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CoreCivic, Inc. (NYSE:CXW)
Q2 2020 Earnings Call
Aug 6, 2020, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. My name is Casey. And I will be your conference operator today's call. [Operator Instructions] At this time, I would like to welcome you to the CoreCivic's Second Quarter 2020 Earnings Conference Call. [Operator Instructions] [Operator Instructions] Thank you.

I would now like to turn the call over to Cameron Hopewell, CoreCivic's Managing Director of Investor Relations. Mr. Hopewell, you may now begin.

Cameron Hopewell -- Director of Investor Relations

Thanks, Casey. Good morning, ladies and gentlemen, and thank you for joining us. Participating on today's call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. On the call today, we will focus on our financial results for the second quarter, yesterday's announcements of our intentions to change our corporate structure and institute a new capital allocation strategy. And an overview of the evolving impacts of the COVID-19 pandemic. During today's call, our remarks, including our answers to your questions, will include forward-looking statements pursuing to the safe harbor provisions of the Private Securities and Litigation Reform Act.

Our actual results or trends may differ materially as a result of a variety of factors, including those identified in our second quarter 2020 earnings release issued after market yesterday and in our Securities and Exchange Commission filings, including Forms 10-K, 10-Q and 8-K reports. You are also cautioned that any forward-looking statements reflect management's current views only and that the Company undertakes no obligation to revise or update such statements in the future. On this call, we will also discuss certain non-GAAP measures. A reconciliation of the most comparable GAAP measurement is provided in our corresponding earnings release and included in the supplemental financial data on our Investors page of our website corecivic.com.

With that, it is my pleasure to turn the call over to our President and CEO, Damon Hininger. Damon.

Damon Hininger -- President and Chief Executive Officer

Thank you, Cameron. Good morning, everyone, and thank you for joining our second quarter 2020 conference call today. today. But also joining us on a day of great historical significance for our company. With last night's announcement noting our plan to convert to a Taxable C Corporation. We are putting our company that better position over time to improve our already strong financial position, and ultimately move our share price back to levels that reflect our strong fundamental business. By doing so, we will be able to build on our unprecedented leadership and supporting life changing reentry programs, policies and services that address America's recidivist crises, and help those in our care succeed with their next step in life. So for today's call, Dave and I will provide an overview of our second quarter financial performance. Yesterday's announcement of our intention to revoke our reelection and become a Taxable C Corporation in 2021, including its implications on our forward-looking business and capital allocation strategy, and our ongoing response to evolving developments resulting from the COVID-19 pandemic.

First, I will briefly touch on our second quarter financial performance. On the top-line, our revenue in the second quarter was $472.6 million, which was a decline of 3.6% over the prior year quarter. The majority of this decline was experienced in our CoreCivic Safety segment. Normalized funds from operations or FFO was $0.56 per share in the second quarter, which represented a 90% decrease from the prior year quarter. The largest impact on our revenue in normalized FFO 2020 has been due to lower utilization levels from our largest government partner, Immigration and Customs Enforcement, primarily due to the COVID-19 pandemic. While current utilization levels by ICE are well below historic averages, the second and third quarters in 2019 were already going to present a difficult comparison because in those periods last year ICE reached historically high utilization levels. If you look at our financial performance sequentially, compared with the first quarter of 2020, our normalized info per share increased by 4% in the second quarter of 2020. Dave will discuss our financial results in great detail after I wrap up my comments.

But before I turn things over to him, let me take a moment to appreciate our tremendous CoreCivic Professionals. I have dedicated nearly three decades of my career to our company. Starting as a frontline correctional officer in Kansas at The Leavenworth Detention Center in 1992. I won't say I have seen it all, but I have seen a lot. COVID-19 is unprecedented in every way. For settings like correctional facilities, the pandemic puts forward a unique set of challenges. Fortunately, at CoreCivic, we prepare for these types of situations all the time and we acted early. We are known to that matters with all our people in the field. They have a tough, but rewarding job that has been made even more demanding. I have had the opportunity to get out into our facilities to see how they are doing and how we can help. Let me tell you that our CoreCivic professionals are an inspiration to me every day, but never more so than now. During our first quarter earnings report, I talked about the Hero Bonus and Extra Paid Day Off that we provided to say thanks to our people in the field.

But as we all know, COVID-19 has required the same level of vigilance and recent weeks as it did in the beginning. That is why last month, we were pleased to again show our gratitude to our field employees with mid-year raises. These pay salary adjustments, which nearly match what we did in the first half of the year, will bring our full-year additional investing in our people to $15 million. The Board and the Management team know that this is the right thing to do to take care of our people right now and to retain them over the long-term. Now we would like to spend a little time discussing our announcement from yesterday, which is the conclusion of our process to evaluate corporate structure and capital allocation alternatives. Our Board of Directors unanimously approved a plan to revoke our election as a real estate investment trusts or REIT and convert to a Taxable C Corporation. This election will be effective January 1, 2021, as we are confident our year-to-date dividend distributions are already sufficient to ensure we qualify as a REIT for the 2020 tax year.

To be abundantly clear, we have not been satisfied with a trading multiple of our stock. For the past several years, our trading multiple whatever metric used to measure it has steadily declined, even as our earnings have grown like they did in 2019. Continuing to pay a dividend yield in excess of 50% is simply not sustainable and recent trading multiple below 10 times, and certainly the current multiple low five times is not acceptable. It translates to a higher cost of capital inhibiting our ability to execute our business plan. As a REIT, because we are required to distribute a substantial portion of our cash flows of dividends, we need to have continuous access to capital at reasonable prices to make investments at higher returns and our cost of capital. With many investors incorrectly categorized and CoreCivic as a non-ESG investment and despite unprecedented leadership in supportive ranging programs and public policies designed to keep people out of prison for good, the cost of our capital has increased.

