September 30, 2021 to $423.2 million during the three months ended September 30, 2022, and decreased $7.4 million, or 0.6%, from $1,261.2 million during the nine months ended September 30, 2021 to $1,253.8 million during the nine months ended September 30, 2022. CoreCivic Safety's facility net operating income decreased $36.3 million, or 30.9%, from $117.3 million during the three months ended September 30, 2021 to $81.0 million during the three months ended September 30, 2022, and decreased $67.9 million, or 20.3%, from $334.2 million during the nine months ended September 30, 2021 to $266.3 million during the nine months ended September 30, 2022. During the three and nine months ended September 30, 2022, CoreCivic Safety generated 82.5% and 83.5%, respectively, of our total segment net operating income, compared with 86.8% and 85.0% during the three and nine months ended September 30, 2021, respectively.
30
The following table displays the revenue and expenses per compensated man-day for CoreCivic Safety's correctional and detention facilities placed into service that we own and manage and for the facilities we manage but do not own, inclusive of the transportation services provided by TransCor:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, |
|
|
For the Nine Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
CoreCivic Safety Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per compensated man-day |
|
$ |
94.73 |
|
|
$ |
91.51 |
|
|
$ |
94.47 |
|
|
$ |
91.21 |
|
Operating expenses per compensated man-day: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed expense |
|
|
53.87 |
|
|
|
48.26 |
|
|
|
52.37 |
|
|
|
48.56 |
|
Variable expense |
|
|
22.73 |
|
|
|
18.38 |
|
|
|
22.04 |
|
|
|
18.49 |
|
Total |
|
|
76.60 |
|
|
|
66.64 |
|
|
|
74.41 |
|
|
|
67.05 |
|
Operating income per compensated man-day |
|
$ |
18.13 |
|
|
$ |
24.87 |
|
|
$ |
20.06 |
|
|
$ |
24.16 |
|
Operating margin |
|
|
19.1 |
% |
|
|
27.2 |
% |
|
|
21.2 |
% |
|
|
26.5 |
% |
Average compensated occupancy |
|
|
71.0 |
% |
|
|
73.2 |
% |
|
|
71.0 |
% |
|
|
72.4 |
% |
Average available beds |
|
|
68,377 |
|
|
|
70,003 |
|
|
|
68,494 |
|
|
|
70,003 |
|
Average compensated population |
|
|
48,556 |
|
|
|
51,260 |
|
|
|
48,615 |
|
|
|
50,647 |
|
The Private Prison EO could have a negative impact on our future results of operations and cash flows, to the extent we are unable to replace the cash flows with new management contracts like we did at our Northeast Ohio and Crossroads facilities, as previously described herein. We had direct contracts with the USMS to care for detainees at our 600-bed West Tennessee Detention Facility that expired on September 30, 2021 and was not renewed and at our 1,033-bed Leavenworth Detention Center that expired on December 31, 2021 and was not renewed. We are actively marketing the West Tennessee and Leavenworth facilities to other government agencies. However, we can provide no assurance that we will be able to reach an agreement for the utilization of the West Tennessee and Leavenworth facilities. During the three and nine months ended September 30, 2021, the contract with the USMS at our West Tennessee facility generated management revenue of $4.5 million and $14.7 million, respectively. During the three and nine months ended September 30, 2021, the contract with the USMS at our Leavenworth facility generated management revenue of $9.2 million and $28.8 million, respectively. We idled both the West Tennessee and Leavenworth facilities upon expiration of the contracts with the USMS. However, we temporarily retained a certain staffing level at both facilities during the first three months of 2022 in the event that we were able to enter into new contracts with government agencies promptly following the contract expirations and to provide transportation services at the Leavenworth facility, which contributed to the increase in operating expenses per man-day in our Safety segment during the nine months ended September 30, 2022. During the three and nine months ended September 30, 2022, these two facilities experienced facility net operating losses aggregating $0.9 million and $4.4 million, respectively, resulting in a total reduction to facility net operating income of $1.4 million and $10.4 million, respectively, at these two facilities as compared to the same periods in 2021.
As previously described herein, we also have one prison contract with the BOP at our 1,978-bed McRae Correctional Facility, which expires in November 2022 that we do not expect to be renewed. During the three and nine months ended September 30, 2022, this facility generated facility net operating income of $1.6 million and $6.3 million, respectively. We entered into a Purchase and Sale Agreement with the Georgia Building Authority to purchase the McRae facility in July 2022 and completed the sale in August 2022. We are now leasing the McRae Correctional Facility from the Georgia Building Authority through November 30, 2022 to allow us to fulfill our obligations to the BOP. We generated net sales proceeds of $129.7 million on the sale of the McRae facility, resulting in a net gain on the sale of $77.5 million, which we recognized in the third quarter of 2022.
Operating margins in the CoreCivic Safety segment have also been negatively impacted during the first nine months of 2022 by increased operating expenses per man-day, which was driven primarily by incremental staffing levels, higher wage rates, and increased registry nursing and other related expenses. As previously described herein, we have experienced labor shortages and wage pressures in many markets across the country, and have provided customary inflationary wage increases to remain competitive, including increases to most of our facility staff during July of the last three years since the COVID-19 pandemic started. Further, we have incurred, and expect to continue to incur, incremental expenses to help ensure sufficient staffing levels under unique and challenging working conditions, including but not limited to, shift incentive bonuses, recruiting and retention bonuses, temporary employee housing expenses and travel reimbursements, off-cycle wage increases, as well as relocation incentives. During 2021, we operated at reduced staffing levels due to COVID-19 health and safety measures, including occupancy restrictions and labor shortages in many of our markets. Further, in an effort to mitigate the spread of COVID-19 and at the direction of our government partners, we significantly reduced the level of movement within our facilities, enabling us to more efficiently manage our staffing. We have worked with our government partners and followed national and local health standards as we reinstated normal movement within our facilities. The negative impact on operating margins resulting from these factors was partially offset by a 3.5% and 3.6% increase in average revenue per compensated
31
man-day during the three and nine months ended September 30, 2022, respectively, when compared to the same periods in the prior year. The increase in average revenue per compensated man-day in both periods resulted from the effect of per diem increases at several of our facilities, as we have received per diem increases resulting from additional funding to address increases in the wages of our employees.
In December 2021, we were awarded a new management contract from the state of Arizona for up to 2,706 inmates at our 3,060-bed La Palma Correctional Center in Arizona. The State will close an outdated public-sector prison and transfer inmate populations to our La Palma facility. The transfer began in April 2022, and is expected to be completed in the fourth quarter of 2022. Before the new award, the La Palma facility supported the mission of ICE by caring for approximately 1,800 detainees. The transition of population from ICE detainees to inmates from the state of Arizona has resulted in the disruption of earnings and cash flows, and we expect this disruption will continue until the occupancy of inmates from the state of Arizona reaches stabilization. Upon full utilization of the new contract, we expect to generate approximately $75.0 million to $85.0 million in annualized revenue at the La Palma facility. However, because of the preparation to receive the Arizona inmates, including a reduction in the average daily population of ICE detainees at the facility, facility net operating income decreased $11.8 million and $25.1 million during the three and nine months ended September 30 2022, respectively, compared with the same periods in 2021.
Our managed-only contract for the 1,030-bed Marion County Jail in Indianapolis, Indiana terminated and operations transitioned to Marion County effective January 31, 2022. Marion County constructed a replacement facility that became fully operational in January 2022. During the three and nine months ended September 30, 2021, this facility generated facility net operating income of $1.3 million and $3.3 million, respectively, compared to a facility net operating loss of $0.1 million during the time the facility was active in 2022.
