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The GEO Group Inc  (NYSE:GEO)
Q1 2019 Earnings Call
April 30, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to The GEO Group First Quarter 2019 Earnings Conference Call. All participants will be in listen-only mode. (Operator Instructions) After today's presentation, there will be an opportunity to ask questions. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Pablo Paez, Executive Vice President, Corporate Relations. Please go ahead.

Pablo E. Paez -- Executive Vice President, Corporate Relations

Thank you, operator. Good morning, everyone and thank you for joining us for today's discussion of The GEO Group's first quarter 2019 earnings results. With us today are George Zoley, Chairman and Chief Executive Officer; Brian Evans, Chief Financial Officer; Ann Schlarb, President of GEO Care; and David Donahue, President of GEO Corrections & Detention. This morning, we will discuss our first quarter results and current business development activities. We will conclude the call with a question-and-answer session. This conference call is also being webcast live on our investor website at investors.geogroup.com.

Today, we will discuss non-GAAP basis information. A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and supplemental disclosure we issued this morning. Additionally, much of the information we will discuss today, including the answers we give in response your to questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters. These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws. Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q and 8-K reports.

With that, please allow me to turn this call over to our Chairman and CEO, George Zoley. George?

George C. Zoley -- Chairman, Chief Executive Officer and Founder

Thank you, Pablo and good morning to everyone. We are very pleased with our strong first quarter results and increased guidance for 2019. Our financial performance was driven by a higher occupancy rates across our diversified real estate portfolio and particularly, throughout our federal facilities for ICE and the US Marshals Service. Additionally, we continue to experience a higher utilization rate for GEO Care's alternatives to Detention program with ICE.

Going forward, we expect these positive trends to continue for the balance of 2019. We believe our strong quarterly results are indicative of the stability of our cash flows and the sustainability of our annual dividend payments, which are now below our guided payout ratio of 75% of our projected 2019 AFFO. During the first quarter, we were awarded a new 10-year contract with the US Marshals Service for the continued operation of our Company-owned 222 bed Queens Detention Facility in New York. We also recently received a one-year extension from ICE for the use of an additional 432 beds at our Aurora ICE Processing Center which we had activated earlier in the year under a short-term agreement. With this ICE contract extension, our Company-owned 1,532 bed Aurora Facility is now fully contracted by ICE and the US Marshals.

Additionally, we have entered into a new con -- direct contract with ICE for our Company-owned 400 bed Mesa Verde ICE Processing Center in Bakersfield, California. We are currently in negotiations for a new direct contract for our Company-owned 1,900 bed at Adelanto ICE Processing Center in San Bernadino County, California. And just last week, we announced a contract modification with ICE for the reactivation of our 1,000 bed South Louisiana ICE Processing Center. The South Louisiana Center, which is currently idle and will house federal immigration detainees under an existing Intergovernmental Service Agreement between Evangeline Parish and ICE.

We expect to begin the intake process during the third quarter with projected annualized revenues of approximately $25 million. The residential centers we manage on behalf of ICE are highly rated by national accreditation organizations and provide high quality, culturally responsive services in safe and humane environments. Those ICE Processing Centers offer enhanced amenities including state-of-the-art artificial turf soccer field, flat screen televisions in all housing areas, covered pavilions and outdoor recreational areas and modern multi-purpose rooms. We believe that our continued growth validates our business strategy and Company ethics. We also continue to be optimistic about our ability to pursue growth opportunities across our diversified platform of Real Estate Management and Rehabilitation Solutions.

There are currently two active procurements by the Federal Bureau of Prisons totaling close to 12,000 beds referred to as CAR 18 and CAR 19. We expect CAR 19 with up to 9,600 beds to be decided this quarter which could result in an increase in our current guidance. Our management team and Board remain focused on the effective allocation of capital to enhance long-term value for our shareholders. We have always enjoyed access to cost effective capital to support accretive projects with a minimum target returns of 13% to 15%. We expect to continue to enjoy access to cost effective capital to support the expansion of our high quality services. We have announced that we will begin publishing an annual report in September 2019, which will help our stakeholders better understand our long-standing commitment to respecting human rights and will over time incorporate appropriate metrics to measure our performance.

I will now ask our CFO, Brian Evans to review our results and outlook.

Brian R. Evans -- Senior Vice President and Chief Financial Officer

Thank you, George. Good morning, everyone. Today we reported first quarter revenues of approximately $611 million and net income attributable to GEO of $0.34 per diluted share ahead of our guidance range of $0.28 to $0.31 per share. Our first quarter results reflect a $1.5 million loss on real estate assets, primarily related to the expected sale of one of our small reentry centers in Pennsylvania. Excluding this item, we reported first quarter adjusted net income of $0.35 and AFFO of $0.67 per diluted share, ahead of our AFFO guidance range of $0.59 to $0.61 per share.