Provoking our REIT election will provide us more flexibility in how we allocate our substantial free cash flow. We believe the change in corporate structure will improve our overall credit profile in terminal in our cost of capital. This change in corporate structure will also give us with significantly more liquidity, which will enable us to reduce our reliance on the capital markets and reduce the size of our bank credit facility. Following our first priority on debt reduction, with a targeted total leverage is 2.25 times to 2.75 times, we expect to allocate a substantial portion of our free cash flow to returning capital to shareholders, which could include share repurchases and future payments of dividends. As detailed in our press release, we will all going to have more flexibility to pursue attractive growth opportunities, not at all which will require capital deployment. We are also evaluating the sale of lower yielding non-core real estate properties outside our corrections portfolio. These mission critical primarily single tenant government lease property for build to suite according to stringent government requirements.

The quality of the properties combined with long-term in place leases and top notch credit quality of our government tenant is a clear difference among other REIT classes, particularly in the current environment which is frothy for government lease assets. So, it has resulted in significant inbound interest in his portfolio. Selling these properties, which are more properly owned by non-taxpaying entities could enable us to do ever accretively while accelerating our capital allocation strategy. With our 2013 conversions, the restructure was the right structure at the right time for CoreCivic. And it remains a great structure for many companies. But we have to recognize the limitations the structure imposed on CoreCivic in this economic and political environment, but also recognize opportunities being a C-Corp affords us and with that adapt to the most appropriate structure that enables us to execute our business plan further de-risk the balance sheet and create the most long-term value. Finally, as many of you know, we were C-Corp for about 12-years prior to our REIT election in 2013.

So we know this structure will work extremely well with our mission and business growth strategy. Now, in our last conference call in May, we spent a majority of our time in detailing our response to the COVID-19 pandemic. I would like to provide you with an update on our operational response particularly highlighted developments that have occurred throughout the second quarter. Since the beginning of the pandemic, we have been working closely with our government partners to develop and implement facility specific COVID-19 Medical Action Plans. Our operational plans follow guidelines by leading health experts from the CDC and the World Health Organization, as well as those guidelines have been updated to and we have also incorporate those into our medical claims. During the second quarter, we saw an increase in positive cases across a number of our facilities consistent with the general public, and across nearly every Correction System in the United States. Our protocols and procedures for addressing positive cases or suspected cases, is well established for both our employees and individuals and trusted to work here.

However, positive test for employees can present operational challenges from a staffing perspective. We have successfully navigated these challenges by utilizing available staff from other nearby facilities without positive cases, when necessary. In coordination with our government partners, our facilities continue to manage to make movement in person visitation and owner interactions in order to reduce the spread of COVID-19. During the second quarter, many of our government partners have expanded testing of inmate and detainee populations beyond its testing guidance from the CDC. This more broad based testing has varying results in terms of the rate of positive cases, but the overall performance of our facilities has been ever. Also consistent with broad based testing performed at government operated facilities into higher rate of asymptomatic positive test results.

Many health experts have highlighted the challenges presented by asymptomatic positive individuals because they have the potential for spreading the virus without knowledge. This was particularly relevant before our businesses and governments implemented hygiene social distancing and PPE protocols in March and April. The broad-based testing being performed across inmate detainee populations has been a helpful tool to potentially reduce the spread of the virus. But testing does have its limitations and cannot replace the need to follow proper hygiene distancing and PPE protocols. We will continue to be responsive to the COVID-19 pandemic and work closely with our government partners to implement best practices as they evolve. COVID-19 is certainly on the top of everyone's mind, but our government partners continue to face challenges that predate the pandemic that have presented us with new opportunities to serve their needs. For example, in July, we commenced the lease of our previously idled 656 bed South East Correctional Complex with a Commonwealth of Kentucky Department of Corrections.

We originally entered into this lease agreement in December of 2019 which has an initial lease term of 10-years and includes five two year renewal options. This is a great solution for the Commonwealth which is to add a significant need for additional correctional capacity and we are pleased we can quickly delivery solution in state with our idled capacity. Many states are facing budgetary challenges from lost tax revenues due to business closures in response to COVID-19. It is still too early to tell the full economic impact of the pandemic will be and how quickly the U.S. economy can recover. There is also still the potential for Federal aid to provide assistance to help state and local economy facing challenges as a result of the pandemic. These matters will take time to develop, but we have already seen a number of states looking to trim their budgets, including corrections budgets. In July, we agreed with the state of Oklahoma to close our 1692 beds Cimarron Correctional Facility in order to generate budget savings.

While we were disappointed for our dedicated staff members at Cimarron, all of them have been provided opportunities to stay with the company and other facilities. We recognize that tough budget driven decisions have to be made when facing a significant budget shortfall. Although Oklahoma's prison population has declined as a result of COVID-19, the state continues to face challenges in their correctional infrastructure, and could very well utilize the Cimarron facility once there budget challenges subside. We have had discussions with a number of other safe partners about ways to quickly generate taxpayer savings in response to the budget challenges, and we are sure those discussions will continue. The COVID-19 pandemic has changed the typical playbook for corrections departments to respond to budget challenges because of the need for more physical space to ensure social distancing. There also remains a number of market opportunities as correction systems look to address their infrastructure challenges.

The State of Alabama is continuing its RFP process to partner with the private sector to build three modern large scale current facilities to modernize its system and close approximately 15 outdated faculties. An initial award, as the first facility for this procurement is expected in the next few months with subsequent awards being announced next year. And the state of Nebraska is actively pursuing a similar path for new corrections facility, but they are not as far as long in the procurement process. We anticipate similar opportunities will continue to come to market because nearly every state has significant portion of their correctional infrastructure that has reached the end of its useful life. Modern facilities provide significant operational cost savings due to thoughtful efficient design they cannot be retrofitted for older prison facilities. This is particularly relevant today with the threat of budget cut forcing government agencies to become more efficient. Also relevant today is a limitation older facilities have presented to system responsive the COVID-19 pandemic including limited medical facilities, concentrated housing areas and centralized HVAC systems hampering the ability to prevent the spread of airborne illnesses.