On September 20, 2021, we entered into a three-year lease agreement with the state of New Mexico at our 596-bed Northwest New Mexico Correctional Center. We previously operated the Northwest New Mexico facility in our Safety segment under a contract with the state of New Mexico. We transitioned facility operations to the New Mexico Corrections Department upon commencement of the new lease agreement on November 1, 2021. During the time the facility operated in our Safety segment during 2021, the Northwest New Mexico facility generated revenue of $9.2 million, including revenue of $2.8 million and $8.1 million during the three and nine months ended September 30, 2021, respectively. During the time the facility operated in our Safety segment during 2021, the Northwest New Mexico facility incurred a facility net operating loss of $2.3 million, including a net operating loss of $0.9 million and $2.1 million during the three and nine months ended September 30, 2021, respectively. During the three and nine months ended September 30, 2022, this facility generated lease revenue of $0.8 million and $2.4 million, respectively, and facility net operating income of $0.3 million and $1.0 million, respectively.
California Assembly Bill 32, or AB32, became effective January 1, 2020. AB32 generally prohibits new contracts and renewals of existing contracts between private, for-profit entities and government agencies for the operation of detention facilities within the state of California, and prohibits the utilization of detention centers operated by private, for-profit entities by the state of California effective January 1, 2028. AB32 does not apply to facilities leased from private, for-profit entities, such as our California City Correctional Center. The U.S. Government and The GEO Group, Inc. both filed lawsuits against the state of California challenging the enforceability of AB32 under applicable law. On September 26, 2022, the Ninth Circuit Court of Appeals, or the Appeals Court, ruled that AB32 violates the Supremacy Clause of the U.S. Constitution, which generally prohibits states from interfering with the enforcement of federal laws and the federal government's exercise of its constitutional powers. Accordingly, the Appeals Court remanded the case to the United States District Court for the Southern District of California for proceedings consistent with this ruling. Our contract with ICE to operate the 1,994-bed Otay Mesa Detention Center is currently scheduled to expire in December 2024, but may be extended by ICE pursuant to the first of its two 5-year renewal options.
32
CoreCivic Community
CoreCivic Community includes the operating results of the residential reentry centers that we operated during each period, along with the operating results of our electronic monitoring and case management services. Total revenue generated by CoreCivic Community increased $0.8 million, or 3.3%, from $25.5 million during the three months ended September 30, 2021 to $26.4 million during the three months ended September 30, 2022, and increased $2.1 million, or 2.9%, from $74.1 million during the nine months ended September 30, 2021 to $76.3 million during the nine months ended September 30, 2022. CoreCivic Community's facility net operating income decreased $0.8 million, or 14.7%, from $5.1 million during the three months ended September 30, 2021 to $4.4 million during the three months ended September 30, 2022, and increased $0.2 million, or 1.3%, from $12.6 million during the nine months ended September 30, 2021 to $12.7 million during the nine months ended September 30, 2022. During the three and nine months ended September 30, 2022, CoreCivic Community generated 4.4% and 4.0%, respectively, of our total segment net operating income, compared with 3.8% and 3.2% during the three and nine months ended September 30, 2021, respectively.
The following table displays the revenue and expenses per compensated man-day for CoreCivic Community's residential reentry facilities placed into service that we own and manage, but exclusive of the electronic monitoring and case management services given that revenue is not generated on a per compensated man-day basis for these services:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, |
|
|
For the Nine Months Ended
September 30, |
|
|
|
2022 |
|
|
2021 |
|
|
2022 |
|
|
2021 |
|
CoreCivic Community Facilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Revenue per compensated man-day |
|
$ |
66.62 |
|
|
$ |
63.35 |
|
|
$ |
64.83 |
|
|
$ |
63.07 |
|
Operating expenses per compensated man-day: |
|
|
|
|
|
|
|
|
|
|
|
|
Fixed expense |
|
|
39.66 |
|
|
|
37.55 |
|
|
|
38.58 |
|
|
|
39.53 |
|
Variable expense |
|
|
12.67 |
|
|
|
8.11 |
|
|
|
11.53 |
|
|
|
8.41 |
|
Total |
|
|
52.33 |
|
|
|
45.66 |
|
|
|
50.11 |
|
|
|
47.94 |
|
Operating income per compensated man-day |
|
$ |
14.29 |
|
|
$ |
17.69 |
|
|
$ |
14.72 |
|
|
$ |
15.13 |
|
Operating margin |
|
|
21.5 |
% |
|
|
27.9 |
% |
|
|
22.7 |
% |
|
|
24.0 |
% |
Average compensated occupancy |
|
|
57.5 |
% |
|
|
56.4 |
% |
|
|
57.3 |
% |
|
|
55.3 |
% |
Average available beds |
|
|
4,869 |
|
|
|
5,049 |
|
|
|
4,869 |
|
|
|
5,055 |
|
Average compensated population |
|
|
2,799 |
|
|
|
2,846 |
|
|
|
2,789 |
|
|
|
2,795 |
|
Like our CoreCivic Safety segment, operating margins in our CoreCivic Community segment were negatively impacted during 2022 by increased operating expenses per man-day, which were driven primarily by higher wage rates during the three-month period, and increased variable expenses, including travel related expenses, during both the three- and nine-month periods. The effect of the increased operating expenses was partially offset by an increase in average revenue per compensated man-day during both the three- and nine-month periods. Average revenue per compensated man-day increased primarily as a result of per diem increases at several of our facilities. Also like our CoreCivic Safety segment, occupancy in our CoreCivic Community facilities continues to be negatively affected by COVID-19 and has not yet returned to pre-pandemic occupancy levels.
Contributing to the improved average compensated occupancy in the CoreCivic Community segment during 2022 were the sales of our 120-bed Fox Facility and Training Center and our 90-bed Ulster Facility in the first quarter of 2022. During the fourth quarter of 2021, we entered into a Purchase and Sale Agreement for our Fox facility, which was sold in February 2022. In addition, during the fourth quarter of 2021, we entered into a separate Purchase and Sale Agreement for our idled Ulster facility, which was sold in March 2022. The two facilities were located in Denver, Colorado and had recently been under-utilized by Denver County, and incurred facility net operating losses aggregating $0.1 million and $0.3 million during the three and nine months ended September 30, 2021, respectively.
CoreCivic Properties
CoreCivic Properties includes the operating results of the properties we leased to third parties and that were used by government agencies during each period. Total revenue generated by CoreCivic Properties increased $0.6 million, or 4.6%, from $13.9 million during the three months ended September 30, 2021 to $14.6 million during the three months ended September 30, 2022, and decreased $11.2 million, or 20.4%, from $54.9 million during the nine months ended September 30, 2021 to $43.7 million during the nine months ended September 30, 2022. CoreCivic Properties' facility net operating income increased $0.1 million, or 1.2%, from $10.6 million during the three months ended September 30, 2021 to $10.7 million during the three months ended September 30, 2022, and decreased $6.5 million, or 16.3%, from $39.6 million during the nine months ended September 30, 2021 to $33.1 million during the nine months ended September 30, 2022. The increases in total revenue and net operating income in the three-month period were primarily the result of the new lease at our Northwest New Mexico Correctional Center, as further described hereinafter. The decreases in total revenue and net operating income in the nine-month period were primarily the result of the three actively leased properties we sold in the second quarter of 2021 and the two actively leased properties we sold in the third quarter of 2022, as further described hereinafter, partially offset by
33
the revenue and net operating income generated by the new lease at our Northwest New Mexico Correctional Center. During the three and nine months ended September 30, 2022, CoreCivic Properties generated 13.1% and 12.5%, respectively, of our total segment net operating income, compared with 9.4% and 11.8% during the three and nine months ended September 30, 2021, respectively.
