Image source: The Motley Fool.
The GEO Group Inc (GEO 0.33%)
Q3Â 2019 Earnings Call
Nov 5, 2019, 11:00 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Good day, and welcome to The GEO Group Third Quarter 2019 Earnings Call and Webcast. [Operator Instructions].
I would now like to turn the conference over to Mr. Pablo Paez, Executive Vice President Corporate Relations. Please go ahead.
Pablo E. Paez -- Executive Vice President and Corporate Relations
Thank you, Operator. Good morning everyone and thank you for joining us for today's discussion of The Geo Group's Third 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 Secure Services. This morning we will discuss our third quarter results and outlook for the balance of the year. 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 to your 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 of the Board, Chief Executive Officer and Founder
Thank you, Pablo and good morning to everyone. We are very pleased with our strong third quarter financial results which were driven by continued positive trends across our diversified business units. While we expect continued growth we are keeping our financial guidance for the fourth quarter unchanged at this time. During the third quarter, we had a significant level of start-up activity which we expect will drive future cash flow growth. Importantly these start-up projects involved the reactivation of previously idle facilities totaling 4600 beds. In September we completed the reactivation of our company-owned 1000-bed South Louisiana ICE processing center. And October 1 we activated our company-owned 1800-bed North Lake Michigan correctional facility and the county-owned 1800-bed Reeves County Texas detention complex one and two. Both of these facilities are fixed-price for the full 10-year contract term with the Federal Bureau of Prisons. Internationally we are in the process of completing negotiations and construction respectively on two expansion projects in Australia and at our Ravenhall and Junee correctional centers totaling approximately 800 combined beds. In the U.K. we are pleased to have been awarded a 10-year contract for the continued delivery of secure transportation services under our GEO Amey joint venture known as the PECS contract.
We have provided secure transportation services under the PECS contract through our Geo Amey joint venture since 2011. We are proud to have been awarded this new 10-year contract to deliver high-quality services involving 1400 professional staff 250 specialist vehicles and 10 transportation hubs. With respect to recent procurement activity in the U.S. both ICE and the U.S. Marshals Service have issued solicitations in California. The U.S. Marshals expects to award a management contract for the government-owned 512-bed El Centro California facility before the end of the year. And under a procurement issued last month, ICE expects to award a minimum of approximately 6750 beds in the Los Angeles San Diego and San Francisco areas at existing facilities. This procurement is expected to result in new long-term contracts starting in mid-December of this year. It involves a rebid of existing contracts at our Adelanto and Mesa Verde ICE processing centers as well as other contractor-operated facilities in California. It also allows for other existing facilities to be proposed in those three areas of the state. As has been widely reported in the media the state of California recently enacted legislation aimed at phasing out public-private partnership contracts for the operation of state correctional facilities and federal facilities. As we have previously announced our contract for our Central Valley facility was already discontinued by the California Department of Corrections and Rehabilitation at the end of September.
And we expect that our California corrections contract for the Desert View facility to be discontinued by April 1, 2020, followed by the Golden State facility contract being discontinued by July 1, 2020. All of our ICE proposals have been submitted and we are now awaiting ICE's review and award decisions. We recognize that media coverage of overcrowded border patrol facilities and the announcement by a handful of our financial institutions discontinuing future financing has caused volatility in our equity and debt markets. Unfortunately, this volatility has been driven by a false narrative and deliberate mischaracterization of our long-standing role as a quality service provider to ICE. As we have said repeatedly we do not manage any facilities that house unaccompanied minors nor any Border Patrol holding facilities. The residential centers we manage on behalf of ICE are highly rated by national accreditation organizations and provide high-quality culturally responsive services in a safe and humane environment. GEO's typical ICE processing center amenities include flat screen TVs in the housing areas comprised of either dormitory or a combination of cellular units with multipurpose rooms outdoor covered pavilions and artificial turf soccer fields. The residents are provided with hot meals clothing 24/7 access to healthcare services and full access to telephones and legal services. Healthcare staffing at our ICE processing centers is approximately 100% more than that of our state correctional facilities.