We expect that there will be growing appreciation for the need to modernize correction systems, especially after the COVID-19 pandemic subsides. Let me also make a comment on the Federal side of the safety segment. We were just awarded this week a new tenure contract with ICE at our T. Don Hutto Residential Center in Taylor, Texas. This is a renewal of a contract we have had in place for many years with ICE at this facility. We also expect in the next few days, the similar award from ICE for Houston Processing Center, which will also be a new tenure year contract and again, a renewal of a long held contract we have had ICE at this facility. And ICE is expected to make millions of dollars in investments in renovating the physical plant of each facility which reinforces their intensity to use the facilities over the long-term.

I now like to pass the call over to Dave, to provide a more detailed look of our financial results in the second quarter, and other recent trends. Dave.

David Garfinkle -- Executive Vice President and Chief Financial Officer

Thank you, Damon. And good morning everyone. In the second quarter, we generated $0.18 of EPS or $0.33 of adjusted EPS, $0.56 of normalized FFO per share, and $0.57 of AFFO per share. Adjusted EBITDA was $101.1 million per quarter. Adjusted amounts exclude $8.2 million of incremental expenses associated with COVID-19, non-cash impairments of $11.7 million $0.3 million of expenses associated with our evaluation of corporate structure alternatives, and a $2.8 million gain on the sale of a real estate property. Of the $8.2 million of COVID-19 expenses, $6.3 million represents the Hero Bonuses paid to facility line staff. Compared with the prior year, quarter adjusted EPS decreased $0.14 normalized FFO per share decreased $0.13, and AFFO per share decreased $0.10. As mentioned in our previous two quarterly earnings calls, we do not expect the elevated federal populations experienced in 2019 to be sustainable in 2020 and lowered our initial 2020 guidance from 2019 per share levels to reflect lower federal populations.

The decision by the Federal government effective March 20, 2020 to deny entry at the southern border for asylum seekers and anyone crossing the southern border without proper documentation or authority in an effort to contain the spread of COVID-19 has amplified the reduction in people being apprehended and detained by ICE. Declines in state populations and our safety segment and in Resident populations and case management services in our community segments, largely driven by COVID-19 also contributed through declines in per share results. Partially offsetting these reductions were new contracts signed with the U.S. Marshal Service and ICE in the prior year and the Mississippi in the first quarter of this year. Finally, a reduction in G&A expenses partly due to lower incentive compensation and partly due to reduction of certain other expenses such as travel due to restrictions imposed by COVID-19 resulted in savings relative to the prior quarter.

I normally don't review financial results compared to the previous quarter. But I do think this comparison is particularly relevant this quarter, since we do not begin to see the impact of COVID-19 until the end of March. During the second quarter adjusted EPS increase by $0.03 and normalized FFO per share increased $0.02 from the first quarter. Although no doubt COVID-19 has had an impact on our business. Occupancy in our safety and community facilities declined from 79% in the first quarter to 75% in the second quarter, translating into a decrease of 3337 average daily resident populations. Occupancy in our property segment remained at 97.3% both quarters. Total revenue declined to $18.5 million, or 3.8% from the first quarter to the second quarter. However, we were able to adjust our expense structure to align with the reduction in occupancy. As a reminder, our first quarter always includes higher unemployment taxes when base wage rates reset, resulting in a per share increase of $0.02 from Q1 to Q2. A new contract with Mississippi signed in the first quarter combined with lower interest in G&A expenses collectively accounting for about $0.03 per share were offset by lower populations in our safety and community segments.

As a result of these factors, adjusted EPS and normalize FFO in the second quarter outperformed in the first quarter. Although we have excluded the impact of COVID-19 expenses on our adjusted per share results, they are included in the operating margins and mandate statistics presented in our supplemental disclosure report. Our total facility operating margin would have been 25.3% for the second quarter, excluding COVID-19 expenses slightly higher than the 24.6% in the first quarter. Our cash flow was stronger in the second quarter. AFFO which we use as a proxy for cash flow after maintenance capex, but before debt repayments was $69.3 million compared with $70.3 million during the first quarter. Net cash provided by operating activities as presented in our statement of cash flows was $98.9 million during the second quarter compared with $75.4 million in the first quarter. With this increase including positive fluctuations in working capital balances.

The resiliency of the business is due to the essential nature of our facilities and services in our safety and community segments further enhanced by the diversification and stability of our property segment, with all three segments supported by the strong credit of our government customers. As of June 30th, we had $364 million of cash on hand after paying $51 million in dividends during the second quarter compared with $335 million as of March 31, 2020. At June 30th, we also had $154 million of availability on a revolving credit facility, which matures in 2023. Our cash balance reflects a partial draw that we made on our credit facility at the end of March out of an abundance of caution due to uncertainties associated with COVID-19 and to maintain maximum balance sheet and operating flexibility. We repaid $50 million of this draw in July and expect to continue to pay down the balance. Our leverage measured by net debt to EBITDA is 3.9 times using the trailing 12-months and we have no debt maturities until October 2022 and no material capital commitments.

Therefore we have no need and do not anticipate access in the capital markets in the short-term. We are on-track to achieve the 10% reduction in our maintenance capital expenditures mentioned on our last call which we expect to total $54 million split evenly between real estate and non real estate assets. Our 2020 capital expenditure forecast also includes approximately $7 million of tenant improvements and leasing commissions associated with new lease agreements unchanged from our estimates at the beginning of the year. Although we continue to perform well and generate significant cash flows, risks and uncertainties associated with COVID-19 remain. Operations in the Criminal Justice System have not yet normalized the southern border remains effectively closed in many state budgets will have significant holes to fill. As Damon mentioned, during the third quarter of 2020, largely due to a lower number of inmate populations in the state of Oklahoma was open from COVID-19 combined with the consequential impact of COVID-19 on the state's budget, we agreed with the state to idle our 1692 bed Cimarron Correctional Facility later this quarter.

