Cameron Hopewell - MD, IR Damon Hininger - President and CEO Dave Garfinkle - CFO.

Tobey Sommer - SunTrust.

Good day, and welcome to the CoreCivic's Second Quarter 2018 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Cameron Hopewell. Sir, please go ahead..

Thanks, Travis. Good morning, ladies and gentlemen, and thank you for joining our call. Participating on the call are Damon Hininger, President and Chief Executive Officer; and David Garfinkle, Chief Financial Officer.

During today's call, our remarks, including our answers to your questions, will include forward-looking statements pursuant 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 first quarter 2018 earnings release and in our SEC filings, including forms 10-K, 10-Q and 8-K reports.

You are also cautioned that any forward-looking statements reflect management's current view 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 that we provide on our Investors page of our website at corecivic.com. With that, it's my pleasure to turn the call over to our President and CEO, Damon Hininger..

Thank you, Cameron, and good morning, and thank you to everyone for joining our second quarter 2018 conference call today. We are also joined here in the room by our Vice President of Finance, Brian Hammonds. CoreCivic is a diversified real estate investment trust specialized in delivering government real estate solutions to serve the public goods.

We are the country's largest owner of government-leased real estate assets, with nearly a 100 facilities totaling over 17 million square foot of real estate and a 35 years of history of delivering a broad range of solutions to help solve tough government challenges in a flexible, cost effective ways.

Our assets generate a consistent cash flow stream underwritten by investment grade government tenants.

We have three primary business segments that focus on corrections and detention facility ownership and management, a growing network of residential reentry centers that help address the America's recidivism prices and ownership of mission critical government leased real estate.

Our safety segment includes 51 correctional and detention facilities with a design capacity of 72,833 beds. Our community segment includes 26 residential reentry facilities with a design capacity of 5,214 beds.

In our property segment, taking into account recent acquisitions includes 25 facilities representing over 1.5 million square feet of real estate.

Over all of our segments, we have active agreements with over 125 government agencies which provides meaningful diversification not only in assets we own, but also significant diversification in our customer base. To briefly summarize, our second quarter financial performance.

We exceeded the high end of our guidance with normalized FFO of $0.57 per share.

Our adjusted EBITDA in the second quarter of $97.5 million significantly exceeded the high-end of our second quarter guidance of $93.4 million and grew from the $92.1 million in the first quarter of 2018 despite a sequential decline in the average daily California inmate [ph] population by over 900.

Our second quarter results outperformed our expectations principally due to increasing utilization trends across our portfolio for the United States Marshall service, startup related expenses at our Lee Adjustment Center for a new contract with the Kentucky coming in line with our expectations, and the timing of California's exit from our Tallahatchie County correctional facility being consistent with our forecast supported by stability and the balance of our portfolio.

Dave will provide a more detailed summary of our second quarter financial performance at the conclusion of my remarks. Also included in yesterday's earnings release was our updated full year 2018 financial guidance, represented an increase across all of our per share earning metrics.

We currently expect to generate normalized FFO per share of $2.29 to $2.33 and AFFO per share of $2.21 to $2.25. Dave will cover in detail the primary drivers of our guidance.

However, it is important to note our 2018 guidance does not include the potential impact of new contracts or acquisitions aside from the two new federal contracts we announced in June and July that will have a modest impact this year and a larger financial impact next year.

We continue to see a large amount of opportunities for new business in the market and we are actively pursuing attractive acquisition targets, all of which can contribute to future growth and diversification.

We are pleased to carry the second quarter earnings fee through to increase our full year 2018 guidance and believe recent business developments have positioned us well to continue to generate earnings growth next year.

In the last 18 months, we have been awarded five new state contracts to utilize existing capacity, representing incremental utilization of approximately 2200 beds and one new state contract to construct a 2432 bed correctional facility that will be leased to state of Kansas under a 20-year lease agreement.

The largest two new contracts for existing capacity completed their ramp up during the second quarter. We completed the activation of our 816 beds Lee Adjustment Center Kentucky and reached normalized occupancy levels. We also completed the ramp up of our new 996 bed contracts with the state of Ohio at our 2016 bed Northeast Ohio Correctional Center.

We are very pleased with the performance of our facility operations teams throughout the ramp up of both facilities and we expect these new contracts to contribute to earnings growth in the second half of this year.

During the second quarter, we continue the side work for our new facility development project in Lansing, Kansas following the development and 20-year lease agreement we were awarded in January.

The $155 million to $164 million project to replace the state's existing 150-year-old plus prison is proceeding on schedule with the first quarter 2020 completion date. And we are pleased with the progress of our team and our construction partners.

During the second quarter, we closed on the private placement of $159.5 million, a non-recourse senior secured notes that will be used to fund the project. Especially in an environment of rising interest rates, we were extremely pleased to finance this project with 20-year bonds at a yield to maturity of 4.43%.

In the last 60 days, we have also been awarded two new federal contracts that are scheduled to ramp up in the second half of this year and are expected to contribute meaningfully to earnings growth to 2019.