The additional healthcare staffing is needed to provide appropriate treatment for individuals who have numerous health and mental health needs due to arriving from countries with limited access to healthcare services. We have been successful in providing these professional services for 30 years under the Democratic and Republican administrations. We provide the same exact services at our facilities today that we have provided for eight years under President Obama's administration. We are proud to have published our first-ever Human Rights and ESG report at the end of September. The report builds on our global human rights policy adopted by our board in 2013. It provides disclosures on how we inform our employees our long-standing commitment to respecting human rights; the criteria we use to assess human rights performance; and our contract compliance program remedies and third-party verification of our performance. The 77-page report also addresses criteria based on recognized ESG reporting standards related to the development of our diverse workforce our efforts to advance environmental sustainability in our facilities and ethical governance practices. Our ESG report further highlights the continued expansion of our GEO continuum of care or CoC program which was first piloted in 2015. Our CoC program integrates offender rehabilitation including cognitive behavioral treatment with post-release support services to address basic community needs of released individuals. This year the CoC program has been implemented at 18 state correctional facilities and two federal facilities managed by GEO.
We are proud to have taken our place as a world leader in offender rehabilitation and of our company's $10 million funding commitment to the CoC program representing 7% of our company's net income. The GEO continuum of care is our company's contribution to criminal justice reform in assisting some of the 2.2 million people still incarcerated. We are expanding our role as vocal advocates for increased funding and improved rehabilitation programs that will help individuals reenter society as productive citizens. We applaud the new efforts in prison sentencing reform made possible by the First Step act resulting in approximately 6000 people released. But we want to draw people's attention to the 2.2 million individuals who still remain incarcerated and have little or no access to rehabilitation programs. We hope we are setting an example as to how more can and should be done. There has been a significant amount of misinformation regarding our banking partners and access to capital. We are pleased to have successfully extended the maturity on our senior revolving credit facility to May 2024 without any change in terms. Our shareholders should take comfort in knowing that we continue to have strong banking relationships with several dozens of lenders and financial institutions in our senior credit facility.
Additionally, we continue to talk to new lenders who have expressed interest in establishing a lending relationship with us. And we do not have any debt maturities due until 2022. And as we discussed during our last earnings call we expect to apply our excess cash flow to paying down debt. During the quarter we repurchased approximately $34 million of our 2022 senior notes in the open market. We also closed on a $44 million 15-year real estate loan bearing an interest rate of 4.2% annually. We believe that our growing earnings and cash flows will allow us to deleverage while providing support for our annual dividend payments which we expect to remain unchanged. We believe that our strong quarterly financial results several new project openings and new procurement activity are indicative of the stability of our cash flows and the sustainability of our dividend payments.
I will now ask Brian Evans to review our financial results outlook and liquidity position.
Brian R. Evans -- Senior Vice President and Chief Financial Officer
Thank you, George. Good morning everyone. Today we reported third-quarter revenues of approximately $632 million and net income attributable to GEO of $0.39 per diluted share. Our third quarter results reflect $6.1 million in start-up expenses pre-tax a $1.2 million loss on real estate assets and a $600000 gain on the extinguishment of debt related to the repurchase of $34 million of our 2022 senior notes. Excluding these items, we reported third quarter adjusted net income of $0.44 per diluted share ahead of our guidance fringe of $0.37 to $0.39 per diluted share. We reported third-quarter AFFO of $0.72 per diluted share also ahead of our guidance range of $0.66 to $0.68 per diluted share. Our strong quarterly financial results were driven by better-than-expected performance and favorable trends across our diversified business segments. Turning to our outlook while we expect favorable trends to continue we have maintained our adjusted net income and AFFO guidance for the fourth quarter. We expect fourth quarter 2019 net income attributable to GEO to be in a range of $0.37 to $0.39 per diluted share and adjusted net income to be in a range of $0.39 to $0.41 per diluted share on quarterly revenues of $629 million to $634 million. We expect fourth quarter 2019 AFFO to be between $0.66 and $0.68 per diluted share. For the full year, we expect net income attributable to GEO to be in a range of $1.45 to $1.47 per diluted share and adjusted net income to be in a range of $1.60 to $1.62 per diluted share on annual revenues of approximately $2.49 billion. We have increased our full-year AFFO guidance to a range of $2.75 to $2.77 per diluted share.