On May 28, 2021, we completed the sale of two leased properties, the 277,000 square foot Capital Commerce Center, primarily leased to an agency of the State of Florida in Tallahassee, Florida, and a 217,000 square foot warehouse property leased to the General Services Administration, or GSA, in Dayton, Ohio, in a single transaction to a third party for an aggregate price of $73.0 million, generating net proceeds of $46.2 million after the repayment of the debt related to the Capital Commerce Center and other transaction-related costs. In addition, on June 29, 2021, we completed the sale of a 541,000 square foot property leased to the GSA in Baltimore, Maryland to a third party for a price of $253.0 million, generating net proceeds of $76.4 million after the repayment of the debt related to the Baltimore property and other transaction-related costs. During our period of ownership in 2021, these three properties generated facility net operating income of $9.5 million. We recorded an aggregate net gain on the sales of these three properties of $38.9 million during the second quarter of 2021.
On September 20, 2021, we entered into a three-year lease agreement with the state of New Mexico at our 596-bed Northwest New Mexico Correctional Center. We previously operated the Northwest New Mexico facility in our Safety segment under a contract with the state of New Mexico. We transitioned facility operations to the New Mexico Corrections Department upon commencement of the new lease agreement on November 1, 2021. We will retain responsibility for facility maintenance throughout the term of the lease. The new lease agreement includes extension options that could extend the term of the lease through October 31, 2041. The average annual rent for the initial three-year lease term is $3.2 million, including annual rent of $4.2 million in the second and third years of the lease, with annual escalators thereafter.
During July 2022, we sold the Stockton Female Community Corrections Facility and the Long Beach Community Corrections Center, both located in California, generating net sales proceeds of $10.9 million. During 2021, these two properties generated facility net operating income of $1.0 million, including $0.3 million and $0.8 million in the three and nine months ended September 30, 2021, respectively. During our period of ownership in 2022, these two properties generated facility net operating income of $0.6 million. We reported an aggregate net gain on the sale of these two properties of $2.3 million during the third quarter of 2022.
In September 2022, we entered into a Letter of Intent with a third party for the sale of our Roth Hall Residential Reentry Center and the Walker Hall Residential Reentry Center both of which are located in Philadelphia, Pennsylvania, for a gross sales price of $6.3 million. We expect the sale to be complete during the fourth quarter of 2022. These two properties operated at a break-even facility net operating income level for the three months ended September 20, 2022, and generated $0.2 million of facility net operating income for the nine months ended September 30, 2022.
General and administrative expenses
For the three months ended September 30, 2022 and 2021, general and administrative expenses totaled $30.2 million and $34.6 million, respectively, while general and administrative expenses totaled $92.8 million and $97.4 million during the nine months ended September 30, 2022 and 2021, respectively. General and administrative expenses consist primarily of corporate management salaries and benefits, professional fees, and other administrative expenses. General and administrative expenses decreased from the prior year periods primarily as a result of a decrease in corporate management salaries and benefits, which was largely related to lower incentive-based compensation.
Depreciation and amortization
For the three months ended September 30, 2022 and 2021, depreciation and amortization expense totaled $31.9 million and $34.0 million, respectively, while depreciation and amortization expense totaled $96.2 million and $100.8 million during the nine months ended September 30, 2022 and 2021, respectively. Depreciation and amortization expense decreased in both periods due to certain information technology equipment becoming fully depreciated. In addition, the decrease in depreciation and amortization expense in both periods was due to the contract termination at the Marion County Jail and the sales of our Fox Facility and Training Center and our Ulster Facility, all of which occurred during the first quarter of 2022. In addition, the sale of our McRae Correctional Facility in the third quarter of 2022 contributed to the decrease in depreciation and amortization expense in both the three- and nine-month periods ended September 30, 2022.
Shareholder litigation expense
On April 16, 2021, we reached an agreement in principle to settle a purported securities class action lawsuit that was filed on August 23, 2016 in the United States District Court for the Middle District of Tennessee, or the District Court, captioned Grae v. Corrections Corporation of America et al. The monetary terms of the settlement included a payment of $56.0 million in return for a dismissal of the
34
case with prejudice and a full release of all claims against all defendants. The settlement agreement, which was approved by the District Court on November 8, 2021, contains no admission of liability, wrongdoing, or responsibility by any of the defendants, including us. As a result of the settlement, we recognized an expense of $54.3 million during 2021 (all of which was recognized during the first six months of 2021), which was net of the remaining insurance available under the Company's policies. We paid the settlement amount in May 2021.
We are also named along with several of our directors in six derivative lawsuits which raise similar allegations to those raised in the Grae securities litigation, which are currently stayed by agreement of the parties. While we believe these lawsuits are entirely without merit, we acknowledge the costs and risks of extensive and complex litigation regarding these matters are substantial and subject to an unpredictable outcome. On June 17, 2022, we and derivative plaintiffs informed the District Court that the parties had reached an agreement as to the plaintiffs' attorneys' fees and expenses. During the second quarter of 2022, we recognized an additional expense of $1.9 million to reflect our estimate of the probable liability associated with these matters. On September 19, 2022, the Court issued an order, or the Preliminary Order, providing for preliminary approval of the proposed settlement of the claims asserted nominally on our behalf against the individual defendants named in the previously disclosed stockholder derivative action. The settlement calls for us to adopt certain governance changes and to pay plaintiff’s counsel $3.5 million in attorneys’ fees. The Preliminary Order set a final settlement approval hearing for December 1, 2022. Considering amounts previously recognized for these matters, we had adequately accrued for this liability as of September 30, 2022.
Asset impairments
Pursuant to the agreement to sell the Oklahoma City Transitional Center expected to close in the fourth quarter of 2022, we recognized an impairment charge of $3.5 million during the three months ended September 30, 2022 associated with this facility held for sale, based on its estimated net realizable value less costs to sell.
Asset impairment charges during the nine months ended September 30, 2021 include $5.2 million for the impairment of pre-development activities recognized in the third quarter of 2021 in our Properties segment. The impairment was a result of lease terminations with the state of Alabama, as previously described in our 2021 Form 10-K. Asset impairment charges during the nine months ended September 30, 2021 also include the impairment of $2.9 million for goodwill and other assets associated with the anticipated termination of a managed-only contract in our Safety segment recognized during the second quarter of 2021, and $1.3 million for the impairment of real estate assets recognized during the first quarter of 2021 for a facility in our Properties segment that was sold during the second quarter of 2021.
Interest expense, net
As discussed in more detail hereinafter, on May 12, 2022, we entered into a Third Amended and Restated Credit Agreement, or the New Bank Credit Facility, in an aggregate principal amount of $350.0 million, consisting of a $100.0 million term loan, or the New Term Loan A, and a $250.0 revolving credit facility, or the New Revolving Credit Facility. The New Bank Credit Facility replaced the Second Amended and Restated Credit Agreement, or the Previous Bank Credit Facility, which was in an aggregate principal amount of $1.0 billion and consisted of a term loan with an original principal balance of $200.0 million, or the Previous Term Loan A, and a revolving credit facility with a borrowing capacity of $800.0 million, or the Previous Revolving Credit Facility. The New Bank Credit Facility extends the maturity to May 2026 from the April 2023 maturity under the Previous Bank Credit Facility. The New Bank Credit Facility and the Previous Bank Credit Facility are together referred to herein as the Bank Credit Facility.