In June, we are awarded a new contract with United States Marshall Service at our Tallahatchie County Correctional Facility in Mississippi to house 1350 prisoners with the option of 1000 additional populations should additional capacity be available.

The new contract is governed by an inter-government agreement between the Tallahatchie County Correctional Authority and United States Marshall Service and has an unusual period of two years with unlimited two-year extension options.

Both the Federal Bureau of Prisons and the Immigrations Customs Enforcement are authorized to utilize this contract should they have need to rise. In fact, ICE is currently housing over 500 detainees at the facility under this contract.

In July, we are awarded a new contract with the Federal government to utilize the portion of our 3060 bed La Palma Correctional Center in Arizona. Under the agreement ICE currently expects to house up to 1000 adult detainees at the La Palma facility as bed capacity becomes available.

The facility is currently occupied by approximately 2300 offenders from the State of California, but the state has indicated to intense to exit facility by January 2019 due to projected population reductions in the state's system.

We started the ramp with ICE in the last 10 days and we currently care for over 100 ICE detainees at the La Palma facility. The La Palma facility is the fifth and final company-owned facility that has provided capacity to populations for the state of California out of state which at its peak had its carrying for nearly 11,000 inmates for California.

With this new contract - with the federal government, we have now secured new contracts with multiple state and federal partners for all five of these facilities substantially removing what has been an earnings headwind for the last three years as well as further diversifying our sources of revenue.

Despite these headwinds, California has been a meaningful partner to us and we stand ready to serve their needs should they continue.

Across these seven new federal and state contracts, we expect to utilize approximately 4500 beds in our CoreCivic safety portfolio, which is clearly one of the strongest business development performances we've had in a number of years.

However, there are still a large number of new market opportunities available in the near-term and we still have a significant math of available capacity to meet those needs.

We believe these opportunities could lead to mutual increases in our long-term cash flows because of our approximately 10,000 beds available at idle facilities and more than 3,000 beds at partially utilize facilities that could effectively provide solutions for these opportunities without the need for additional capital deployment.

I'll first discuss state level opportunities. Earlier this year, the Commonwealth at Puerto Rico issued an RFP to move up to 3200 inmates off the island in order to reduce the annual budget further to public corrections and rehabilitation.

This budget reduction initiative is part of a larger effort by the Commonwealth's Governor to address the territory's debt prices, which is impacting essentially all of the government agencies and their operations. The RFP calls for an initial phase of 1300 inmates to be housed off the island beginning this year.

Upon full implementation of the RFP, the Department of Corrections estimate annual budget savings of approximately $50 million. We have responded to the RFP and believe our response is compelling, not just for the cost savings for the Commonwealth, but also to provide a more humane and more robust programmatic environment.

We believe an award could be announced in relatively short order and we believe, we are uniquely positioned to meet this urgent need. Earlier this year, the Vermont Department of Corrections issued an RFP to house up to 350 inmates due to over-crowding of the state's correctional system.

The inmate population is currently housed under a separate contract between Vermont and the State of Pennsylvania that is scheduled to expire this fall. We have responded to the RFP with available capacity in our facilities and are awaiting a final decision.

With the successful ramp of our 816 bed Lee Adjustment Center completed and the Commonwealth of Kentucky have an additional need for capacity in our system due to overcrowding, we have the opportunity to market our two remaining out facilities that are located within the state.

The Marian Adjustment Center and Southeast Kentucky Correction facility have a combined capacity of approximately 1500 beds and Kentucky's need for additional capacity far exceed this capacity. We are also in active discussions with a number of other states that have correctional capacity needs that could materialize over the next 12 months.

In terms of estimating the magnitude of these needs, we've had discussions with multiple other states looking for between 1000 and 2000 beds individually. We are also in a process to responding to a new RFP for a 1931 bed managed only opportunity in Delaware County, Pennsylvania.

Although, we have exited a number of managed only contracts in recent years, we carefully evaluate each opportunity that comes to market and consider them submitting their proposal on a case-by-case basis.

The facility is currently operated by another private provider under a contract expiring at the end of the year, so we expect an award announcement to be issued later this year.

Looking next at opportunities for CoreCivic Safety at the federal level, our recent contract wins with the United States Marshall Service and Immigration Custom Enforcement clearly indicate both agencies have experienced increased capacities recently and are projecting their needs will continue to grow.

United States Marshall Service averaged daily increased their population average ratio, I should say has grown substantially in 2018 from 52,000 at the beginning of the year to approximately 57,000 as of June 30th.

Multiple CoreCivic facilities with Marshall's contracts are already in place have experienced an increase in Marshall's populations and have capacity available to accommodate additional population's growth and our new contract with the Marshall at Tallahatchie is expected to ramp up in the second half of the year.

Should the agency have additional capacity needs, we have multiple facilities that could accommodate this growth.

ICE gradually increase its utilization of our detention capacity in the first half of 2018 and with the new current track for 1000 beds at La Palma facility, we expect their utilization will continue to increase in the second half of the year.

We are in the time of year during the hottest summer months for the rate of activity along the South West border typically experiences modest decline. This summer has seen above average temperatures in the South West. So, it is likely we will see the seasonality again this year.