Prior to the pandemic, we were negotiating with the state to provide them with additional bed capacity in the state at our Diamond Back facility. We also closed the 200 bed Oklahoma City Transitional Center during the second quarter, and during the third quarter consolidated the remaining resident populations that are 390 bed Tulsa Transitional Center to Oklahoma's System, either in their Tulsa facility. Other states could face similar challenges. During 2019. These three facilities generated net operating income of $2.8 million, so the closures won't have a material impact on our financial results. Although a much smaller segment at 3% of total NOI for the quarter, our community segment has been impacted by a larger percentage than the safety segment as the disruption in court hearings, as well as an overall desire to minimize movement within the system have resulted in a reduction in the number of referrals to our community facilities.

This resident population is considered lower risk. So governments have acted faster to transfer certain residents assigned for reentry facilities to non-residential statuses such as furloughs, home confinement or early releases to create additional space for enhanced social distancing within our reentry facilities. We cannot predict how long asylum seekers and anyone attempting to cross the southern border without proper documentation or authority will be denied entry. Therefore, it is difficult to quantify the impact of our more transient Federal offender populations. It is also difficult to predict the actions of our state partners in response to any outbreaks in public or private correctional facilities. And we cannot predict how long the criminal justice system will be impacted, or how long inmate population levels will remain below their pre-COVID-19 levels.

Because of all the uncertainties associated with our safety and community segments, we are continuing to suspend our financial guidance until we can produce more reliable estimates. However, we can provide some direction having gone through a full quarter under COVID-19. Offender populations continue to decline mostly due to a reduction in new intakes rather than early releases. Without the court system functioning normally, and with the southwest border still effectively close, we expect to continue to experience declines and offender populations in our safety and community segments. Although we are somewhat able to right size staffing levels, we believe it is important, especially at this moment to provide well deserved wage increases for frontline facility staff who continue to deliver critical services to the people entrusted to our care. Most of our facilities received wage increases July 1.

We are projecting margin compression for wage increases in an environment where it will be difficult to obtain offset and per diem increases. It is difficult to predict when but service levels will eventually normalize adding to our salaries expense. As previously mentioned, during the third quarter, we will ramp down our Cimarron facility, and we estimate operating losses of $2.1 million at this facility during the quarter because of the transition. Our operating margins will also be impacted by incremental expenses to procure Personal Protective Equipment and other miscellaneous supplies related to COVID-19, which we estimate to be $3.5 million to $4.5 million during the second half of the year, albeit at lower stress levels and reported during the first half of the year. Our G&A expenses will be negatively impacted by expenses associated with the evaluation and implementation of our corporate structure conversions from a REIT to a Taxable C Corporation, which we estimate to be $5 million to $6 million.

Note that we will exclude these expenses along with the COVID-19 expenses from our calculations of adjusted EPS adjusted needed and normalized FFO and AFFO as we did in the second quarter. Despite the pandemic, we continue to make progress on a number of business opportunities that will favorably impact the second half of 2020. On July 1, 2020, a new lease with the Commonwealth of Kentucky commenced at our 656 bed southeast Correctional Complex. Kentucky will operate the facility in our property segment under a 10-year lease agreement that contains five two year renewal options. This facility has been idled since 2012. Last month, the state of Mississippi exercised their second expansion option through October 4, 2020 for their management contracts and our safety segment, after expanding the contract from 375 inmates to 1,000 during the first quarter of 2020. Last month, the Idaho Board of Corrections authorized the Idaho Department of Corrections to enter into a contract with core service to care for Idaho offenders that are facilities in Arizona.

Although we have not yet executed a contract, we are optimistic that a final contract will be executed in the coming weeks with an expectation of receiving offenders at our Saguaro Correctional Facility shortly thereafter. The state of Kansas and Nevada, which we are both expected to return their inmate populations to the respective states upon expiration of their management contracts this year both extended them for another year from avail themselves of our capacity during the pandemic. Although not incremental for the second half of the year, Damon mentioned the renewal of a contract with ICE at our T. Don Hutto facility in Texas for up to an additional 10-years. And we expect a similar renewal of a contract at our Houston Processing Center under the same procurement in the coming weeks, both demonstrating the continued bed demand. Finally, we continue to pursue a longer term opportunity in Alabama to design build and finance construction for up to three new correctional facilities for the state, which the state would operate. We are pleased with the progress on this opportunity for our property segment.

We are one of two remaining bidders and remain optimistic in a contract awarded by the end of the year. Damon covered in detail our decision to become a Taxable C Corp starting in 2021. So I will conclude my remarks by pointing you to an investor presentation on our website that further describes the strategy. In it you will see among other things, our historical ability to repurchase $500 million of stock in the three years proceeding our conversions to REIT in 2013, because of our durable cash flows, we are confident the C-Corp structure will open new pathways to build shareholder value, including strengthening our balance sheet and improving our credit profile, returning capital to investors and investing in growth opportunities. We look forward to the potential to sell lower yielding noncore real estate outside of our correctional portfolio, possibly at levels accreted to FFO per share, which would accelerate the implementation of our revised capital allocation strategy. As we are seeing in this volatile time, CoreCivic has a durable business model and financial strength thanks to the essential nature of our services and facilities and the embedded in long standing culture of service excellence of our professionals.

I will now turn the call back to the operator, Casey to open up the lines for questions.

Questions and Answers:

Operator

[Operator Instructions] We will take our first question from Joe Gomes of NOBLE Capital Markets.

Joe Gomes -- NOBLE Capital Markets -- Analyst

Good morning. Thanks for taking the questions.

Damon Hininger -- President and Chief Executive Officer

Good morning Joe.

David Garfinkle -- Executive Vice President and Chief Financial Officer

Good morning Joe.