Compared to the same period of last year, our first quarter 2019 results reflect the following items. The activation of a previously idled 338-bed annex at our Folkston ICE Processing Center in Georgia in July 2018. The activation of the previously idled 661-bed Eagle Pass Texas facility for the housing of inmates from the State of Idaho in August 2018. The activation of the new 1,000-bed Montgomery ICE Processing Center in September 2018 and the activation of an additional 432-beds at the Aurora ICE Processing Center in early 2019. These positive items were partially offset by a year-over-year increase of approximately $5 million in net interest expense attributable to higher interest rates and higher overall outstanding debt balances.

Moving to our outlook. This morning, we increased our guidance for the full year 2019 and issued guidance for the second quarter 2019. We expect our full year net income attributable to GEO to be in a range of $1.42 to $1.48 per diluted share and adjusted net income to be in a range of $1.44 to $1.50 per diluted share and annual revenues of approximately $2.47 billion. We expect our full year AFFO to be in a range of $2.64 to $2.70 per diluted share.

Our updated guidance reflects continued higher utilization rates across our ICE in US Marshals facilities and our Alternatives to Detention contract with ICE. As well as the recently announced reactivation of our 1,000-bed South Louisiana ICE Processing Center during the third quarter of 2019. Our guidance does not reflect any additional share buybacks under our current share repurchase program. Additionally, our guidance does not assume any further reactivation of our approximately 4,000 remaining idled beds. As George discussed, the Federal Bureau of Prisons has two active procurements totaling 12,000 beds, which are expected to be decided this year and could represent upside to our current guidance.

Additionally, as we noted last quarter, the payments under our operating lease agreement for the idled 1,250-bed Hudson Colorado Facility conclude at the end of 2019. The expiration of the operating lease obligation is expected to result in annual cash flow savings of $10 million for GEO beginning in 2020. For the second quarter 2019, we expect net income attributable to GEO to be in a range of $0.35 to $0.37 per diluted share and adjusted net income to be in a range of $0.36 to $0.38 per diluted share on quarterly revenues of $607 million to $612 million. We expect second quarter 2019 AFFO to be in a range -- to be between $0.65 and $0.67 per diluted share.

Looking at our liquidity position, we have approximately $290 million in available capacity under our revolving credit facility, which matures in May of 2021. Additionally, we have an accordion feature of $450 million under our senior credit facility. As George mentioned, we've always enjoyed access to cost effective capital and we expect to continue to have adequate access to the cost effective capital to support our growth. We have several decades long relationships with our banking partners and we hope to extend the maturity of our -- existing revolving credit facility in the near-term.

Turning to our uses of cash, our growth CapEx is expected to be approximately $65 million in 2019, of which, approximately $20 million had been spent as at the end of the first quarter. We also have approximately $15 million in scheduled annual principal payments of debt. Earlier this month, our Board -- declared a quarterly cash dividend of $0.48 per share or $1.92 per share annualized. Given the strength of our operational performance and increased guidance, our dividend payment is currently below our guided payout ratio of 75% based on our projected AFFO for 2019. We expect to make any necessary adjustments by year end. As we have expressed to you in the past, we believe that our dividend payments are supported by stable, predictable and growing cash flows.

At this time, I will turn the call over to Dave Donahue for a review of our GEO Corrections and Detention segment.

J. David Donahue -- Senior Vice President and President, US Corrections and Detention and International Operations

Thanks, Brian and good morning, everyone. I'd like to provide you an update on our GEO Corrections and Detention business unit, starting with our federal segment. We have a three decade long partnership with the federal government, involving the operation of correctional facilities, housing predominantly criminal aliens for the Federal Bureau of Prisons, pretrial detention facilities for the US Marshals Service and secure residential facilities for US Immigration and Customs Enforcement.

During the first quarter, we were pleased to have been awarded a 10-year contract by the US Marshals for the continued operation of our Company-owned 222-bed Queens Detention Facility in New York. We believe this renewed contract is indicative of the stability of our long-standing customer partnerships as our Queens Facility has been in operation since the 1990s.

We are also pleased to have recently entered into a new direct contract with ICE for our Company-owned 400-bed at Mesa Verde ICE Processing Center located in Bakersfield, California. We are also presently negotiating the new direct contract for our Company-owned 1,900-bed Adelanto ICE Processing Center in San Bernardino County, California. Our Adelanto and Mesa Verde facilities total approximately 2,300 combined beds and play an important role in providing needed federal detention capacity in this part of the country.