This short period of seasonality aside, ICE is actively pursuing additional capacity as agency's projected continued growth and their detention capacity needs. Finally, with the Federal Bureau of Prisons, there are two outstanding procurements.

CAR XIX is a re-bit of the managed only 2355 bed [ph] facility in California, which is currently operated by MTC. Responses were due to the BOP last year and follow-up discussion notices with the Bureau have been ongoing.

CAR XIX is a procurement that was issued in 2017 and is intended to provide additional bed capacity from a private sector to alleviate overcrowded conditions and BOP operated facilities and to increase utilization of the Bureau's most cost-effective beds.

We believe an award announcement for both of these opportunities will come in the first half of the federal fiscal year. As a reminder, today we only have two contracts with the BOP for correctional capacity representing 5.6% of our total revenue. Clearly, there is a lot of positive activity ongoing in our CoreCivic Safety segment.

But we also have a number of attractive opportunities in our other two business segments, CoreCivic Properties and CoreCivic Community.

The CoreCivic Properties which specializes in the development, construction and maintenance of mission critical real estate lease to federal, state and local government agencies, there are at least six other states publicly discussed in a public private partnership approach as a powerful solution to replace their aging prison infrastructure.

A solution similar to the ongoing prison development project we have in Kansas. We've made great progress in marketing this solution to jurisdictions given that until January this year, no transaction of this kind had ever been done or been achieved.

The runway for opportunities in this market strictly looking at the replacement of out-of-date criminal justice infrastructure is substantial.

Collectively, we estimate $15 billion to $20 billion required investments are desperately needed for these types of facilities to make them safer for staff and inmates alike more efficient and provide the kind of reentry programming space we know can help people better prepare to rejoin their communities.

We believe public, private partnerships similar to what we accomplished with Kansas are the key to solving this national infrastructure challenge.

In addition, we have existing idle correctional facilities in Colorado, Oklahoma, and Minnesota, or we continue to pursue opportunities to leases capacity to these respective state departments of corrections. As all three have a need for additional correctional capacity in their system due to overcrowding and or aged infrastructure.

And we aren't simply limiting the growth of potential - growth potential, of course properties to the criminal justice sector. We are also pursuing growth of this business segment through the acquisition of other government lease assets with the bias towards those that are mission critical.

Growth in this area will allow us to leverage our extensive real estate management and maintenance capabilities, as well as our 35-year history of developing real estate solutions for government agencies. So far this year, we have acquired 13 properties lease to federal and state government agencies representing over 367,000 square feet.

These leases provide predictable stream of cash flows through the long-term lease agreements with investment grade government tenants, resulting in an attractive risk adjusted returns to our shareholders.

We are aggressively pursuing additional opportunities to grow this portion of the business between the real estate assets lease by the federal government GSA and similar real estate lease by states and local government agencies, the addressable market for a potential acquisition is substantial and we are actively pursuing multiple investment opportunities.

In CoreCivic Community, we were quiet on the acquisition front in the second quarter. But we continued the integration of Rocky Mountain Offender Management Systems, a provider of non-residential community based correctional alternatives which we acquired in January.

This process is going quite well, and we've had positive discussions with our existing partners about this new service capabilities and how they could potentially utilize these surfaces.

We are continued to pursue acquisitions of additional community corrections facilities and providers of alternatives to detention incarceration services in order to expand the footprint of the CoreCivic Community segment and the solutions we can provide.

As you can see, we have experienced very positive developments across all three business segments for a new contract awards, increased utilization and accretive M&A transactions.

Coupled with the fact that the utilization of our existing contracts has been mostly stable, we believe these positive developments have put us on a trajectory of cash flow growth over the next year. Another positive development has been the help of the overall economy improving the fiscal conditions of our government partners operating budgets.

The strong labor markets and increase in state budgets have provided the best environment in many years for contractual inflators being appropriated for contracts. The contractual inflators in state contracts typically be go in effect at the start of the state's fiscal year which is typically July 1st.

This is a trend we have seen over several years, but the trend appears to have accelerated this year as growth in the overall economy has accelerated and the nations' unemployment rate has declined.

Now like many corporations of course, this has also created labor challenges for us in certain locations requiring us to make market adjustments when necessary, something we expect will continuously - and we continuously monitor and take closer look at this going forward.

At this time, I'll turn the call over to our CFO, Dave Garfinkle to provide an overview of our second quarter results and our updated full year 2018 financial guidance.

Dave?.

Thank you, Damon and good morning, everyone. In the second quarter, we generated $0.36 of adjusted EPS compared to our guidance range of $0.33 to $0.35 and $0.02 ahead of the first call consensus estimate. Normalized FFO totaled $0.57 per share compared to our guidance range of $0.53 to $0.55 and $0.02 ahead of the first quarter consensus estimate.

AFFO totaled $0.55 per share compared to our guidance range of $0.50 to $0.52. Adjusted EBITDA was $5.1 million higher than the mid-point of our guidance for the second quarter reflecting strong operating performance.

Q2 2018 adjusted amounts exclude charges of a $1 million associated with the amendment extension of our credit facility executed in April, $800,000 of M&A expenses and $1.6 million of asset impairments while Q2 2017 adjusted amounts exclude $300,000 of M&A expenses.