Joe Gomes -- NOBLE Capital Markets -- Analyst

Lot to digests here but let's start with the operating results and then maybe we will switch gears to the conversion. On the operating results, and looking forward I know the crystal balls is very cloudy today, but do you guys-when you are looking at you think that they are we are getting near a bottom on the ICE and U.S. Marshal type populations? They have declined I think the last time I have looked ICE was now below 22,000 on a daily pop versus in the 40s and is high as in the 50s last year, but just kind of get a little bit of your guys view on where we might be seeing a bottom on those.

Damon Hininger -- President and Chief Executive Officer

Yes, Joe, thank you so much for your question. And you nailed it and kind of framed it, looking into a crystal ball because that is exactly what we would be doing if we are-answer this. Kind of an obvious point. But all this is going to be also what happens nationally internationally is related to COVID-19. And then obviously the direction that that changes relative to CDC guidance and Federal state and local partners and in turn our government partners this one be an ICE. So it would be pure speculation and into a looking into a crystal ball to give any kind of view on that at the moment. But I would say what we are doing and things that we can't control is continue to kind of recalibrate our resources, our staffing and our services within these facility as appropriate based on direction from ICE. It is very clear.

And I think it is getting reinforced with this announcement, this last couple days with ICE on Hutto for a 10-year contract that our solutions, our capacity, the locations of these facilities and also the additional services that we can help them provide like courts and space for attorneys and case managers that this solution continues to resonate and with that they want to sign long-term agreements. So hard to give at the moment any kind of forecasts on populations. I mean, you can look at-I guess, when they kind of look at the trajectory is it has narrowed or I guess flattened a tad, but it continue to see kind of the decline based on all the reports. But I will let David Garfinkle with me on that to answer.

David Garfinkle -- Executive Vice President and Chief Financial Officer

So yes, I think the pace of declines is slowing a little bit. And Joe is a reminder we discussed last quarter, about two thirds of our federal contracts have guarantees if you are a fixed monthly payments. So we are protected on the downside somewhat. That is really to provide the capacity to the federal government in the event that they see a surge or an increase in population.

And I would say based on the conversations we have had with our federal government partners, they are expecting increases in federal populations eventually. The crystal ball and the challenge is predicting when that will occur.

Joe Gomes -- NOBLE Capital Markets -- Analyst

And have any of the ICE or U.S. Marshals so I just said you have a guaranteed minimum guarantees. But with the significant drop in decline have any of them come back to you yet to say, Hey, we want to renegotiate?

Damon Hininger -- President and Chief Executive Officer

No. So it is the contrary, and I would say kind of Dave's point we have had some conversations with folks in leadership and they are always preparing potentially what happens in the coming days, weeks and months with not only the pandemic but also going into 2021 maybe some outcomes in Congress and in the White House. So they are preparing and without working with us to prepare. Yes, the other thing I would say, again, just to kind of reinforce again, the attractiveness of our solutions the announcement this week of our contract at Hutto.

Again, we think we are probably there to right to get similar 10-year extension on our ICE contract at Houston. And then you probably saw to GEO had an announcement this week with South Texas. So two announcements already, a third one is about to come again, I think just reinforces the fact that ICE really wants to maintain the capacity they have got nationally for their detention system.

Joe Gomes -- NOBLE Capital Markets -- Analyst

Okay. And I'm going to switch gears over to the community segment. As you guys mentioned, you have seen a larger impact there. I noticed in a quarter you did take some impairment charges. If we start to see the community segment continue to see this bigger impact. Are we at risk of seeing more impairment charges going forward there?

Damon Hininger -- President and Chief Executive Officer

Yes, great question. This is Damon, I would again talk with Dave on this a little bit, but I would say the value and the desire by government invest in these facilities with this mission is really, really strong. I think you have probably heard me say, I have been with the company almost 30-years. The last 10-years has been very encouraging to me, because governors, legislators, folks at the federal level have that we want to put more investment on increasing programs, but also Rangers facilities, and that that message continues to be very strong.

But you do appreciate obviously, in a very tough fiscal environment, some of these jurisdictions has to make a really, really tough decisions, because obviously state level, they have got to close the deficit. They can't go year-over-year with a deficit. So, I don't see it as a widespread kind of potential action, but obviously something we are very sensitive and keep a close eye on in obviously the coming days or week. Would you add to that, David?

David Garfinkle -- Executive Vice President and Chief Financial Officer

Yes. The only thing I would add, I think as I mentioned in my script, the government's in the community segment had acted faster as a lower risk population. So I think they are more comfortable putting them on home confinement things. So we see it as a short-term drop in the community facility, and it can happen fast as I think our total NOI for the quarter was $3.8 million. So, for the company, it is not a significant number, but for the segments, as I mentioned, they are significant percentages. But eventually, we expect those populations come back.

Again, eventually, putting a definition on when is very difficult, but as Damon mentioned, we continue to see nationwide, that dialogue about helping people in prison transition to society and to be able to reduce recidivism rates is still a very important part of the dialogue. So I think they will continue to make investments in those facilities and we could see a resumption or populations returning to pre pandemic levels faster in that community segment even then in the safety segment.

Joe Gomes -- NOBLE Capital Markets -- Analyst

Okay. And on the cash flow, I think you think you have generated roughly 100 million from operations in the quarter. Are you kind of anticipating a similar level for the next two quarters?

David Garfinkle -- Executive Vice President and Chief Financial Officer

I said our AFFO was pretty much flat with what it was in the first quarter. The $98.9 million is what you are going to see in the statement of cash flows for Q2 where we represent a year-to-date through June 30th. So to back out the first quarter, that is the number you get close to 100 million. That did include some positive working capital fluctuations, so we collected on some receivables, our receivables actually very low at the end of the second quarter.