Earlier this month, we also received a one-year extension from ICE for the use of a 432-bed housing unit at our Company-owned 1,532-bed Aurora Colorado ICE Processing Center. We had previously activated these additional 432 beds in the beginning of the year under a short-term agreement in response to the increasing the for detention bed space at the federal level. Finally this past week, we announced that ICE and Evangeline Parish have entered into a contract modification of their existing intergovernmental agreement for the reactivation of our Company-owned 1,000 bed South Louisiana ICE Processing Center located in Brazil, Louisiana.

The South Louisiana Center which is currently idle will house federal immigration detainees under the existing intergovernmental agreement and is expected to begin the intake process during the third quarter of 2019. The South Louisiana Center is expected to generate annualized revenues of approximately $25 million. We are pleased to have been able to build on our long-standing partnership with ICE to provide needed bed space and services that comply with the federal government's performance based National Detention Standards, as well as guidelines set by the independent accrediting entities.

The state-of-the-art residential centers we manage on behalf of ICE provide high quality, culturally responsive services in safe and humane environment and offer enhanced amenities including artificial turf soccer fields, flat screen televisions on all housing units and covered pavilions and outdoor recreational areas. As we discussed in our last quarterly call, ICE received an increase of funding under the current fiscal year to support an average annual capacity of 45,300 detention beds, which represents an increase of approximately 5,000 beds from prior fiscal years.

The appropriations bill also allows the Department of Homeland Security to further increase detention capacity by reallocating funds from other accounts. Looking at the President's budget request for the next fiscal year, which begins on October 1st, the administration has requested funding to support an average annual capacity of 54,000 detention beds.

Moving to pending federal procurements, the Federal Bureau of Prisons has two active solicitations for the housing of criminal aliens, which are expected to result in contract awards this year. Under the CAR 19 procurement, the BOP expects to award up to 9,600 beds at existing facilities with contract announcements expected during the second quarter of 2019. Under the CAR 18 solicitation, the BOP is rebidding the management contract for the government-owned 2,355-bed Taft Facility in California, which is expected to result in a contract award in the latter part of the year.

Now moving to our state segment, we believe our non-state correctional customers have stable budgets and our facilities have been able to provide high quality service and implement enhanced rehabilitation programs without being impacted by budgetary constraints. We now have expanded our GEO continuum of care programs to 15 GEO state correctional facilities across our current state customers. We're excited about the opportunity to expand our relationships within those states and we also remain optimistic about the opportunity to partner with new states across the country.

We are currently in discussions with a number of states regarding their current needs and challenges. Several states continue to face capacity constraints and many of our state customers are facing challenges related to older prisons which need to be replaced with new and more cost efficient facilities. In the states where we operate, the average age of the state prisons range from approximately 30 years to 60 years.

Moving to our international markets. We recently transitioned the management contract at the Parklea Correctional Centre in Australia to a new operator as we had previously disclosed. We were also recently informed by the State of Queensland that the Arthur Gorrie Correctional Centre will be transitioned to government operation between the end of 2019 and the first quarter of 2020. These two transitions are offset by several expansion projects we are currently undertaking in Australia.

In New South Wales, we are developing a 489-bed expansion at the Junee Correctional Centre which will bring the centre's total capacity to 1,279 beds with expected completion during the fourth quarter of 2019. In Victoria, we are also constructing 137-bed expansion to the Fulham Correctional Centre which will bring the total capacity at that centre to 955-beds with the expected completions during 2020. Also in Victoria, we are in negotiations with an additional 300-bed expansion at our 1,300-bed Ravenhall Correctional Centre.

At this time, I'll turn the call over to Ann for a review of our GEO Care segment. Ann?

Ann M. Schlarb -- Senior Vice President and President, GEO Care

Thank you, Dave and good morning, everyone. I'd like to provide you an update on our GEO Care business unit starting with our GEO Community Reentry Services division which is the largest service provider in the United States. As we updated you last quarter, GEO Reentry undertook a consolidation and reorganization of our reentry operation in Pennsylvania in an effort to improve the delivery of services for our clients and achieve better overall economies of scale.

Earlier this month we took an important step toward maximizing the utilization of our Company-owned assets in Pennsylvania. With the partial reactivation of a previously idled reentry center. The Philadelphia Reentry Center previously known as Hoffman Hall, was activated on April 1st under a new 5-year 70-bed contract with the Federal Bureau of Prisons which is expected to generate approximately $3 million in annualized revenues. We also recently activated a new day recording center with the Federal Bureau of Prisons in Sacramento, California.