Moving to our capital structure during the third quarter we repurchased approximately $0.34 of our senior notes due 2022 representing approximately 14% of the outstanding amount for that tranche of our senior notes which have the nearest maturity. Additionally, during the third quarter, we closed on a $44 million 15-year real estate loan bearing interest at 4.22% annually. At the end of the quarter, we had approximately $395 million in available capacity under our revolving credit facility in addition to an accordion feature of $450 million under our senior credit facility. As George mentioned in early June we extended the maturity of our $900 million revolving credit facility to May 2024 which contractually obligates all banks in the facility for approximately 5 years. We were able to complete this extension without any changes to the revolver size or pricing. We continue to have ample capacity in our revolver to take out the remaining amount outstanding of our 2022 senior notes if we want to do so. We recognize that since the execution of the revolver's extension new stories regarding our banking partners have created significant volatility in our debt and equity markets. This volatility is directly tied to heightened political rhetoric that as George mentioned is based on a mischaracterization of our role as a service provider and our overall company record. There has also been a significant amount of misinformation regarding our banking partners and our access to capital including a recent online opinion editorial on Forbes which provided misleading and false information. Contrary to these misleading claims we continue to enjoy access to capital with several dozens of lenders and financial institutions currently in our senior credit facility.
While a handful of banks, have announced plans to not extend future financing arrangements to our industry all of those banks are contractually obligated under our senior credit facility through May 2024 and those banks only represent approximately 25% of GEO's total borrowing capacity. Further, the handful of bank announcements have not impacted our operations or financial flexibility and the credit agencies have not changed our ratings for over 30 months. Our quarterly financial results reflect growing cash flows and we completed the start-up phase for 4600 beds across three facilities during the third quarter. Additionally, as we had previously disclosed the payment under our operating lease agreement for the idle 1250-bed Hudson Colorado facility will conclude at the end of 2019. The expiration of this operating lease obligation is expected to result in annual cash flow savings of $10 million beginning in January 2020. Continued growth in our cash flows will allow us to naturally deleverage while providing support for our annual dividend payment. We also expect our capex requirements to significantly decrease going forward. Aside from our maintenance capex needs which we currently estimate at approximately $25 million to $30 million annually we only expect minimal growth of capex requirements mostly in connection with our electronic monitoring segment. As we have noted previously we expect to have between $50 million and $75 million in excess cash flow annually to apply toward paying down debt while maintaining our current dividend payments. And we would expect our total net leverage to decrease to approximately 4.5 times by the end of 2020.
At this time I will turn the call over to Dave Donahue for a review of GEO Secure Services.
J. David Donahue -- Senior Vice President and President of GEO Secure Services
Thanks, Brian. Good morning everyone. I'd like to provide you an update on our GEO Secure Services business unit. Starting with our federal segment as has been noted today we completed the reactivation of several previously idle facilities during the third quarter. In Louisiana, we activated our company-owned 1000-bed south Louisiana ICE processing center in Basile Louisiana under an existing inter-governmental agreement with ICE. The south Louisiana center is expected to generate annualized revenues of approximately $25 million. In Michigan, we commenced operations on October 1 under a 10-year contract with the Bureau of Prisons for the reactivation of our company-owned 1800-bed North Lake correctional facility. The new contract is projected to generate approximately $37 million in annualized revenues. And in Texas also under a 10-year contract with the BoP, we worked with Reeves County to reactivate the county-owned 1800-bed Reeves County detention center one and two. GEO provides management consulting and support services to Reeves County in relation to this facility while the county holds the contract with the BoP for the operations of the facility.
