By M. Marin
NYSE:CXW
READ THE FULL CXW RESEARCH REPORT
New contracts offset impact of two expired agreements
CoreCivic (NYSE:CXW) reported 3Q24 results last week, beating our/consensus projections by a wide margin. Total revenue came in at $491.6 million, compared to our forecast of $473.6 million and the consensus estimate of $469.8 million. The 3Q24 topline represents a 2% year-over-year increase compared to revenue of $483.7 million reported in 3Q23, despite the impact of two expired agreements (see below) in 3Q24. New contracts that have come online over the past several quarters offset the impact of the contract expirations. For instance, on July 25, 2024, the company was awarded a new management contract with the state of Montana that contributed to 3Q24 revenue. In addition, about 120 residents were expected to arrive at CXW’s 1,896-bed Saguaro Correctional Facility in Eloy, Arizona in 3Q24, roughly doubling the population at the facility from Montana under an existing management contract. The company also houses about 1,000 residents from Hawaii, and nearly 600 residents from Idaho at this facility. Under a separate contract with the state, CXW also manages the fully occupied Crossroads Correctional Center in Shelby, Montana.
Source: Company Presentations
Over the past 5-years, retention rates on owned and controlled facilities is over 95% and the company is engaged in discussions for additional contracts with existing and potential partners, including federal, state, and local agencies. Thus, we remain optimistic about CXW’s business trends going forward and expect further contract renewals, extensions and new business agreements with ICE and CXW’s other government partners in the future, reflecting the limited supply of and older state of many government owned correctional facilities. CXW has indicated that the prospective pipeline for new contracts is robust.
As noted, in 3Q24 recent contract awards offset the impact of two expired agreements; the company’s lease at its California City Correctional Center expired on March 31, 2024, and the company’s lease at its South Texas Family Residential Center in Dilley, Texas expired in August 2024. In each case, we see the expiration as related to exogenous factors and believe they do not reflect on the company’s relationships with its government partners. For instance, the Cal City facility closed primarily because prison populations in the state of California have declined in recent years and are projected to decrease further. The South Texas closed because it was more expensive for ICE to operate compared to other detention facilities.
CXW’s relationship with ICE, its largest government partner, continues to be strong, in our view. Although ICE revenue fell 3.4% year-over-year (to $139.7 million) due to South Texas, excluding this facility in both years, on a pro forma basis ICE revenue was up 10.9% year-over-year and 4.6% quarter-over-quarter. CXW recognized $5.7 million of deferred revenue on this contract in 3Q24.
Multiple recent RFIs, RFPs suggest potential for significant uptick in occupancy
Compensated occupancy in 3Q24 increased to 75.2%, up from 72.0% in 3Q23. Given the operating leverage in the company’s business, 3Q24 operating margin expanded to 9.0% compared to 7.7% in 3Q23. The company ramped down its operating cost structure at South Texas in anticipation of the contract expiration, which benefitted the operating margin.
We expect the results of RFIs and RFPs, as well as other ongoing business discussions, to lead to new business and anticipate the company’s momentum to continue in 2025. Government entities and ICE need to house the prison populations and detainees and also face budgetary issues that likely constrain construction of new facilities in the near-term. Moreover, under the incoming administration, there is expected to be upward pressure on ICE’s need for detention space. ICE and Homeland Security (DHS) recently issued an RFI (Request for Information) to “identify possible detention facilities to house non-citizens in support of its public safety mission, specifically seeking detention capacity in the Chicago, Harlingen, Texas and Salt Lake City markets. This is ICE’s largest RFI for potential new detention capacity in more than a decade. According to management, the facility should be within two-hours of travel from the listed ICE office and have about 850 to 950 detention beds plus an infirmary. CXW believes it is the only provider with available capacity in all three locations and that its 1,033 bed Midwest Regional Reception Center in Leavenworth, Kansas could represent a well-positioned solution. The company expects ICE to put out an RFP for these needs in early 2025.
ICE also issued an RFP in June 2024, for up to 600 detention beds in New Jersey and an RFI in August 2024, ICE West Coast Multi-State RFI, to identify possible detention facilities available for single adults in proximity to the San Francisco, Seattle, Phoenix and El Paso ICE field offices. The RFI seeks approximately 850 to 950 detention beds for each of the four field offices. We believe this level of government activity implies that CXW’s momentum continues going forward.
Balance sheet strengthening measures and cost optimizations
At the same time, CXW continues to strengthen its balance sheet and repaid about $75 million of net debt in 3Q24. CXW’s leverage ratio (measured as net debt-to-TTM adjusted EBITDA) was 2.2x at the end of 3Q24; the company’s target leverage range is 2.25x to 2.75x. Moreover, the company has no major debt maturities before 2029 other than some $262 million maturing in 2027, which notably carry a 4.75% stated interest rate. Given the current interest rate environment, we therefore do not expect the company to refinance these in advance. Although the leverage ratio at the end of 3Q24 was below the target range, the absence of EBITDA from the two expired contracts noted above implies that the leverage ratio will rise, even though debt will probably not increase. Therefore, we expect CXW will prioritize debt reduction in the near-term over share repurchases.
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