This marks our first day reporting center on behalf of the Federal Bureau of Prisons and we are excited about the potential opportunity to expand the delivery of these services at the federal level. Further, as the federal government begins to implement the provisions of the recently enacted First Step Act, we believe that the services we provide to our GEO Reentry Division can play an important role in improving rehabilitation and reintegration outcomes.

Moving to our Youth Services Division, we have continued to experience a stable utilization rates and steady operational performance. Our Youth Services facilities and programs provide important rehabilitation and treatment alternatives for youth across several states and local jurisdictions. Our BI Electronic Monitoring Division has continued to experience steady growth driven in part by the increased utilization under our Alternatives to Detention contract with ICE. This growing program has allowed the federal government to effectively use Community Alternatives for individuals going through the immigration review process.

Finally, we are proud of the continued expansion of our GEO Continuum of Care program which has been implemented across 18 GEO Care facilities including 15 state correctional facilities in the US. Our GEO Continuum of Care integrates enhanced and custody rehabilitation programs including cognitive behavioral treatment with post-release support services such as transitional housing, transportation, clothing, food and job placement assistance. We believe that the scope and substance of these programs are unparalleled in our industry and we have made a further commitment to fully implement our GEO Continuum of Care at all 22 state correctional facilities operated by GEO by 2020.

At this time, I'll turn the call back to George for his closing remarks.

George C. Zoley -- Chairman, Chief Executive Officer and Founder

Thank you, Ann. Clearly GEO's first quarter in 2019 was financially and operationally the best in our history. Further, the balance of 2019 looks very encouraging as well. For these things we are very proud and grateful. But at the same time, we're continuing to be mindful of our responsibility to respect and protect the human rights of those in our care.

In 2013, our Board of Directors established a human rights policy for our Company which was the first in our industry. We have announced that we will begin publishing an Annual Report in September 2019, which will help our stakeholders better understand our long-standing commitment to respecting human rights and will over time incorporate appropriate metrics to measure our performance. For our state clients, we are spending $10 million of our own money representing 7% of our annual net income to improve offender rehabilitation through the GEO Continuum of Care.

We've expanded the GEO Continuum of Care Program to 15 state facilities resulting in over 9,000 vocational certificates and nearly 3,000 high school equivalency diplomas in 2018. On any typical day, there are approximately 30,000 participants enrolled in GEO's offender rehabilitation programs, which resulted in 6.7 million program hours completed during 2018.

The Continuum of Care Program is supervised and assisted at the corporate level with a division that is expanded to 50 staff with subject matter experts in education, cognitive behavioral treatment, substance abuse treatment, post-release services, training and quality assurance. To our knowledge, no other public or private correctional organization has the -- this accumulation of offender rehabilitation expertise and enables us to aspire to be a world leader in this area. For our federal clients, we have spent hundreds of millions of dollars building modern secure residential care facilities.

And each year we spend tens of millions of dollars renovating facilities to ensure that they meet GEO's standards for operational excellence. The facilities for the BOP and the US Marshals Service are designed and operated to meet the standards of the American Correctional Association, ACA which provides accreditation and periodic reaccreditation. Our ACA scores are consistently 99% or higher. Our ICE facilities meets the design and performance based National Detention Standards developed under the Obama Administration. GEO's ICE Processing Centers offer enhancement and these including state-of-the-art artificial turf soccer fields, flat screen televisions in all housing areas covered pavilions and outdoor recreational areas and modern multi-purpose rooms.

The health service areas of the GEO to ICE facilities are generally much larger than those in correctional institutions due to the need for more healthcare staff to take care of the detainees who arrive with numerous health issues due to their limited prior access to healthcare. With an average length of stay of 30 days to 45 days, the ICE detainees are provided the opportunity to receive health examination as well as follow-up treatment by the onsite healthcare staff as well as offsite healthcare specialists. This process provides benefits not only to the healthcare of the detainees, but also for the protection of the general public.

In June, we will hold a Company conference for the senior executives in charge of our 15 ICE facilities, allowing us to address our commitment to human rights, quality healthcare services and other operational issues. We are also proud of The GEO Foundation and its active support of various organizations in our host communities. During 2018, the Foundation contributed $1.3 million to organizations focused on health, disabilities, at risk children and education. The GEO Foundation also provided $700,000 in scholarships funding for high school graduates.