Interest expense is reported net of interest income and capitalized interest for the three and nine months ended September 30, 2022 and 2021. Gross interest expense, net of capitalized interest, was $23.5 million and $23.1 million for the three months ended September 30, 2022 and 2021, respectively, and was $73.1 million and $69.9 million for the nine months ended September 30, 2022 and 2021, respectively. Gross interest expense was based on outstanding borrowings under our Bank Credit Facility, our Term Loan B (which we repaid in full in May 2022, as further described hereinafter), our outstanding senior unsecured notes, and our outstanding non-recourse mortgage notes, as well as the amortization of loan costs and unused facility fees. Interest expense during the nine-month period ended September 30, 2022 compared with the same period in 2021 increased primarily as a result of the issuance of $675.0 million aggregate principal amount of 8.25% senior unsecured notes in April and September 2021, which increased the average interest rate applicable to our outstanding debt, as further described hereinafter. However, the increase in gross interest expense was partially offset by a decrease in the average outstanding balance on our Previous Revolving Credit Facility (which we repaid in full in the third quarter of 2021), the redemption and repurchase of an aggregate of $426.4 million of senior unsecured notes during 2021, the repayment of certain non-recourse mortgage notes during 2021, the repayment of $90.0 million of the then-outstanding balance of the Term Loan B during October 2021, and the $124.1 million repayment of the remaining balance of the Term Loan B during May 2022, all as further described hereinafter, which also contributed to a reduction in interest expense during the three-month period ended September 30, 2022 compared with the same period in 2021.
35
We benefited from relatively low interest rates on our Previous Bank Credit Facility, which was largely based on the London Interbank Offered Rate, or LIBOR. Based on our total leverage ratio, borrowings under our Previous Bank Credit Facility during most of 2021 were at the base rate plus a margin of 0.50% or at LIBOR plus a margin of 1.50%, and a commitment fee equal to 0.35% of the unfunded balance of the Previous Revolving Credit Facility. During the fourth quarter of 2021, based on a reduction in our total leverage ratio, borrowings under our Previous Bank Credit Facility decreased to a base rate plus a margin of 0.25% or LIBOR plus a margin of 1.25%, and a commitment fee equal to 0.30% of the unfunded balance of the Previous Revolving Credit Facility. Based on our current total leverage ratio, loans under our New Bank Credit Facility bear interest at a base rate plus a margin of 2.25% or at the Bloomberg Short-Term Bank Yield Index, or BSBY, rate plus a margin of 3.25%, and a commitment fee equal to 0.45% of the unfunded balance of the New Revolving Credit Facility. Although we are exposed to rising interest rates, we have reduced our exposure to rising interest rates by paying down our variable rate debt. The only remaining variable rate debt we have is associated with our New Term Loan A, which had an outstanding balance of $97.5 million as of September 30, 2022, and our New Revolving Credit Facility, which has no outstanding balance and remains undrawn.
On May 19, 2022, we voluntarily repaid in full the debt outstanding under our Term Loan B, amounting to $124.1 million, and satisfied all of our outstanding obligations under the Term Loan B. We did not incur any prepayment penalties in connection with the repayment of the Term Loan B, which had a scheduled maturity of December 18, 2024. The prepayment was made in full with cash on hand. The Term Loan B bore interest at LIBOR plus 4.50%, with a 1.00% LIBOR floor (or, at our option, a base rate plus 3.50%).
The 2018 acquisition of the Capital Commerce Center located in Tallahassee, Florida was partially financed with a non-recourse mortgage note, or the Capital Commerce Note, which was fully secured by the Capital Commerce property. The Capital Commerce Note carried a fixed interest rate of 4.5%, required monthly principal and interest payments, and was scheduled to mature in January 2033. The Capital Commerce Note was fully repaid in connection with the sale of the Capital Commerce Center on May 28, 2021.
In connection with the acquisition of the SSA-Baltimore office building in 2018, a wholly-owned unrestricted subsidiary of ours assumed $157.3 million of in-place financing. The assumed non-recourse mortgage note, or the SSA Baltimore Note, carried a fixed interest rate of 4.5% and required monthly principal and interest payments, with a balloon payment of $40.0 million due at maturity in February 2034. The SSA-Baltimore Note was fully secured by the SSA-Baltimore property. The SSA-Baltimore Note was fully repaid in connection with the sale of the SSA-Baltimore property on June 29, 2021.
On April 14, 2021, we completed an underwritten registered public offering of $450.0 million aggregate principal amount of 8.25% senior unsecured notes due 2026, or the Original 8.25% Senior Notes, which are guaranteed by our existing and future subsidiaries that guarantee the Bank Credit Facility. The Original 8.25% Senior Notes were priced at 99.0% of face value and as a result have an effective yield to maturity of 8.50%. We used a significant amount of the net proceeds from the offering of the Original 8.25% Senior Notes (i) to redeem all of our previous $250.0 million aggregate principal amount of 5.0% senior unsecured notes, which were due in 2022, or the 5.0% Senior Notes, including the payment of the applicable "make-whole" redemption amount of $15.5 million and accrued interest, and (ii) to repurchase $149.0 million of our $350.0 million principal amount of 4.625% senior unsecured notes due 2023, or the 4.625% Senior Notes, at an aggregate purchase price of $151.2 million in privately negotiated transactions, reducing the outstanding balance of the 4.625% Senior Notes to $201.0 million. In the second and fourth quarters of 2021, we purchased an additional aggregate $27.3 million of our 4.625% Senior Notes at par in open market purchases, further reducing the outstanding balance of the 4.625% Senior Notes to $173.7 million. In addition, in the second and third quarters of 2022, we purchased an additional $7.1 million of the 4.625% Senior Notes at a weighted average purchase price approximately equal to par in open market purchases, reducing the outstanding balance of the 4.625% Senior Notes to $166.5 million as of September 30, 2022. The "make-whole" redemption amount paid in connection with the redemption of the 5.0% Senior Notes and the aggregate price paid for the 4.625% Senior Notes in excess of the principal amount of the notes repurchased resulted in charges of approximately $19.2 million during the second quarter of 2021, including costs associated with the repurchases and the proportionate write-off of existing debt issuance costs. The remaining net proceeds from the issuance of the Original 8.25% Senior Notes were used to pay down a portion of the amounts outstanding under the Previous Revolving Credit Facility and for general corporate purposes.
36
On September 29, 2021, we completed an underwritten registered tack-on public offering of $225.0 million in aggregate principal amount of 8.25% Senior Notes due 2026, or the Additional 8.25% Senior Notes, at an issue price of 102.25% of their aggregate principal amount, plus accrued interest from the April 14, 2021 issue date for the Original 8.25% Senior Notes, resulting in an effective yield to maturity of 7.65% for the Additional 8.25% Senior Notes. The Additional 8.25% Senior Notes and the Original 8.25% Senior Notes, together the 8.25% Senior Notes, constitute a single class of securities and have identical terms, other than issue date and issue price. The issuance of the Additional 8.25% Senior Notes increased the total aggregate principal amount of the 8.25% Senior Notes outstanding to $675.0 million. The net proceeds from the issuance of the Additional 8.25% Senior Notes totaled approximately $225.5 million, after deducting the underwriting discounts and estimated offering expenses and including the original issuance premium. We used the net proceeds from the offering of the Additional 8.25% Senior Notes to pay down our Previous Revolving Credit Facility and for general corporate purposes. In the third quarter of 2022, we purchased $33.5 million of the 8.25% Senior Notes at a weighted average purchase price approximately equal to par in open market purchases, reducing the outstanding balance of the 8.25% Senior Notes to $641.5 million as of September 30, 2022.