Our financial performance succeeded forecast partly due to higher federal populations in our course of exceeded key portfolio.

Notably, our per share results exceeded expectations even though we retain staff at our 2672 bed Tallahatchie County Correction Facility in Mississippi longer than previously anticipated as our prior guidance contemplated the complete phase out by California beds facility by June 30th.

While our California did impact transfer all 1300 inmates out of this facility we retained staff throughout the quarter while we negotiated with a number of potential new customers to ensure a smooth transition with experienced staff if we were able to secure one or more new contracts. On June 14, 2018, we announced a new contract U.S.

Marshall Service to care for up to 1350 offenders at this facility, essentially replacing the vacancy of California populations with the ability to utilize additional beds subject to availability.

At June 30, 2018, we also cared for 200 additional offenders at the Tallahatchie facility under new contracts utilized by the States of South Carolina and Wyoming as well as the U.S. Virgin Islands and are in discussions with additional state customers with needs that could potentially result the utilization of the remaining capacity.

When compared with the prior year quarter, earnings were positively impacted by higher U.S. Marshall's populations across the portfolio and a new contract with the State of Ohio for up to 996 offenders at our North East Ohio Correctional Center that commenced during the third quarter of 2017.

The positive impact of these population increases was offset by start-up activities in the current quarter at the Lee Adjustment Center pursuant to a new management contract with Commonwealth of Kentucky. The transition from California populations the new federal and state populations at our Tallahatchie facility.

The termination of the contract with the Bureau of Prisons at our Eden Detention Center effective April 30, 2017 and higher interest expense.

The increase in interest expense primarily resulted from the repayment in October 2017, a variable rate short-term borrowing under our revolving credit facility with net proceeds from the issuance of $250 million, 10-year unsecured notes at a fixed interest rate of 4.75%.

Financial results also included six M&A transactions since the end of the second quarter of 2017 through the end of the second quarter of 2018 with an investment totaling $88.6 million for five residential reentry centers, four government lease properties and a company that provides non-residential correctional alternatives including electronic monitoring and case management services.

Of these nine properties, four are residential reentry centers, that we owned and operate under our course of CoreCivic Community portfolio, and five of our properties operated by third-party tenants under our CoreCivic properties portfolio.

Our CoreCivic community portfolio generated 6.1% of our adjusted EBITDA during the second quarter of 2018, which as of June 30, comprised of 26 residential reentry centers we owned and managed with the total design capacity of 5,214 beds in six states and the aforementioned non-residential Correctional alternative subsidiary providing electronic monitoring at case management services.

Our CoreCivic properties portfolio, generated 9.1% of our adjusted EBITDA during the second quarter of 2018. Subsequent to quarter end, we acquired a portfolio of properties for $12 million a 100% leased to the U.S.

Federal Government, through the GSA on behalf of the Social Security Administration, the Department of Homeland Security and Immigrations and Customs Enforcement. We expect these 12-property portfolio acquisition to achieve a cap rate in excess of 10% well above our target return for GSA leased assets.

Following this acquisition, our CoreCivic Properties portfolio comprised 25 properties leased to third-parties, totaling 1.5 million square feet in 10 states. The CoreCivic Properties portfolio was 99.5% leased during the second quarter of 2018 with very stable cash flows under leases with fixed monthly rents.

At June 30th, we had $71 million of cash on-hand and nearly $700 million of availability on our revolving credit facility and no debt maturities until 2020. We have a strong balance sheet with leverage of 3.7 times and fixed charge coverage of 5.2 times using the trailing 12 months.

We are in excellent position, to grow our cash flows through the utilization of idle bed capacity, in an environment with increasing demand and have the flexibility to take advantage of M&A and other growth opportunities that require capital deployment.

We continue to build the pipeline of government leased property acquisitions, which generate cap rates in the market generally from 5% to 8%, depending on property characteristics enabling us to achieve levered returns that exceed our weighted average cost of capital utilizing non-recourse secured debt.

We also have an active pipeline of investments that fit in our CoreCivic community portfolio that we would expect to finance with our corporate balance sheet.

Our capital expenditure forecast, which is included in the press release, includes approximately $15 million of capital expenditures for the remainder of 2018 for construction of the new Lansing Correctional Facility in Kansas, which is progressing on budget and on schedule to be complete in the first quarter of 2020.

This project has a total estimated cost of a $155 million to a $165 million, $12 million of which has been incurred through June 30th, under a guaranteed maximum price contract with the developer.

The project will be a 100% financed with the previously disclosed private placement, which closed in the second quarter of 2018, and will be drawn in quarterly installments to align with construction expenditures.