So I think going into the next two quarters, I wouldn't expect to see that level of cash flow in the statement of cash flows. Again, we don't have guidance out there, but as I alluded to, in our remarks, occupancies populations continue to decline. So it would be tough to say that we would achieved the same level of AFFO in Q3 as we did in Q2, but that is a little bit of crystal ball and that is why we don't have guidance out there, it is tough to predict.

Joe Gomes -- NOBLE Capital Markets -- Analyst

And guys, to be cautious took down the liquidity earlier this year. You recently paid back, 50 million you said, but you still have a significant amount of cash on the balance sheet. If you look at it prior to the draw down, why just pay back 50 why not a bigger numbers or something else out there that is keeping you wanting to have a large cash balance?

Damon Hininger -- President and Chief Executive Officer

Yes, great question, Joe. As I mentioned that that was a drawdown in the first quarter of an abundance of caution. Then we launched the evaluation of the corporate structure and what we are going to do with the dividend. And so it is something we have been thinking about and I totally expect in the second half year, we will continue to take that cash and pay down the revolver.

Joe Gomes -- NOBLE Capital Markets -- Analyst

Okay, and then let's switch gears prior to the credit conversion. Maybe you could just kind of walk us through a little bit more on the thought process and what other alternatives your financial advisor here brought to the table tables you guys to look at when you make the conversion, is there either a positive or negative from the cost perspective of being the C-Corp versus a REIT, maybe you can you can talk a little bit about those. It is about some of the new program services that you are talking about and maybe be able to grow into and your confidence and your ability to do those and who you'd be going up against to access those services.

Damon Hininger -- President and Chief Executive Officer

Absolutely. So this is Damon again, I will tuck-in with Dave on this, but answer of course, your questionnaire So, Joe, if you have heard me say and we have talked about this quite a bit, obviously that reinforces in my script. For I mean, this multiple for our stock is just not appropriate. I mean, you look at underlying real estate, and you look at the replacement costs of what it would take for government to replace that real estate. I mean, we are talking conservatively maybe three, maybe six, maybe up to $12 billion in our real estate is valued if you look at replacement costs. And so we are just not getting credit for real estate but also the services, especially in this environment COVID-19 that we provide to our to our government partners. And so it was that kind of with that context, you are talking about with the board of maybe us other alternatives to where we can kind of reallocate our cash flow and our capital in a more effective way to not only meet the needs of the business, but also think of some ways that we can return capital to shareholders in different ways.

Like, share repurchases, P&L and other example. And the models have been great, we are going to work with them along with places walk on its analysis. They have done a very thoughtful working along with team process to evaluate this and work with the board. It has been kind of multiyear discussion, but I would say probably in earnest has been probably last six seven months where we have really as in earnest talk about this alternative going to a C-Corp. And it is probably through got probably eight nine meetings, we had the board. So it was a very, very detailed discussion and good analysis. The other alternatives you probably heard talked about and kind of equity circles within our universe OpCo PropCo potentially going private. Those were alternatives. So we felt like this was one that just made the most sense we have got the board, the management team, and all that kind of key functions under one roof as a C-Corp. Second it is a structure we are familiar with. So we did 12-years before the actually 2013 we were at C-Corp.

So we know from a business perspective as part of your question, we won't miss a beat. So operations, responsibilities of all of our employees serving our government partners and people trust our care, we will do this and it won't impact them at all. They won't see any change and kind of operation as it relates to kind of day-to-day business activities. I guess the other thing I would say is that you look at this dead market. I mean, look at interest rates and holy cow. I mean, it is a lot of people with it is low rate interest environment are taking advantage of that and obviously doing debt deals in kind of historic low levels and getting a lot of debt that they are able to address kind of the needs for their respective organizations. But we are not seeing that and that we are seen that in a backdrop where we had a very meaningful increase in earnings and performance and 2019. And you are looking at just kind of the outstanding debt that is in the industry. I mean you are seeing kind of current yield out there 12%. And that is just crazy.

And so we thought-if we are not going to get any credit for a dividend yield, and we are also seeing just the bond market just not being kind of a appropriately calibrate from the risk perspective of our underlying real estate and the simple nature of our business that our government partners really require us. C-Corp potentially could be a right way where we can kind of control our destiny and kind of pave our way all the needs we have and also pay down debt appropriately. So I think, there were still a parts to your questionnaire, I think I have addressed most of that, but let me turnover to my colleague here.

David Garfinkle -- Executive Vice President and Chief Financial Officer

Obviously, I have got two things. So, G&A labor efforts and things like that the cost structure going forward is not material. In fact, it is probably nothing it is really just different I would say. Our finance department has to deal with the operating requirements as a REIT, so some back office things that we have to deal with in order to comply with the REIT requirements. As Damon mentioned, it has no impact whatsoever on facility staff, facility operations. They wouldn't even know the difference between what we are doing as a REIT or as a regular Taxable C-Corp. Different issues as a C Corporation and Taxable C Corporation. There are tax consulting engagements to try to attach plans. So I would say it is truly just a difference.

So I don't see it any different really, in terms of what G&A expenses we would be projecting under a Taxable C Corp structure compared with the REIT restructure. And then going back to the cost of debt that Damon was talking about. Under a C-Corp structure, we can self fund the business, we can retain our cash flows. As we mentioned the prioritization would be priority would be on paying down debt, but you get to 2.25 to 2.75 times leverage which is a very comfortable leverage, very low leverage, we can potentially see improved credit ratings from the rating agencies. But it should improve, it will definitely improve our overall credit profile and should reduce our overall cost of capital them.

So we like the ability to take control of our destiny rather than having to rely on the capital markets, which have become increasingly expensive. But if the capital markets are there for us, like Damon mentioned, if we are able to go out and issue data at a reasonable or very low opportunistic rates, we will take advantage of that, push out maturities and deal with the balance sheet like that. But under a Taxable C Corp structure, the important thing is we don't have to, we have to rely on the capital markets for those things.