Gross interest income was $2.7 million and $2.4 million for the three months ended September 30, 2022 and 2021, respectively, and was $7.7 million and $7.6 million for the nine months ended September 30, 2022 and 2021, respectively. Gross interest income is earned on notes receivable, investments, cash and cash equivalents, and restricted cash. Interest income also includes interest income associated with the 20-year finance receivable associated with the Lansing Correctional Facility lease to the Kansas Department of Corrections, which commenced in January 2020, and amounted to $2.2 million for the three months ended September 30, 2022 and 2021, and $6.6 million for the nine months ended September 30, 2022 and 2021. Total capitalized interest was $0.3 million and $0.2 million during the three months ended September 30, 2022 and 2021, respectively, and was $0.8 million and $0.2 million during the nine months ended September 30, 2022 and 2021, respectively.
Expenses associated with debt repayments and refinancing transactions
During the third quarter of 2022, we incurred charges of $0.8 million for the write-off of a pro-rata portion of the loan costs associated with the aforementioned open market purchases of the 4.625% Senior Notes and the 8.25% Senior Notes, net of discounts to the principal balance of notes purchased. Further, as previously described, during the second quarter of 2022, we incurred charges of $0.8 million for the write-off of a portion of the pre-existing loan costs associated with our Previous Bank Credit Facility, as well as $6.0 million associated with the write-off of the remaining unamortized debt issuance costs and original issue discount resulting from the prepayment of our Term Loan B.
Also, as previously described, during the second quarter of 2021, we completed the sales of three non-core actively leased properties in two separate transactions for a collective aggregate price of $326.0 million, generating total net proceeds of $122.6 million after the repayment of two non-recourse mortgage notes associated with two of the properties and other transaction-related costs. In connection with the sales, we incurred charges of $32.5 million associated with the prepayment of the two non-recourse mortgage notes and non-cash charges of $0.5 million associated with the write-off of existing debt issuance costs. Expenses associated with debt repayments and refinancing transactions during the second quarter of 2021 also included $19.2 million associated with the redemption of our $250.0 million in aggregate principal amount of 5.0% Senior Notes originally due in October 2022, as well as the aggregate price paid for our 4.625% Senior Notes in excess of the principal amount of the notes repurchased, costs associated with the repurchases, and the proportionate write-off of existing debt issuance costs.
Gain on sale of real estate assets, net
Gain on sale of real estate assets, net during the nine months ended September 30, 2022, primarily includes the gains on the sales of the McRae Correctional Facility in our Safety segment and the Stockton Female Community Corrections Facility and the Long Beach Community Corrections Center in our Properties segment, all of which were recorded in the third quarter of 2022, as previously described herein. Gain on sale of real estate assets, net during the nine-month period also includes gains related to the sales of certain other real estate properties, including two vacant land parcels.
Gain on sale of real estate assets, net during the nine months ended September 30, 2021, includes the gains on the sales of the Capital Commerce Center in Florida, a 217,000 square foot warehouse property in Dayton, Ohio, and a 541,000 square foot property in Baltimore Maryland, all of which were recorded in the second quarter of 2021, as previously described herein.
Income tax expense
On August 5, 2020, we announced that our BOD unanimously approved a plan to revoke our REIT election and become a taxable C Corporation, effective January 1, 2021. As a result, we are no longer required to operate under REIT rules, including the requirement to distribute at least 90% of our taxable income to our stockholders, which provides us with greater flexibility to use our free cash flow.
37
We continued to operate as a REIT for the remainder of the 2020 tax year, and existing REIT requirements and limitations, including those established by our organizational documents, remained in place until January 1, 2021. Effective January 1, 2021, we became subject to federal and state income taxes on our taxable income at applicable tax rates, and are no longer entitled to a tax deduction for dividends paid. We recorded an income tax expense of $24.2 million and $8.6 million for the three months ended September 30, 2022 and 2021, respectively, and $34.9 million and $128.7 million for the nine months ended September 30, 2022 and 2021, respectively. Income tax expense for the three months ended September 30, 2022 included an income tax expense of $21.0 million associated with the gain on sale of real estate assets previously described, partially offset by an income tax benefit associated with asset impairments and expenses associated with debt repayments and refinancing transactions previously described. Income tax expense for the nine months ended September 30, 2022 included an income tax expense of $19.5 million associated with the gain on sale of real estate assets previously described, partially offset by an income tax benefit associated with shareholder litigation expenses, asset impairments, and expenses associated with debt repayments and refinancing transactions previously described. Income tax expense for the first nine months of 2021 included $114.2 million primarily resulting from the revaluation of our net deferred tax liabilities due to the completion of all significant actions necessary to revoke our REIT election. No catch-up tax payments or penalties resulted from the revocation of our REIT election. Income tax expense related to operations for the three and nine months ended September 30, 2021 was partially offset by an income tax benefit of $1.4 million and $19.7 million, respectively, associated with the settlement agreement reached on April 16, 2021 in connection with the shareholder litigation, incremental expenses directly associated with COVID-19 (reflected in operating expenses), asset impairments, and expenses associated with debt repayments and refinancing transactions, net of an income tax expense associated with the gain on sale of real estate assets.
Our effective tax rate could fluctuate in the future based on changes in estimates of taxable income, the implementation of additional tax planning strategies, changes in federal or state tax rates or laws affecting tax credits available to us, changes in other tax laws, changes in estimates related to uncertain tax positions, or changes in state apportionment factors, as well as changes in the valuation allowance applied to our deferred tax assets that are based primarily on the amount of state net operating losses and tax credits that could expire unused.
LIQUIDITY AND CAPITAL RESOURCES
Our principal capital requirements are for working capital, capital expenditures, and debt service payments, as well as outstanding commitments and contingencies, as further discussed in the notes to our financial statements. Effective January 1, 2021, we became subject to federal and state income taxes on our taxable income at applicable tax rates, and are no longer entitled to a tax deduction for dividends paid, which were available when we elected REIT status. However, we believe this conversion in corporate tax structure improves our overall credit profile and will lower our overall cost of capital, as we are able to allocate our free cash flow toward the repayment of debt, which may include the purchase of our outstanding debt in open market transactions, privately negotiated transactions or otherwise. Any such debt repurchases will depend upon prevailing market conditions, our liquidity requirements, contractual requirements, applicable securities laws requirements, and other factors. During 2021 and the first nine months of 2022, we repaid $574.5 million of debt, net of the change in cash. Following our first priority of utilizing free cash flow to reduce debt, we expect to allocate a substantial portion of our free cash flow to returning capital to our shareholders, which could include share repurchases and future dividends. Any future dividend is subject to the BOD's determinations as to the amount of distributions and the timing thereof, as well as limitations under the Company's debt covenants. We were not able to implement a meaningful share repurchase program under the REIT structure without increasing our debt because a substantial portion of our free cash flow was required to satisfy the distribution requirements under the REIT structure. On May 2, 2022, the BOD approved a share repurchase program to purchase up to $150.0 million of our common stock. On August 2, 2022, the BOD increased the authorization to repurchase under the share purchase program by up to an additional $75.0 million of our common stock, which resulted in a total aggregate authorized amount to repurchase of up to $225.0 million of our common stock. Repurchases of our outstanding common stock will be made in accordance with applicable securities laws and may be made at our discretion based on parameters set by our BOD from time to time in the open market, through privately negotiated transactions, or otherwise. The share repurchase program has no time limit and does not obligate us to purchase any particular amount of our common stock. The authorization for the share repurchase program may be terminated, suspended, increased or decreased by the BOD in its discretion at any time. Through September 30, 2022, we completed the repurchase of 6.6 million shares of our common stock at a total cost of $74.5 million, using cash on hand and cash provided by operations.