Moving next to a further discussion of our earnings guidance, as indicated in the press release, adjusted EPS for the third quarter of 2018, is in range of $0.37 to $0.39. normalized FFO per share guidance for the third quarter, is $0.57 to $0.59 and AFFO per share guidance for the third quarter is $0.55 to $0.57.

for the full year, adjusted EPS guidance is a range of a $1.47 to a $1.51 an increase from our May guidance, of a $1.42 to a $1.48. Full year normalized FFO per share guidance, is in range of $2.29, to $2.33 up from our May guidance range of $2.24 to $2.30.

and full year AFFO per share guidance is $2.21 to $2.25 up from our May guidance range of $2.17 to $2.23. our updated full year guidance reflects the $0.03 beat in Q2, carrying through to the full year and additional increase of $0.02 to $0.04 for the new contract with the U.S.

Marshall Service at our Tallahatchie facility, partially offset by $0.02 for our faster ramp down of California populations forecasted at our La Palma Correctional Center and the transition to a new federal contract at this facility as it ramps up populations during the second half of the year.

Our updated full year guidance reflects an increase in adjusted EBITDA by $8.3 million of the midpoint compared with our May guidance.

Elaborating further on California, as we discussed on our last earnings call, because of projected lower inmate populations in California's Correctional System, our previous forecast reflected a reduction in California inmate populations in our 3060 bed La Palma Correctional Center to 1500 inmates by December 31, 2018 which was based on the proposed fiscal 2019 budget issued by the governor of California in January, calling for the phase out of the La Palma Facility by fall 2019.

Governor Brown signed the state's fiscal 2019 budget in June which calls for the removal of the California populations at our La Palma facility by January 2019. Our guidance generally conforms with the state's final budget and now reflects a reduction to about 450 inmates by December 31, 2018. A faster reduction at La Palma than our previous forecast.

However, on July 24, 2018, we announced that we entered into a new contract with the federal government to utilize a portion of the beds expected to be vacated by California at the La Palma facility. Our forecast reflects the ramp up a federal population close to 1,000 offenders by December 31, 2018.

This faster reduction in populations from the state of California and carrying costs while we ramp up federal populations during the third and fourth quarters resulted in a $0.02 per share reduction from our May guidance.

Obviously, we stand ready to assist California with their needs and if California does not ramp down as quickly as we have forecasted there could be upside to our guidance. As of yesterday, we cared for 2,300 California inmates that the La Palma facility down from 3,000 as of the beginning of the year.

Revenue from California state program is expected to generate 3.6% of our revenue in 2018, and about 1.5% of our revenue in the fourth quarter of 2018. As Damon further described, we continue active discussions with potential customers at both the federal and state level to utilize our idle facilities and available capacity.

However, our guidance does not include any new contracts beyond those previously announced because the timing of government actions on new contracts is always difficult to predict. Depending on the location, new contract awards could also come with startup costs that are not included in our guidance.

In addition, although we continue to pursue a number of attractive investment opportunities that are creative to FFO per share using our long-term weighted average cost of capital, our guidance does not include any new M&A activity beyond those already announced.

The adjusted EBITDA guidance in our press release enables you to calculate our estimated effective income tax rate of 4% to 5% and provide you with our estimate of total depreciation and interest expense for the third quarter and full year 2018. We expect G&A expenses to be approximately 5.5% to 6% of total revenue.

I will now turn the call back to Damon for closing comments before opening up the lines for questions..

Thank you, Dave. Now before I open the call up for Q&A, I would like to take this opportunity to discuss recent coverage of federal immigration policies in order to clarify the valued, but limited role CoreCivic plays in the country's immigration system.

While we know, this is a highly charged emotional issue for many people, much of the information about our company being shared by special interest groups is outright wrong and politically motivated, resulted in many reaching misguided conclusions about what we do.

To be clear, none of our facilities provide housing for children who aren't in the supervision, under the supervision of a parent.

The only facility of ours that houses children is our South Texas Family Residential Center, a facility that was built in 2014 with a family residential mission at the request of President Barack Obama's administration to help the country address a humanitarian crisis along the South West border, which is intended to maintain family unity, while federal authorities conducted initial steps of the asylum termination process.

At no point in time do we house minor children in absence of the child's parent. Additionally, CoreCivic does not advocate for or against legislation or policies that determine the basis for or duration of an individual's detention. We do not enforce immigration laws or policies or have any say whatsoever in the individual's deportation or release.

CoreCivic does not know the circumstances of individuals when they are placing their facility and our responsibility is to care for each person respectfully and humanely while they receive the legal due process they're entitled too.

Our ICE facilities are under consistent operational oversight and held accountable to federal performance based national detention standards. And in the case of our South Texas Family Residential Center, we are also held accountable to federal family residential standards.

Each and every one of our ICE facilities are required undergo regular review and on procedures and we are proud of our operation performance. The fact is our sole job is to help the government solve problems in ways it could not do alone.

To help manage unprecedented humanitarian crisis, dramatically improve the standard of care for several people and meet other critical needs efficiently and innovatively.

We have done this same mission for more than 35 years working with both Democrat and Republican administrations to operate to two facilities for ICE and as predecessor Immigration and Naturalization Service, an agency that was founded in 1933.

CoreCivic's very first contract was with INS at our Houston Processing Center, a contract we still have to this day because of the quality of service we have provided to the federal government for more than three decades.

Having set the record straight on this often-misrepresented topic, I'll turn the call over to our operators to open the lines for questions..