Damon Hininger -- President and Chief Executive Officer

You know, one thing I would add Joe to is that, this is really significant step, but it is part of the other steps we have taken to kind of do this business. And so as you know, over the last four, five, six years, we have really taken some steps I think as we go into 2021 is really lower the risk profile even more so with the company. Notably, in last 10-years we have continue to kind of shy away from our managed only business. So the last 10-years-this is the time, I have been CEO, we have lowered our exposure to business. So this is again, the business that government owns real estate, we provide the service. We have lowered that by about 16 facilities about 20,000 beds.

It is just the top line. So we obviously hit revenues is about $240 million in annual revenues with those 19 facilities that we have transitioned back to the government. But this was your single-digit margin business and with that it had about 4000 employees and about $1 to $2 million in kind of annual capex for these facilities. So we have also put aside now with this completely kind of narrowing the May and July [Phonetic] business not only the capex need for the business against small, but significant, but also the risks with that business being a single digit margin. So that is one step. And then also, I think, as you and I talked about the Bureau of Prisons and the State of California with our state program both those partners individually are about 15% of our revenue in 2010 or combined about 25% or 30% of our revenue.

Today, I would say California is zero, and BOPs now only 2% of our revenue. So we have taken it again from about 25%-30% of revenue down to 2%. So the volatility with those partners obviously been taken down dramatically from a risk perspective. So those steps along with the one that we announced yesterday, we just think would really positioned the company going into 2021 to be really a lower risk and be able to control our own destiny in a very meaningful way.

Joe Gomes -- NOBLE Capital Markets -- Analyst

Very thoughtful. Thank you for those answers. I will step back and let someone else ask a few here. And thanks again.

David Garfinkle -- Executive Vice President and Chief Financial Officer

Thank you.

Damon Hininger -- President and Chief Executive Officer

Thank you Joe.

Operator

Thank you. [Operator Instructions] We will take our next question from Kevin Ken wrestling of Rubicon Partners.

Kevin wrestling -- Rubicon Partners -- Analyst

Good morning, gentlemen. Thank you for taking my call. Just a couple of quick questions about the debt levels that you are targeting. Based on what I'm seeing, and maybe I'm obviously working based on the numbers that I can green here. The level of debt reduction you are targeting is that if you are looking at the current numbers, or the trailing 12-months is that around we are looking at $800, $830 million.

David Garfinkle -- Executive Vice President and Chief Financial Officer

I'm not sure, which period of time you are talking about. But I would say this. In 2019 to regenerate over $300 million of AFFO which as I mentioned in my comments were used as a proxy for cash flow after maintenance capex but before debt repayments.

Our pre-pandemic guidance included AFFO say $283.5 million at the midpoint for 2020. Now will incur taxes so if you apply a 28% tax raise and 2019 pre-tax income, we would have paid an additional $15 million in annual taxes and $43 million if you applied it to the pre-pandemic guidance for 2020. So that will translate into slightly over $200 million of annual pay downs of debt.

Damon Hininger -- President and Chief Executive Officer

And let me, add a little bit to that answer and the previous too. I mentioned earlier about kind of, what we are seeing within the industry on kind of yield for outstanding bond maturities. I will tell you and virtually I bet everybody on the call knows this already. But if you watch our bond prices right now, in the last 30- days to 45-days, we are trading much tighter than others in the industry with this announcement. So the bond market, I think his hands are pretty loudly, they liked his idea of going back to a C-Corp and be able to control our destiny.

So I think that is, again, virtually I bet everybody on the call knows already, but if you follow the move in the last 30-days to 45-days, there is a delta, 500, call it 600 basis points of our maturity versus others in the industry. And so that, again, they just say in the bond markets to say and this is a really good step and kind of turn it on.

David Garfinkle -- Executive Vice President and Chief Financial Officer

Yes, and one more comment of mine. That didn't take into consideration the property sales. So we have identified that we call lower yielding, GSA government leased properties outside the corrections portfolio, that would only accelerate the capital allocation strategy. And we could even do those potentially creatively. So it is not like we are going to be killing the earnings by disposing of those properties because they are just lower cap rates.

And so we think we could potentially sell those potentially creatively but certainly not significantly dilutive while delivering the business at the same time. Like I said, accelerating the capital allocation strategy, getting to our target leverage ratio sooner, and being able to, at that point then do other things like buy back stock and pay dividends.

Kevin wrestling -- Rubicon Partners -- Analyst

Thank you for the color. I was referring to I guess the amount, the total amount that we need to reduce the debt by, so to go back to 2.25. So just if you look at, for instance, that the guidance you guys gave pre-COVID. And you applied those numbers and the 2.25, 2.75, what level of I mean, how much in that we are looking at like that would be required to be paid down over the next couple of years?

David Garfinkle -- Executive Vice President and Chief Financial Officer

Yes, I'm sorry, it would be about $500 million. If you go back to our pre-pandemic guidance, and split the baby on the 2.25 to 2.75 leverage, that would be about $1 billion so we have about $1.5 billion of that is recourse debt. So we would be paying down 500 million to get to that level, the targeted level.

Kevin wrestling -- Rubicon Partners -- Analyst

And then so once you sell those properties, and I think those properties, if we are talking about the same properties is a regionally guys paid for them about $428 million, those the properties you are talking about?

Damon Hininger -- President and Chief Executive Officer

Those are the properties we are talking about, that is probably I don't remember the exact number but that is in the ballpark for sure.

David Garfinkle -- Executive Vice President and Chief Financial Officer

And some of them they have debt on them. So that is how you are getting down to a net proceeds and you are assuming the whole portfolio. So, you pay off with the non-recourse debt, any defeasance costs and so forth. So, we are comfortable putting out we put in our press release, net proceeds after all that about 150 million could be more, could be less, but that is kind of a marker out there for us.