We will also pursue attractive growth opportunities, including new development opportunities in our Properties segment, to meet the need to modernize outdated correctional infrastructure across the country, and explore potential opportunities to expand the scope of non-residential correctional alternatives we provide in our Community segment that were not available under the REIT structure. As a REIT, we depended on the capital markets to provide resources we could deploy toward acquisition and development opportunities. This capital was not always available to us and came at an increasing cost. The revocation of our REIT election provides us with significantly more liquidity and financial flexibility, which enables us to reduce our reliance on the capital markets and enabled us to reduce the size of our Bank Credit Facility.
38
With the extensively aged criminal justice infrastructure in the U.S. today, we believe we can bring real estate and financing solutions to government agencies like we did in connection with the construction of the Lansing Correctional Facility that commenced operations in January 2020. We financed the construction of the Lansing Correctional Facility 100% with project specific financing, requiring no equity commitment from us. We believe we can also provide other real estate solutions to government agencies faced with extensively aged criminal justice infrastructure, including "turn-key" solutions like those we are providing to the state of Arizona in connection with the new contract awarded to us during the fourth quarter of 2021 at our La Palma Correctional Center, as well as real estate only solutions to government agencies that need correctional capacity where they prefer to perform the operations. We expect to incur $4.0 million to $5.0 million in capital expenditures for the award from the state of Arizona. Most real estate only solutions would not require material capital expenditures if we have existing capacity. However, in the future we could incur capital expenditures to provide replacement capacity for government agencies that have extensively aged criminal justice infrastructure and are in need of new capacity.
In July 2022, we entered into a Purchase and Sale Agreement with the Georgia Building Authority to purchase the 1,978-bed McRae Correctional Facility for a price of $130.0 million in order to update their aged and inefficient public sector correctional infrastructure. We completed the sale in August 2022. The sale of the McRae facility generated net sales proceeds of $129.7 million. We also sold two additional properties and a parcel of land during the third quarter of 2022 that generated net sales proceeds of approximately $15.6 million, and have entered into additional agreements to sell two additional properties in our Properties segment and a property in our Community segment for an aggregate gross sales price of $7.2 million. These sales will provide additional liquidity to us for general corporate purposes, which may include making repurchases under our share repurchase plan and/or reducing our outstanding indebtedness.
As of September 30, 2022, we had cash on hand of $185.3 million, and $233.2 million available under our New Revolving Credit Facility. During the nine months ended September 30, 2022 and 2021, we generated $118.2 million and $284.1 million, respectively, in cash through operating activities. We currently expect to be able to meet our cash expenditure requirements for the next year and beyond utilizing cash on hand, cash flows from operations, and availability under our New Revolving Credit Facility. Following the completion of the offering of the Original 8.25% Senior Notes and redemption of our 5.0% Senior Notes in the second quarter of 2021, and of the entry into our New Bank Credit Facility in the second quarter of 2022, we have no debt maturities until May 2023, when the remaining $166.5 million of the 4.625% Senior Notes matures. We currently anticipate that we will have sufficient liquidity to repay the remaining outstanding 4.625% Senior Notes upon maturity.
Our cash flow is subject to the receipt of sufficient funding of and timely payment by contracting governmental entities. If the appropriate governmental agency does not receive sufficient appropriations to cover its contractual obligations, it may terminate our contract or delay or reduce payment to us. Delays in payment from our major customers or the termination of contracts from our major customers could have an adverse effect on our cash flow and financial condition. Although our revenue has been negatively impacted by COVID-19, we have not experienced any unusual delays in payments from our major customers.
Debt
As of September 30, 2022, we had $166.5 million principal amount of unsecured notes outstanding with a fixed stated interest rate of 4.625%, $250.0 million principal amount of unsecured notes outstanding with a fixed stated interest rate of 4.75%, and $641.5 million principal amount of unsecured notes outstanding with a fixed stated interest rate of 8.25%, or collectively, the Senior Notes. In addition, we had $151.6 million outstanding under the Kansas Notes with a fixed stated interest rate of 4.43% and $97.5 million outstanding under our New Term Loan A with a variable interest rate of 6.6%. We had $16.8 million of letters of credit outstanding under our New Revolving Credit Facility at September 30, 2022. There was no other amount outstanding under our New Revolving Credit Facility as of September 30, 2022. As of September 30, 2022, our total weighted average effective interest rate was 7.0%, while our total weighted average maturity was 5.1 years.
On May 12, 2022, we entered into the New Bank Credit Facility in an aggregate principal amount of $350.0 million, consisting of the New Term Loan A with an original principal balance of $100.0 million and the New Revolving Credit Facility with a borrowing capacity of $250.0 million. The New Bank Credit Facility replaced the Previous Bank Credit Facility, which was in an aggregate principal amount of $1.0 billion and consisted of the Previous Term Loan A with an original principal balance of $200.0 million and the Previous Revolving Credit facility with a borrowing capacity of $800.0 million. The New Bank Credit Facility extends the maturity to May 2026 from the April 2023 maturity under the Previous Bank Credit Facility. The New Bank Credit Facility includes an option to increase the availability under the New Revolving Credit Facility and to request term loans from the lenders in an aggregate amount not to exceed the greater of (a) $200.0 million and (b) 50% of consolidated EBITDA for the most recently ended four-quarter period, subject to, among other things, the receipt of commitments for the increased amount. At our option, interest on outstanding borrowings under the New Bank Credit Facility is based on either a base rate plus a margin ranging from 1.75% to 3.5%, or at the BSBY rate plus a margin ranging from 2.75% to 4.5% based on our then-current total leverage ratio. The New Revolving Credit Facility includes a $25.0 million sublimit for swing line loans that enables us to borrow at the base rate from the Administrative Agent on same-day notice and also has a $100.0 million sublimit for the issuance of standby letters of credit.
39
The New Bank Credit Facility requires us to meet certain financial covenants, including, without limitation, a total leverage ratio of not more than 4.50 to 1.00 (from 5.50 to 1.00 under the Previous Bank Credit Facility) for which we may net unrestricted cash and cash equivalents not exceeding $100.0 million when calculating, a secured leverage ratio of not more than 2.50 to 1.00 (from 3.25 to 1.00 under the Previous Bank Credit Facility) for which we may net unrestricted cash and cash equivalents not exceeding $100.0 million when calculating, and a fixed charge coverage ratio of not less than 1.75 to 1.00 (unchanged from the Previous Bank Credit Facility). The New Bank Credit Facility is secured by a pledge of all of the capital stock (or other ownership interests) of our domestic restricted subsidiaries, 65% of the capital stock (or other ownership interests) of our "first-tier" foreign subsidiaries, all of our accounts receivable and those of our domestic restricted subsidiaries, and substantially all of our deposit accounts and those of our domestic restricted subsidiaries. In the event that (a) the consolidated total leverage equals or exceeds 4.00 to 1.00 or (b) we incur certain debt above a specified threshold, certain intangible assets and unencumbered real estate assets that meet a 50% loan-to-value requirement are required to be added as collateral. In addition, the New Bank Credit Facility contains certain covenants that, among other things, limit the incurrence of additional indebtedness, payment of dividends and other customary restricted payments, permitted investments, transactions with affiliates, asset sales, mergers and consolidations, liquidations, prepayments and modifications of other indebtedness, liens and other encumbrances and other matters customarily restricted in such agreements. The New Bank Credit Facility is subject to certain cross-default provisions with terms of our other unsecured indebtedness, and is subject to acceleration upon the occurrence of a change of control.