Yes, sir. [Operator Instructions]. Our first question comes from Tobey Sommer SunTrust..

Thank you. With respect to occupancies. First topic, I'd like to ask you a question about. It sounds like you think you can hold the games year-over-year. And I'm curious Damon where you think occupancy can be in maybe not just 12 months, but 24 months? Thank you..

Absolutely Tobey. Thank you very much for your question. So, as you know we've got about 10,000 beds and kind of round numbers for idle facilities about 3000 beds and facilities that are partially utilized.

And I think if we think about kind of the line of sight that we've got with existing facilities for partially utilized which we've talked about before, Puerto Rico from kind of active opportunities plus the couple of that are off-market. And then also kind of mid to near-term with BOP and CAR XIX and some other activities we see at the federal level.

We think there is a path to north of 90% occupancy within the CoreCivic Safety portfolio. We've got two or three facilities kind of look at a different way.

two or three facilities that have probably near-term don't have any marketing opportunities notably with Minnesota, with our first facility, our Commerce City [ph] in Colorado and our Torrent [ph] facility. All three of them are being marketed could be opportunities, but I don't see anything probably the next prior to 6 to 12 months.

But if you back out those three facilities occupancies potentially could be in the CoreCivic Safety kind of in the 90% to 95% range. So, hopefully that gives you kind of least - kind of indication of what potential opportunity could be over the next 24 months..

It does. Thank you. And as a follow-up with respect to changes in occupancy. What's a good rule of thumb for what each point in occupancy to mean for profitability metrics, whether it's EBITDA or FFO per share. And I know there are some variability as to contract per DM who the customers, the location et cetera.

But any kind of ranges that you can give us there?.

Yeah, Tobey. This is Dave. But you've raised kind of the multiple variables that go into that calculation whether the facility is going to be an owned and managed facility, whether it's going to be leased facilities generally lower EBITDA. And I would use probably EBITDA is probably the easiest calculation.

But while a 1% increase in our occupancy we've got about 78,000 beds so that be about 780 offenders. If you apply the average margin in Q2 which we posted on our supplemental disclosure report on our website, so Q2 the average margin was $20.18.

So, if you apply that $20.18 to 780 offenders that would be about $5 million to $6 million of additional EBITDA. Obviously, the number will be lower if you're activating a facility and its underutilized because you'll have lower margins as opposed to higher facility when utilization is maximized.

So, if the 1% is coming from a facility RE operation, let's just say that, the number could be up to twice as much of that, a $10 million to $12 million..

Thank you. And wanted to kind of switch topics and talk about per DMs which were up. Could you talk about the trends that are allowing that to happen and whether or not you see momentum there continuing. Thanks..

Absolutely, Tobey, this is Damon. So, I'll tackle that one and I'll give you two observations. The first one is just generally we're seeing state budgets improve throughout this country and notably with our partner agreement that we have with about a dozen various states.

And so, with that the discussions that we've had during this spring have been very, very encouraging and good support there to not only give us an increase but with that saying, we're going to raise ours as appropriate because of the trends we're seeing in the labor market and so that'd be my second point.

The labor market being a business where we work with customers who do this themselves they're obviously feeling pressures like we are with the labor market and so we're somewhat aligned very aligned I should say with our state partners on the corrections leadership when we go to the legislature and others to talk about fund increases because increases that we have in our contracts and have built some of those pressure on labor side they're looking also for increases on the safe side just to deal with public employee that are feeling the same type of labor pressures with the most respective jurisdictions..

Okay..

Tobey, actually one more thing is that we went back I didn't say on my script when we went back probably a 5,6 maybe 7 years where we've had this type of kind of positive movement on escalators on our state contracts..

Okay.

And do you think that is there I think does the economy holds up do you think there'd be an opportunity for it's kind of an above recent average increase next budget cycle?.

I would say it's probably going to be, they're pretty close in line with CPI so I think yeah you got to get some jurisdictions if you got a little more tightness and maybe more activity on the labor market than others then you maybe a little above the average but I think generally if I think about the whole portfolio it's probably in line with CPI..

Yeah, and most state budget's years begin July 1st, so we've already seen those in Q3 obviously we reported those but as Damon mentioned it was as good year we've seen as in many years for appropriations getting funded for CPI increases..

Okay.

I was wondering if you could comment on the M&A pipeline the amount of activity you're seeing at the property or deal sizes changing?.

Absolutely. This is Damon again.

So, I would say continues to increase, the amount of activity that our folks internally are bringing us whether it's a deal opportunities, I'd say it is generally continuing to increase during the course of the year and so just kind of give you a sense of size, we've looked at portfolios where we got multiple properties of course as large as 15 so up to 15 properties in a portfolio and we've looked at kind of transaction size in kind of the range of $10 million to $20 million kind of on a low end up to $0.5 billion, in fact kind of near-term we're looking at some opportunities that are in a range of kind of $50 million to $250 million.

So those are very active market.

And as you know we've gotten some opportunities at the federal level, but also the state level and we think that there is obviously a few players that the federal level looking at these assets, but as the state and local level we don't think there is much competition, so we think good opportunity kind of mine per value for some of these opportunities and bring a lot of expertise to the tables owners..