Kevin wrestling -- Rubicon Partners -- Analyst

Okay. So $150 million and then this year, the fact that this year, the debt was suspended, I'm sorry, the dividends were suspended above 100 million as well. So we are looking at 250. So that is, I guess, even without the conversion, you guys could already, like raise half of what the overall target is, if I understand correctly. Is that right?

David Garfinkle -- Executive Vice President and Chief Financial Officer

That is all right. And yes, I think we paid 100 million this year is I think we should we are saying for 200 million on an annual basis. So yes, I mean we can delever pretty quickly with the cash flow as the business generates.

Kevin wrestling -- Rubicon Partners -- Analyst

Right. I mean, it is your decision you guys made. Even without a conversion, you could have sold the properties get $150 million in equity, at least in them. And then because from a tax perspective, you don't have to pay any extra dividends. Even if you decide to continue with the REIT structure then that is another $100 million in cash altogether $250 million so that gets you halfway where you want to go. Is that right.

David Garfinkle -- Executive Vice President and Chief Financial Officer

Yes, I saw the 150 the dividend was 200. You are saying if we reduce the dividend or maintain the dividend?

Kevin wrestling -- Rubicon Partners -- Analyst

I'm saying even if you just-I mean, you guys suspended it and you could still retain the restructure until next year. I guess-the dividend at whatever level -

David Garfinkle -- Executive Vice President and Chief Financial Officer

Yes, that is right. I mean it would have been this year. So if we had suspended the dividend this year and resumed it next year, we would have saved $100 million dollars in dividends for the second half of the year. And if we are able to generate $150 million in net proceeds from the asset sales, that would have been a total of $250 million this year whenever you lose sales.

Kevin wrestling -- Rubicon Partners -- Analyst

Okay. And then so it seems you guys are going to go ahead with a conversion in next year. So beside this 150 this year and 100 next year, are you looking at what level based on the pre-COVID estimates or guidance. We are looking at the payout or I'm telling you they pay down of what a level of $160 million a year in cash. Is that what you are looking at?

David Garfinkle -- Executive Vice President and Chief Financial Officer

Yes, I would say it is probably $200 million a pre-pandemic level would have been about $200 million after taxes.

Damon Hininger -- President and Chief Executive Officer

I will say the question is at what 202 was like with the pandemic. But pre-pandemic it is appropriate number.

Kevin wrestling -- Rubicon Partners -- Analyst

So we are looking at reaching that debt level target, I guess the middle of 2022.

Damon Hininger -- President and Chief Executive Officer

Again, if you get to kind of back to normal level. And again that is the crystal ball question, you get the normal level in 2021 or I think extended. So it could be a little longer than that.

Kevin wrestling -- Rubicon Partners -- Analyst

Okay. Okay, that makes a lot of sense. And I guess the ultimate objective here maybe is to go to investment grade just to expand the universe of creditors that can invest in the debt?

Damon Hininger -- President and Chief Executive Officer

I think investor grade, it is a little bit hard nut to crack. And we did have a one time as a REIT. But we think the bigger goal is that this will get awarded for investment both in the bond and equity side is just to lower the credit profile to company period.

Now that leads credit rating upgrades investment grade possibly, but I will say that keeping we also want to do is control flow that is the lower credit profile of the company lower leverage and again kind of their away based on the needs we have with the debt maturities but also the need with the business.

David Garfinkle -- Executive Vice President and Chief Financial Officer

Yes, let me be clear, I think, we think we would be investment grade to the quarter to two and three quarters times leverage with the cash flow that we generate. But that is not MLBL be all. We are not going to continue to change levers policy if the rating agencies say you got to get a loan one time just as an example.

We are not going to manage the business to get to investment grade, we are going to manage the business to leverage level that we believe is appropriate and we believe our credit profile will be substantially improved with this decision because of our ability to retain our cash flows and uses it to pay down debt or for other things other than the mandatory dividend.

Kevin wrestling -- Rubicon Partners -- Analyst

Okay, understood. I guess the last question is more of a housekeeping. I know there was some issues with the a little bit Detention Center in New Jersey, what was the that center's contribution to FFO in 2019?

Damon Hininger -- President and Chief Executive Officer

I will let you answer that last part, I guess just to give a little bit of context there. So we got a lease with the current landlord through 2022. And then we have got the unilateral rights extend at least through 2027. So we have got visibility on that property for the next seven years, but I will let Dave answer your question.

David Garfinkle -- Executive Vice President and Chief Financial Officer

Yes, I mean, we don't-if it is-how many beds facility. 200 bed facility. So it is a relatively small facility. We don't disclose EBITDA by facility or facility that we continue to operate for competitive reasons, but it would not be material one, but it is one that we still believe that we are going to be able to retain.

Kevin wrestling -- Rubicon Partners -- Analyst

Okay, understood.

Damon Hininger -- President and Chief Executive Officer

Thanks you very much for your questions.

Kevin wrestling -- Rubicon Partners -- Analyst

Thank you.

Operator

Thank you. This concludes today's question-and-answer session. I will now turn the conference back over to Damon for closing remarks.

Damon Hininger -- President and Chief Executive Officer

Thank you so much, Casey, and thank you so much for everybody joining on the call today. In the coming days and weeks feel free to reach out to Cameron Hopewell or other members of the management team. With this announcement, we made today's happenings additional questions offline. And also just a reminder what Dave said earlier, we do have a updated investor presentation in website or has been uploaded and provide a little more color and context with the strategy with the conversion.

So with that, thank you so much for your continued interest and the support of our CoreCivic. Have a good rest of your day.

Operator

[Operator Closing Remarks].

Duration: 64 minutes

Call participants:

Cameron Hopewell -- Director of Investor Relations

Damon Hininger -- President and Chief Executive Officer

David Garfinkle -- Executive Vice President and Chief Financial Officer

Joe Gomes -- NOBLE Capital Markets -- Analyst

Kevin wrestling -- Rubicon Partners -- Analyst

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