Operating Activities
Our net cash provided by operating activities for the nine months ended September 30, 2022 was $118.2 million, compared with $284.1 million for the same period in the prior year. Cash provided by operating activities represents the year to date net income (loss) plus depreciation and amortization, changes in various components of working capital, and various non-cash charges. The reduction in cash provided by operating activities primarily resulted from a decline in facility net operating income of $74.2 million, combined with negative fluctuations in working capital during the nine months ended September 30, 2022, compared with the nine-month period in 2021.
Investing Activities
Our net cash flow provided by investing activities was $101.9 million for the nine months ended September 30, 2022 and was primarily attributable to $156.2 million in net proceeds from the sale of assets, partially offset by capital expenditures for facility development and expansions of $17.2 million and $33.7 million for facility maintenance and information technology capital expenditures. Our net cash flow provided by investing activities was $274.5 million for the nine months ended September 30, 2021 and was primarily attributable to $320.7 million in net proceeds from the sale of assets, partially offset by capital expenditures for facility development and expansions of $14.5 million and $38.4 million for facility maintenance and information technology capital expenditures.
Financing Activities
Our net cash flow used in financing activities was $331.6 million for the nine months ended September 30, 2022 and was primarily attributable to debt repayments, including the aforementioned $167.5 million related to our Previous Term Loan A, $124.1 million related to our Term Loan B, and $40.6 million related to our 4.625% and 8.25% Senior Notes. In addition, our net cash flow used in financing activities was attributable to $12.7 million of scheduled principal repayments under our Term Loan A, Term Loan B, and our non-recourse mortgage note. Our net cash flow used in financing activities also included $79.1 million for the share repurchase program our BOD authorized during the second quarter of 2022, as well as the purchase and retirement of common stock that was issued in connection with equity-based compensation, and dividend payments on restricted stock units that became vested of $0.9 million. These payments were partially offset by the $100.0 million of proceeds from the aforementioned issuance of the New Term Loan A.
Our net cash flow used in financing activities was $228.8 million for the nine months ended September 30, 2021 and was primarily attributable to net repayments under our Revolving Credit Facility of $219.0 million. In addition, cash flow used in financing activities included $27.4 million of scheduled principal repayments under our Term Loan A, Term Loan B, and non-recourse mortgage notes, as well as $426.0 million for the aforementioned repayment of Senior Notes, $161.9 million for the repayment of non-recourse mortgage notes in connection with the aforementioned sale of assets, and $64.4 million for debt defeasance, issuance, and other refinancing and related costs. Cash flow used in financing activities also included $1.0 million of contingent consideration associated with the acquisition of a business acquired in 2019 and $1.6 million for the purchase and retirement of common stock that was issued in connection with equity-based compensation. These payments were partially offset by the $445.5 million of gross proceeds from the aforementioned issuance of the Original 8.25% Senior Notes that were issued in the second quarter of 2021 at a 99.0% discount of face value and the $230.1 million of gross proceeds from the aforementioned issuance of the Additional 8.25% Senior Notes that were issued in the third quarter of 2021 at a 102.25% premium of face value.
40
Supplemental Guarantor Information
All of the domestic subsidiaries of CoreCivic (as the parent corporation) that guarantee the Credit Agreements have provided full and unconditional guarantees of our Senior Notes. All of CoreCivic's subsidiaries guaranteeing the Senior Notes are 100% owned direct or indirect subsidiaries of CoreCivic, and the subsidiary guarantees are full and unconditional and are joint and several obligations of the guarantors.
As of September 30, 2022, neither CoreCivic nor any of its subsidiary guarantors had any material or significant restrictions on CoreCivic's ability to obtain funds from its subsidiaries by dividend or loan or to transfer assets from such subsidiaries.
The indentures governing our Senior Notes contain certain customary covenants that, subject to certain exceptions and qualifications, restrict CoreCivic's ability to, among other things, create or permit to exist certain liens and consolidate, merge or transfer all or substantially all of CoreCivic's assets. In addition, if CoreCivic experiences specific kinds of changes in control, CoreCivic must offer to repurchase all or a portion of the Senior Notes. The offer price for the Senior Notes in connection with a change in control would be 101% of the aggregate principal amount of the notes repurchased plus accrued and unpaid interest, if any, on the notes repurchased to the date of purchase. The indenture related to our 8.25% Senior Notes additionally limits our ability to incur indebtedness, make restricted payments and investments and prepay certain indebtedness.
The following tables present summarized information for CoreCivic and the subsidiary guarantors, on a combined basis after elimination of (i) intercompany transactions and balances among CoreCivic and the subsidiary guarantors and (ii) equity in earnings from, and any investments in, any subsidiary that is a non-guarantor (in thousands).
|
|
|
|
|
|
|
|
|
|
|
September 30, 2022 |
|
|
December 31, 2021 |
|
Current assets |
|
$ |
432,332 |
|
|
$ |
531,626 |
|
Real estate and related assets |
|
|
2,386,275 |
|
|
|
2,502,135 |
|
Other assets |
|
|
211,731 |
|
|
|
224,277 |
|
Total non-current assets |
|
|
2,598,006 |
|
|
|
2,726,412 |
|
Current liabilities |
|
|
368,173 |
|
|
|
237,795 |
|
Long-term debt, net |
|
|
970,024 |
|
|
|
1,344,606 |
|
Other liabilities |
|
|
281,586 |
|
|
|
293,456 |
|
Total long-term liabilities |
|
|
1,251,610 |
|
|
|
1,638,062 |
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine
Months Ended
September 30, 2022 |
|
|
For the Twelve
Months Ended
December 31, 2021 |
|
Revenue |
|
$ |
1,372,956 |
|
|
$ |
1,848,315 |
|
Operating expenses |
|
|
1,061,813 |
|
|
|
1,332,248 |
|
Other expenses |
|
|
194,439 |
|
|
|
336,084 |
|
Total expenses |
|
|
1,256,252 |
|
|
|
1,668,332 |
|
Income before income taxes |
|
|
130,611 |
|
|
|
60,543 |
|
Net income (loss) |
|
|
95,746 |
|
|
|
(77,456 |
) |
Funds from Operations
Funds From Operations, or FFO, is a widely accepted supplemental non-GAAP measure utilized to evaluate the operating performance of real estate companies. The National Association of Real Estate Investment Trusts, or NAREIT, defines FFO as net income computed in accordance with GAAP, excluding gains or losses from sales of property and extraordinary items, plus depreciation and amortization of real estate and impairment of depreciable real estate and after adjustments for unconsolidated partnerships and joint ventures calculated to reflect funds from operations on the same basis. We believe FFO is an important supplemental measure of our operating performance and believe it is frequently used by securities analysts, investors and other interested parties in the evaluation of REITs and other real estate operating companies, many of which present FFO when reporting results.