Thank you.

Dave, I think you mentioned something about potential incremental 2019 impact from recent contract wins and in the ramping of those, what is the knowable kind of incremental impact from those for next year in terms of FFO?.

Well the knowable ones are the United States Marshall Service and Tallahatchie that was a $0.06 to $0.10 FFO per share increased for a full year basis. Then we've got the new contract with federal government at La Palma that's going to be offset by the decline at La Palma.

So, those populations and that's what we estimate to be 1000 inmates or detainees at La Palma from the federal government that would be replacing at the beginning of this year 3000 California inmates.

So that's probably a net negative unless we're able to enter into new contracts and Damon talked about some of those opportunities that we're very optimistic of getting that could be incremental to La Palma.

Obviously, Ohio and Lee Adjustment Center, two contracts really stabilize occupancy capped out on those contracted capacities in the second quarter. So those will be a full year impact in 2019. I think those are probably the most notable..

Okay. The shifting gears to Puerto Rico. You talked about the savings.

There have been some media reports that you are front runner for the initial phase, I was wondering if you could speak to that and what the likelihood is for Puerto Rico to execute kind of the full scope of the contract as they've articulated, it's a bigger number than the initial challenge?.

Very good, Tobey. This is Damon again. Thank you for this question. Yes, so Puerto Rico, let me answer maybe the last half first, we think that there is a real, real need for this solution.

Puerto Rico has had some fits and starts in the past as they thought about solutions off the island, but we think the timeline they've laid out from the first part of year to the issuance of the procurement, some of the public statements made by the governor and other leadership within the Commonwealth, and the timeline they followed, I should say, also with the procurement with the due date, with the tour facilities.

They have kept pretty close to that timetable. So, it's kind of back to the first point.

We think this is a real opportunity and a real need and a really great way we can provide a great solution for them, as you all know as you know, I should say, Tobey, it's just been really challenging for the Commonwealth, now for their fiscal situation, but also with these recent hurricanes and how it's really put a lot of stress on their infrastructure.

So, we're in active discussions with Puerto Rico. We think are we are well-positioned for really two key reasons. One is, we know Puerto Rico really well. We've been working with them off and on over the last 20 plus years, both on the island and off the island. And so, we think we bring a lot of expertise to the table.

And then the second thing is that since I do want to move fairly quickly, we think and pass it is that we've got available two day, where we could ramp up, immediately puts us in a great competitive advantage. So, we're hopeful. Again, a discussion has been very positive. We think that the urgency and the need is really there.

And we also know that they're looking at our other jurisdictions where we do work. These last 18 months where we've gotten these five new state contracts, those haven't happened by accident, because we've provided really good high quality, great programmatic solutions to the government partners.

And so, when you get five new agreements, people like Puerto Rico and Vermont, they're talking to those folks and how the experience been and so we think that also has been working to our advantage with this momentum we've got on the safe side. So, stay tuned.

We are in active discussions and hopeful that they move forward here reporting of the year [ph]..

Okay. Two last questions for me and thank you for taking them. One on the replacement bed opportunity.

Are there any characteristics of the Kansas arrangement that might change or be different in the replacement conversations that you're having now? In personally, I'm kind of I have one in mind? Is it possible that the company CoreCivic could retain long-term ownership? And then my last question is with respect to BOP inmate populations.

Do you think they're going to increase over the next couple of years? Thanks..

Absolutely, totally. So, this is Damon again let me, I'll tackle both of those. So, the first one to your question on other jurisdictions looking at kind of Kansas like solutions.

Yeah, everyone is going to be very different when they we've learned in our travels around the country and marketing the solution to places like Alabama and Vermont, Wyoming and Kansas some of the jurisdictions are talking publicly about a need for this replacement capacity.

Every jurisdiction is different and some of the pressures and challenges and constraints they have not only on the project itself, but also the lease and how they lease those facilities we think are going to be very different. So, our view is, let's get in front of these jurisdictions. Let's introduce ourselves.

Let's talk about our experience provided mission critical real estate solutions over the last 35 years.

And then just listen to understand kind of what their constraints are and some of the sensitivities they have, not only with it again, the actual physical plant and facility, but also the actual lease and some of the maybe constraints they have on their system relative to balance sheet, bonding capacity levels et cetera.

To your second question, on BOP. So, we actually - the BOP, we just met with them here over the weekend at the American Correctional Association Conference at Minneapolis.

They're always good to meet with the industry during these conferences and so we got a really kind of new view from them or updated view I should say, not new, but updated view from them over the weekend on kind of populations.

And what they're saying going into next fiscal year which as you know starts on October 1st at the federal level, we're saying they'll probably going to see - still see some declines for the first part of the year, but the populations that were reverse bottom out and start to increase during the course of the fiscal year.

So, I think their view is 2019, little bit decline at first, bottoms out start to increase potentially just kind of flat for the fiscal year and then going into 2020 and beyond and see an increase.

And they noted as you and I talk about Tobey kind of leading indicator, the Marshall Service population, so that the Marshall Service increasing by about 8000-9000 prisoners over the last 12 months. They're clearly watching that closely and see that as a lead indicator for their additional capacity utilization.