Turning to procurement activity at the federal level the BoP has canceled the CAR 18 solicitation for the management contract of the government-owned 2355-bed Taft facility in California. This decision was made as a result of damage sustained by the facility during seismic activity in California earlier this year. While it remains possible that a portion of the Taft facility may remain in operation the solicitation has been canceled. Also in California, both ICE and the U.S. Marshals Service have issued recent procurements for bed space. The U.S. Marshals has issued a solicitation for the management and operation of the 512-bed El Centro facility which is owned by the government. We expect the decision on this procurement to be made before the end of the year with a contract effective date of January 1, 2020. With respect to ICE, the agency has issued a solicitation for a minimum of approximately 6750 beds at existing facilities in the Los Angeles San Diego and San Francisco areas. The procurement encompasses a rebid of existing contracts for four contractor-operated facilities including our 1940-bed Adelanto and 400-bed Mesa Verde ICE processing centers.
The solicitation also allows for other existing facilities to be proposed. As we noted last quarter our contract for our 700-bed Central Valley facility was discontinued by the California Department of Corrections and Rehabilitation at the end of September. And as George discussed earlier our 700-bed Desert View and 700-bed Golden State California corrections contracts will also be discontinued by April and July 2020 respectively. Moving to our state segment we believe our remaining state correctional customers have stable budgets and we have been able to provide high quality services without being impacted by budgetary constraints. We are also 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 relating to older prisons. In the states where we operate the average age of state prisons ranged from approximately 30 to 60 years. In Alabama, the state is expected to move forward with a solicitation process to build several thousand beds to replace their existing facilities which are currently overcrowded and costly.
We are monitoring the opportunity which may result in contract awards in the first half of 2020. Finally, as we have previously announced we discontinued the managed-only contract at the 625-bed Northeast New Mexico detention facility which had been financially underperforming for several years. Moving to our international markets we are currently undertaking a number of expansion projects in Australia. In the state of Victoria, we are engaged in negotiations for a 300-bed expansion at our 1300-bed Ravenhall Correctional Centre which is expected to result in additional annual revenues of $19 million. In New South Wales we are completing the development of a 489-bed expansion at the Junee Correctional Centre bringing the total capacity to 1279 beds. This expansion is expected to be completed between the end of this year and the beginning of next year with the projected annual revenues of $12 million. Also in Victoria, we are constructing a 137-bed expansion to the Fulham Correctional Centre which will bring the total capacity at the center to 955 beds with expected completion during 2020.
Finally in the United Kingdom, our GEO Amey joint venture was awarded a 10-year contract last week by the U.K. home office for the continued delivery of secure transportation services under the PECS program. We have been providing these services since 2011 and this contract award is a testament to the high-quality partnership of our GEO Amey joint venture with the U.K. home office. The contract will encompass secure transportation for approximately 250000 individuals across the criminal justice system in England and Wales with 1400 transportation staff 250 special purchase secure vehicles and 10 vehicle depots.
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 of 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 Reentry Services division. During the third quarter, we were awarded a new 60-bed contract expansion in Alabama for our Alabama therapeutic education facility. Additionally in Louisiana, we were awarded a new contract for a non-residential day reporting center. We continue to pursue areas where we can assist individuals with successfully reentering the community including residential non-residential and in-custody treatment and rehabilitation services. Moving to our youth services division our programs continue to provide important rehabilitation and treatment alternatives for use across several states and local jurisdictions with stable utilization rates across our residential facilities.
Our BI Electronic Monitoring division was awarded a contract during the third quarter for the continued delivery of electronic monitoring solutions to the administrative office of the U.S. Courts. Additionally, we are awaiting a contract award decision by the end of the year for the rebid of the alternatives to detention contract with ICE. This program has allowed the federal government to effectively use community alternatives for several tens of thousands of individuals going through the immigration review process. BI has held this important contract since ICE first piloted the program in 2004. Finally, we continue to expand our GEO Continuum of Care programs across the country. Our continuum of care programs integrate enhanced in-custody rehabilitation including cognitive behavioral treatment with post-release support services such as transitional housing transportation clothing food and job placement assistance.