41
We also present Normalized FFO as an additional supplemental measure as we believe it is more reflective of our core operating performance. We may make adjustments to FFO from time to time for certain other income and expenses that we consider non-recurring, infrequent or unusual, even though such items may require cash settlement, because such items do not reflect a necessary or ordinary component of our ongoing operations. Normalized FFO excludes the effects of such items.
FFO and Normalized FFO are supplemental non-GAAP financial measures of real estate companies' operating performance, which do not represent cash generated from operating activities in accordance with GAAP and therefore should not be considered an alternative for net income or as a measure of liquidity. Our method of calculating FFO and Normalized FFO may be different from methods used by other REITs and real estate operating companies and, accordingly, may not be comparable to such REITs and other real estate operating companies.
Our reconciliation of net income to FFO and Normalized FFO for the three and nine months ended September 30, 2022 and 2021 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended
September 30, |
|
FUNDS FROM OPERATIONS: |
|
2022 |
|
|
2021 |
|
Net income |
|
$ |
68,318 |
|
|
$ |
30,012 |
|
Depreciation and amortization of real estate assets |
|
|
24,158 |
|
|
|
24,877 |
|
Impairment of real estate assets |
|
|
3,513 |
|
|
|
— |
|
Gain on sale of real estate assets, net |
|
|
(83,828 |
) |
|
|
— |
|
Income tax expense for special items |
|
|
21,165 |
|
|
|
— |
|
Funds From Operations |
|
|
33,326 |
|
|
|
54,889 |
|
Expenses associated with debt repayments
and refinancing transactions |
|
|
783 |
|
|
|
— |
|
Goodwill and other impairments |
|
|
— |
|
|
|
5,177 |
|
Income tax benefit for special items |
|
|
(206 |
) |
|
|
(1,449 |
) |
Normalized Funds From Operations |
|
$ |
33,903 |
|
|
$ |
58,617 |
|
|
|
|
|
|
|
|
|
|
|
|
For the Nine Months Ended
September 30, |
|
FUNDS FROM OPERATIONS: |
|
2022 |
|
|
2021 |
|
Net income (loss) |
|
$ |
97,883 |
|
|
$ |
(79,933 |
) |
Depreciation and amortization of real estate assets |
|
|
72,825 |
|
|
|
73,562 |
|
Impairment of real estate assets |
|
|
3,513 |
|
|
|
1,308 |
|
Gain on sale of real estate assets, net |
|
|
(87,149 |
) |
|
|
(38,766 |
) |
Income tax expense for special items |
|
|
22,073 |
|
|
|
9,291 |
|
Funds From Operations |
|
|
109,145 |
|
|
|
(34,538 |
) |
Expenses associated with debt repayments
and refinancing transactions |
|
|
7,588 |
|
|
|
52,167 |
|
Expenses associated with COVID-19 |
|
|
— |
|
|
|
2,434 |
|
Income taxes associated with change in corporate
tax structure and other special tax items |
|
|
— |
|
|
|
114,249 |
|
Shareholder litigation expense |
|
|
1,900 |
|
|
|
54,295 |
|
Goodwill and other impairments |
|
|
— |
|
|
|
8,043 |
|
Income tax benefit for special items |
|
|
(2,530 |
) |
|
|
(28,985 |
) |
Normalized Funds From Operations |
|
$ |
116,103 |
|
|
$ |
167,665 |
|
42
Material Cash Requirements
The following schedule summarizes our contractual cash obligations by the indicated period as of September 30, 2022 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due By Year Ended December 31, |
|
|
|
2022
(remainder) |
|
|
2023 |
|
|
2024 |
|
|
2025 |
|
|
2026 |
|
|
Thereafter |
|
|
Total |
|
Long-term debt |
|
$ |
2,400 |
|
|
$ |
178,290 |
|
|
$ |
14,722 |
|
|
$ |
17,698 |
|
|
$ |
715,985 |
|
|
$ |
378,014 |
|
|
$ |
1,307,109 |
|
Interest on senior and mortgage
notes |
|
|
37,930 |
|
|
|
75,236 |
|
|
|
71,161 |
|
|
|
70,916 |
|
|
|
44,186 |
|
|
|
54,852 |
|
|
|
354,281 |
|
Contractual facility developments
and other commitments |
|
|
4,066 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
4,066 |
|
South Texas Family Residential
Center |
|
|
12,961 |
|
|
|
51,421 |
|
|
|
51,562 |
|
|
|
51,421 |
|
|
|
38,460 |
|
|
|
— |
|
|
|
205,825 |
|
Leases |
|
|
1,231 |
|
|
|
4,742 |
|
|
|
4,690 |
|
|
|
4,564 |
|
|
|
4,297 |
|
|
|
18,483 |
|
|
|
38,007 |
|
Total contractual cash obligations |
|
$ |
58,588 |
|
|
$ |
309,689 |
|
|
$ |
142,135 |
|
|
$ |
144,599 |
|
|
$ |
802,928 |
|
|
$ |
451,349 |
|
|
$ |
1,909,288 |
|
The cash obligations in the table above do not include future cash obligations for variable interest expense associated with our New Term Loan A or the balance on our outstanding New Revolving Credit Facility, if any, as projections would be based on future outstanding balances as well as future variable interest rates, and we are unable to make reliable estimates of either. Certain of our other ongoing construction projects are not currently under contract and thus are not included as a contractual obligation above as we may generally suspend or terminate such projects without substantial penalty. With respect to the South Texas Family Residential Center, the cash obligations included in the table above reflect the full contractual obligations of the lease of the site, excluding contingent payments, even though the lease agreement provides us with the ability to terminate if ICE terminates the amended IGSA associated with the facility.
We had $16.8 million of letters of credit outstanding at September 30, 2022 primarily to support our requirement to repay fees and claims under our self-insured workers' compensation plan in the event we do not repay the fees and claims due in accordance with the terms of the plan, and for a debt service reserve requirement under terms of the Kansas Notes. The letters of credit are renewable annually. We did not have any draws under these outstanding letters of credit during the nine months ended September 30, 2022 or 2021.
INFLATION
Many of our contracts include provisions for inflationary indexing, which may mitigate an adverse impact of inflation on net income. However, a substantial increase in personnel costs, workers' compensation, utilities, food, and medical expenses could have an adverse impact on our results of operations in the future to the extent that these expenses increase at a faster pace than the per diem or fixed rates we receive for our management services. As previously described herein, we have experienced increases in personnel costs and expect the labor market to remain challenging, which could have a material adverse effect on our operations. We outsource our food service operations to a third party. The contract with our outsourced food service vendor contains certain protections against increases in food costs.
SEASONALITY AND QUARTERLY RESULTS
Certain aspects of our business are subject to seasonal fluctuations. Because we are generally compensated for operating and managing correctional, detention, and reentry facilities at a per diem rate, our financial results are impacted by the number of calendar days in a fiscal quarter. Our fiscal year follows the calendar year and therefore, our daily profits for the third and fourth quarters include two more days than the first quarter (except in leap years) and one more day than the second quarter. Further, salaries and benefits represent the most significant component of operating expenses. Significant portions of our unemployment taxes are recognized during the first quarter, when base wage rates reset for unemployment tax purposes. Quarterly results are also affected by government funding initiatives, acquisitions, the timing of the opening of new facilities, or the commencement of new management contracts and related start-up expenses which may mitigate or exacerbate the impact of other seasonal influences. Because of seasonality factors, and other factors described herein, results for any quarter are not necessarily indicative of the results that may be achieved for the full fiscal year.
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