With respect to our GEO employees, we continue to be mindful of the adequacy of their wages and its impact on position vacancies. This is an ongoing process and periodically we make adjustments on a facility by facility basis. But I would like to report effective May 1, 2019 our lowest starting wage rate for corrections or detention officer will be increased to $13 per hour.

Fortunately, many, if not most of our corrections and detention officers particularly at our federal facilities start at a much higher hourly rate. In closing along with being a financially successful publicly traded Company, we are great -- gratified with our leadership role in Offender Rehabilitation, quality secure residential care for federal agencies and financial support for non -- for profit organizations and high schools in our host communities.

That completes our presentation, and we would now be glad to address any questions.

Questions and Answers:

Operator

Thank you. We will now begin the question-and-answer session. (Operator Instructions) And our first question will come from Tobey Sommer of SunTrust.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Thanks. My first question relates to CAR 19. Have you had kind of back and forth communication with the A DLT's sends best and final bids were submitted such that our kind of outward sign that the process is moving forward and just as a point of clarification. Did you say in the end of the years when you expect that contract forward?

George C. Zoley -- Chairman, Chief Executive Officer and Founder

No, I said this quarter we believe the proposal and evaluation process has been completed.

Brian R. Evans -- Senior Vice President and Chief Financial Officer

Yeah, Tobey this is Brian. The end of the year was -- we said that it could possibly represent upside to our end of the year performance.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. Thank you very much. That -- much better hearing of that now. I appreciate that. And then I was hoping I could ask about ICE. You just had a contract announcement, is it your sense that ICE has additional need -- needs beyond what this announcement represents? Or do you think that ICE could be in a good spot relative to access to beds at this stage?

George C. Zoley -- Chairman, Chief Executive Officer and Founder

Well ICE has several solicitation and pre-solicitation notices that go around the entire country from the West Coast in California to the North and the Northeast and in the South. So there is a multiple number of solicitations that ICE is involved in.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

So I guess and you would say that a -- the demand there could represent ongoing incremental new opportunities?

George C. Zoley -- Chairman, Chief Executive Officer and Founder

Well it's many tens -- many thousands of beds that are being solicited by ICE at this time.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Could you comment on the US Marshals, the training populations and how long that those elevated populations -- how long that takes generally to lead to a pick up in BOP inmate populations? I've been a little surprised that there has to be at least populations haven't started to turn upwards more significantly given the elevated trends (inaudible)? Thanks.

George C. Zoley -- Chairman, Chief Executive Officer and Founder

Well, I think that relates to the length of the adjudication process, and I would just personally estimate it may be a year between all of these trans-motions and procedures to fully adjudicate somebody and whether they're going to be sentenced or not to a facility in the BOP. So I would guess that a one year lag time.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. And then my last question has to do with the actual second half, in the state business Alabama has been in the news. Could you describe your appetite to participate in the business opportunities in Alabama and kind of give us your expectation for our timeline? Thanks.

George C. Zoley -- Chairman, Chief Executive Officer and Founder

Well we're following the situation and we're -- we've heard that they may do an RFP for I don't know several hundreds of beds. But what -- we know that the legislature is presently in session and they're deliberating on what -- how to approach their capacity needs. Their facilities are very old and antiquated very costly to maintain. They've just received the critical report on the status of their prison system. And they're deliberating how to move forward financially and operationally.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. Thank you. And my last question has to do with a Credit Facility, Brian. You said you're working on it kind of near-term. How long will you anticipate extending the maturity of that. And is it reasonable to expect that a conclusion next month, this quarter or kind of what's the reasonable range? Thanks.

Brian R. Evans -- Senior Vice President and Chief Financial Officer

Well the extension would be for five years from when we closed so it's a standard 5-year revolving credit facility. And I think reasonably this quarter.

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

Okay. Thank you very much.

Operator

(Operator Instructions) And this concludes our question-and-answer session. I would like to turn the conference back over to George Zoley for any closing remarks.

George C. Zoley -- Chairman, Chief Executive Officer and Founder

Okay. Thank you for joining us on this conference call. We look forward to addressing you on the next one.

Operator

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.

Duration: 35 minutes

Call participants:

Pablo E. Paez -- Executive Vice President, Corporate Relations

George C. Zoley -- Chairman, Chief Executive Officer and Founder

Brian R. Evans -- Senior Vice President and Chief Financial Officer

J. David Donahue -- Senior Vice President and President, US Corrections and Detention and International Operations

Ann M. Schlarb -- Senior Vice President and President, GEO Care

Tobey Sommer -- SunTrust Robinson Humphrey -- Analyst

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