The continuum of care program is supervised and assisted at the corporate level with a division that has expanded to over 50 staff with subject matter experts in education cognitive behavioral treatment substance abuse treatment post-release services continuum of care training and quality assurance. As was highlighted in our recently published ESG report on any typical day there are approximately 30000 participants enrolled in GEO's offender rehabilitation programs. Our continuum of care programs delivered 6.7 million program hours 9000 vocational certificates and nearly 3000 high school equivalency diplomas in 2018 and we are on-pace to surpass these metrics in 2019.
At this time I'll turn the call back to George for his closing remarks.
George C. Zoley -- Chairman of the Board, Chief Executive Officer and Founder
Thank you, Ann. The fundamentals of our business remain strong and our financial operational results are driven by our company's quality services and continued growth. We have always been committed to treating everyone in our care with respect and dignity and we acknowledge our unique responsibility to respect and protect their human rights. We are proud to have published our first-ever human rights and ESG report in September of this year. We hope to continue to engage with our diverse stakeholders as we refine our ESG reporting going forward and work to dispel the political rhetoric and false narratives that have regrettably created volatility in our company and in the capital markets. We are proud of the dedication and professionalism of our diverse workforce who over the last 30 years have helped establish GEO as a leading professional service provider to federal state and local government agencies. We remain focused on the effective allocation of capital and believe our growing cash flows will allow us to deleverage while providing support to our annual dividend payments. As we did this quarter we expect to continue to apply our increasing cash flow on paying down debt in the coming quarters.
That completes our presentation and we would be glad to address any questions.
Questions and Answers:
Operator
Thank you. We will now begin the question and answer session. [Operator Instructions] The first question today comes from Dane Bowler of 2nd Market Capital. Please go ahead.
Dane Bowler -- 2nd Market Capital -- Analyst
Hey guys. Good quarter. I'm hoping you can provide a little bit more color on the $44 million loan you took out. Who is the counterparty and what properties are securing the loan?
Brian R. Evans -- Senior Vice President and Chief Financial Officer
Several banks. We haven't disclosed publicly who the banks were and it was on a -- we have a few assets that are not included in the collateral pool on our senior credit facility. So, that's where we were able to do it.
Dane Bowler -- 2nd Market Capital -- Analyst
Do you have any additional capacity to do that on other properties?
Brian R. Evans -- Senior Vice President and Chief Financial Officer
You know maybe one or two other smaller-sized assets, so we're continuing to look at that or some other alternative financing vehicles. So we'll look at that.
Dane Bowler -- 2nd Market Capital -- Analyst
All right. Thank you.
Operator
The next question comes from David Napsker [Phonetic] of Ardea Capital Management [Phonetic]. Please go ahead.
Unidentified Participant
Hi. I have a very specific question, I'd like to answer -- you'd answer in a general way. California is obviously a big problem. I just moved from Nevada after 59 years there and it seems to be the most difficult state. The specific question is the two facilities where your contracts run out in April and May of next year. Do you have risk on it or are they just management contracts? Or do you have some of the property? And from that, if you could just expand how much property risk do you have in specifically California, but in general if you have another answer? Thank you.
George C. Zoley -- Chairman of the Board, Chief Executive Officer and Founder
Well, they are both owned facilities, but have submitted proposals for new contracts for those facilities.
Brian R. Evans -- Senior Vice President and Chief Financial Officer
For Desert View and Mesa Verde.
Unidentified Participant
Okay. So for the state to take over the property or...
George C. Zoley -- Chairman of the Board, Chief Executive Officer and Founder
No. No. As I indicated earlier, there's an ICE procurement asking for new contracts in three basic locations, San Diego, Los Angeles and the San Francisco area. We have two existing facilities that serve the San Francisco and Los Angeles area. They are respectively the Mesa Verde facility and the Adelanto facility. And they -- we have definitely submitted those facilities for new long-term contracts.
Unidentified Participant
Okay. Thank you.
Operator
[Operator Instructions] The next question comes from Matthew Larson of National Securities. Please go ahead.