So, not part of your question, but a common question we ask about CAR XIX is with 9500 beds in that procurement is a need still there and I think with MCN 8000 to 9000 population increase to Marshall Service that these still are going to be there with the gear going into 2019 and 2020..

Thank you very much..

Thank you, Tobey..

Operator:.

[Operator Instructions] :.

Good morning. Thank you for taking my questions.

I want to talk about just use of the capital over the next 12 to 24 months, so when you think about how you will allocate gross capital, how would you bucket between office acquisitions versus residential reentry or growing your correction retention business and is there any new development of expansions? Thanks..

Thanks, Kevin. I'll take that one. I would say the pipeline for both CoreCivic Community which is residential reentry center business is active, probably not as active as I said at CoreCivic Properties pipeline would be.

There is just more opportunities in the GSA and government leased property type than there are in the residential reentry center market.

The residential reentry center market, you're typically going to be seeing relatively small transactions anywhere in the $5 million to $50 million transactions whereas Damon pointed out, if you're looking at CoreCivic Properties and a government leased asset class, they can be significantly varying sizes, so we're looking at deals anywhere from $10 million to $50 million for individual properties and then portfolios that reached $250 million or higher.

So, I would say as we look at the capital allocation, it's probably going to be more skewed on a dollar basis towards CoreCivic Properties then it would in CoreCivic Community just because there is more opportunities in that space.

When it comes to the CoreCivic Safety space, we've got 10,000 available beds, so don't see any new construction on the horizon.

I guess I wouldn't be too shocked if we had a small expansion in a particular market that has unique demands or acute demands with limited alternative bed capacity, but really shouldn't see too much deployment of capital on the CoreCivic Safety business..

Okay.

And you mentioned that expansion would that be - and if so would that expansion include family beds?.

This is Damon. So, yes, the OT facility is one that we are considering, it would just be for adults..

Just for adults. Okay. Thanks. And then looking at your office portfolio, you mentioned Dave $250 million portfolio transaction or larger.

How would you plan to fund that in terms of debt versus equity?.

It would be secured debt in the government leasing ....

On non-recourse?.

On non-recourse, yes. CMBS financing mortgage notes something like that, it's similar to what we financed Capital Commerce Center at the beginning of the year that acquisition was financed for about a 50-55% loan to value that was an attractive 4.5% fixed fully amortizing mortgage over a 15-year term, so it would look very similar to that..

Got it, thanks. And then as you think about leverage going forward I know as you grow out the property size of business back in support a little bit higher leverage point and in the past, you said that leverage would a little bit above four times.

So, as you are thinking about your credit rating and your I guess that ending leverage point, what's kind of the sweet spot for you guys?.

Yes, that's a great question Kevin. You're right.

I look at it as we've always said three to four times on the CoreCivic Safety and CoreCivic Community business, government leased assets can handle a higher leverage level investment grade reach out there in that asset class 5, 6 maybe even seven times leverage, we have no aspirations to get our leverage that high.

On that part of the business, we'd be comfortable 5 or 6 times leverage. So, on a blended basis, it does come out a little bit north of four times.

Does that answer your question?.

Yes, that's helpful. I appreciate that. And then, can you just maybe give us some visibility and the how populations at South Texas trended throughout the quarter, given all the influx and arrivals and the attention around family separation..

Yes, it's Damon, so I give a little color there. So, we saw some fluctuation during the summer months, I looked at this morning and I think we were kind of 1500, 1600 I think - there that would been occupied so probably historically that's probably a pretty close to the average. We have been as high recently as 2000 and then sub 1,000.

So, I say right now today's it's pretty close to probably historical average and then I know some numbers just came out more generally not just with South Texas, but generally about kind of family activity on the South West border and I looked at that over the last few days and it appears that, family kind of apprehensions on the South West border or maybe a little higher than historical still below that notable level in 2014, which was huge crisis on the South West border and call this in the action with Obama administration, but I'd say that kind of current activity, there is a little - maybe a little higher than historical norms during the summer months..

Got it, thanks. And final one for me housekeeping item. The Lansing CapEx, the $60 million or so that you plan to spend in 2018. That's all running through the cash flow statement, correct, because in other words year-to-date you have only occurred from my estimates $44 million of CapEx versus to $130 million guide.

So, I just want to make sure now comparing apples to apples? Thank you..

You are, yes absolutely those cash expenditures go through the investing section of our cash flow statement..

Thanks for the time..

You're welcome. Thank you..

At this time, I would like to turn the call back over to our speakers for closing remarks..

Thank you, Travis. Before we conclude the call, I want to take a moment to recognize our employees. Who are chaplains, nurses, mothers, veterans and many others. These are really, really good people doing great work for our government partners and the individuals and trusted in our care.

So, to them, directly, I am sincerely honored to serve alongside you all. I really appreciate everyone joining us on the call today, and we look forward to reporting to you in November on our progress through the third quarter of this year. Everyone have a great rest of your day..

Thank you, ladies and gentlemen. This concludes today's teleconference and you may now disconnect..