Matthew Larson -- National Securities -- Analyst
Hi, thanks for taking the call. Back to California, you know they passed some resolution that they wouldn't be working with any private internment centers or prisons. But in trying to assess the downside of the political rhetoric if for some reason you know one of these candidates who has tried to diminish the value of private prisons and perhaps put out misleading data. One of the things would be there is overcrowding. To build a new facility is difficult for cash-strapped municipalities and states. But if for some reason they couldn't work with for-profit folks like yourself and you own facilities I mean -- is it a possibility that if in the most draconian sense that they would just buy your facilities at some reasonable value, so that even though you lose the contract, it's not as if you have to write off the facility? Because there's plenty of other states which you outlined whether it's Alabama, Texas and some of these other places that have aging facilities that have kind of a different bent on the whole thing. So is that kind of the Plan B, if the worse comes and you've got to -- your customers just won't work with you, because it's a political season and the wrong people might get elected. Would it be an option just to sell the facility to the state let them manage it but still recover the bulk of your investment?
George C. Zoley -- Chairman of the Board, Chief Executive Officer and Founder
Well, those are clearly alternatives that we're not contemplating at this time but there are alternatives -- the leasing of a property the sale of a property. But you know, I think we have considerable flexibility at this particular time.
Matthew Larson -- National Securities -- Analyst
Okay. I mean I tend to agree. I mean stuff said on the campaign trail or what have you often doesn't show up in reality. I think Guantanamo is still open but that's just a comment. All right. Trying -- you know personally as an investor trying to gauge the downside. And the upside is pretty evident. So thanks for that answer.
George C. Zoley -- Chairman of the Board, Chief Executive Officer and Founder
I referenced the ICE solicitation is in progress as we speak. All proposals have been submitted. They're undergoing a review and according to the solicitation new contracts are contemplated in mid-December of next month.
Matthew Larson -- National Securities -- Analyst
Can I just touch on that because I've got to admit I haven't drilled down totally on what was passed in California. I think Gavin Newsom's group, basically passed beginning in -- some sort of initiative beginning next year that they just would not renew contracts as a state for private prisons or detention centers. And yet you're now saying that you have a lot of contract bid, request for bids out there by ICE and what-have-you. Do they work outside of maybe the state you know memo? Because they are ICE and it's a federal issue and so they might be domiciled in California but since it's federal it's apart from whatever California wants to do?
George C. Zoley -- Chairman of the Board, Chief Executive Officer and Founder
You made a lot of complicated statements there. Let me see if I can untangle them. First of all, the statute it's AB 32 and it does not go into effect until January 1 of next year. But it does restrict any state or federal facilities to their contract terms effective January 1 of this year. So if you have a contract that's in place before the end of this year, it can go the full length of its contract term.
Matthew Larson -- National Securities -- Analyst
Got it. Okay, I mean, that's a good piece of information. Thank you. Appreciate it.
Operator
The next question today comes from Maya Sarda of Wells Fargo Asset Management. Please go ahead.
Maya Sarda -- Wells Fargo Asset Management -- Analyst
My question was actually already answered.
George C. Zoley -- Chairman of the Board, Chief Executive Officer and Founder
Okay. Thank you.
Operator
This concludes our question-and-answer session. I would like to turn the conference back over to Mr. George Zoley for any closing remarks.
George C. Zoley -- Chairman of the Board, Chief Executive Officer and Founder
Thank you all for listening today. We look forward to addressing you on the next quarterly conference call.
Operator
[Operator Closing Remarks]
Duration: 39 minutes
Call participants:
Pablo E. Paez -- Executive Vice President and Corporate Relations
George C. Zoley -- Chairman of the Board, Chief Executive Officer and Founder
Brian R. Evans -- Senior Vice President and Chief Financial Officer
J. David Donahue -- Senior Vice President and President of GEO Secure Services
Ann M. Schlarb -- Senior Vice President and President of GEO Care
Dane Bowler -- 2nd Market Capital -- Analyst
Unidentified Participant
Matthew Larson -- National Securities -- Analyst
Maya Sarda -- Wells Fargo Asset Management -- Analyst
