By M. Marin
NYSE:CXW
READ THE FULL CXW RESEARCH REPORT
Occupancies reached 74.3% compared to 70.3% in 2Q23…
CoreCivic (NYSE:CXW) reported 2Q24 results that beat our / consensus expectations. Revenue came in at $490.1 million compared to $463.7 million in 2Q23. The company beat our forecast and the consensus. We modeled 2Q24 revenue of $481.4 million. The consensus estimate was $481.9 million. Revenue represented a strong 6% year-over-year advance, the expiration of company’s lease (on March 31, 2024) at its California City Correctional Center notwithstanding, as the state’s prison populations have declined in recent years and are projected to decrease further.
2Q24 Takeaways
▪ CXW 2Q24 beat underscores organic improvements, operating leverage as occupancies rise
▪ Occupancies reached 74.3%, up from 70.3%
▪ Adjusted EPS was $0.20, ahead of our/consensus & compared to $0.12 in 2Q23 on the same basis
▪ CXW believes Leavenworth facility well-suited for ICE, DHS recent RFI
▪ Management has indicated that the prospective pipeline is robust
▪ Recent debt issuance extended maturities, maintained cost of capital despite uncertain rate, economic outlook
▪ Leverage ratio of 2.5x within target range of 2.25x to 2.75x, no major debt maturities before 2029
▪ Company purchased 1.3m CXW shares in 2Q24; expect near-term priority debt reduction v. share repurchases
We believe the strong topline underscores the organic improvements the company records as occupancies rise. The termination of Title 42 has led to higher ICE demand for space and consequently to higher occupancies at CXW facilities. Average compensated occupancies at CXW facilities reached 74.3%, up from 70.3% in 2Q23, as illustrated below. Occupancies have not yet returned to pre-COVID levels, but continue to trend up.
Revenue from the company’s largest government partner accounting for about 31% of aggregate revenue through 1H24, ICE, advanced 10.5% year-over-year post-Title-42, which ended May 11, 2023. ICE revenue declined slightly sequentially nationwide and for CXW. Revenue from ICE was $151.0 million in 2Q24, compared to $136.7 million in 2Q23 and $153.8 million in 1Q24.
We also believe 2Q24 results underscore the strong operating leverage in the company’s model, as occupancies and consequently revenues rise. The 2Q24 operating margin was 9.9%, up from 8.1% in 2Q23, as operating income increased 29% to $48.3 million from $37.4 million. At the same time, costs have begun to normalize and the company has pursued cost containment efforts where it can. Expenses for registry nursing, temporary labor, overtime and other categories declined significantly both year-over-year and sequentially. CXW reported adjusted EPS of $0.20 normalizing for non-recurring items, compared to $0.12 in 2Q23 on the same basis. We modeled adjusted EPS of $0.14 and consensus was $0.13. Normalized FFO excluding special items increased to $0.42 per share, up 27% compared to $0.33 in 2Q23 and our forecast of $0.37/share on the same basis.
Potential opportunity for CXW’s Leavenworth facility
ICE is terminating services at the South Texas Family Residential Center in Dilley, Texas primarily for budgetary reasons. The lease was operated under a costly Family Residential Standards (FRS) model because the facility was initially designed to house families seeking asylum. CoreCivic originally entered into the contract in 2014 as ICE sought to provide solutions for the high volume of families seeking to enter the U.S. at the time. Subsequently in 2021, the facility transitioned primarily to detention of single adults.
CXW was able to largely match lease costs with expected revenue reduction; the company leased the center from Target Hospitality Corp. While there might be an opportunity to replace populations at the facility, we believe CXW continues to focus on its owned properties, including adding occupancy at idled or under-utilized facilities.
A proposed DHS bill outlines sufficient funds for 50,000 ICE detention beds, representing an increase compared to the current 41,500 level. We also believe ICE has dry powder post-South Texas to meet needs at other facilities and we would expect CXW to garner a rising number of contracted beds with ICE over time. Recently, ICE and Homeland Security (DHS) issued an RFI (Request for Information) to “identify possible detention facilities to house non-citizens in support of its public safety mission.” Specifically, ICE is seeking detention capacity in the Chicago, Harlingen, Texas and Salt Lake City markets. CXW’s 1,033 bed Midwest Regional Reception Center, which is located in Leavenworth, Kansas, has capacity and potentially could represent a well-positioned solution. This is ICE’s largest RFI for potential new detention capacity in more than a decade, according to management.
New management contract with Montana expands relationship with the state…
Moreover, the company was awarded a new management contract with the state of Montana on July 25, 2024. CXW expects roughly 120 residents at its 1,896-bed Saguaro Correctional Facility in Eloy, Arizona to arrive in 3Q24. This would double the population at the facility from Montana under an existing management contract. At this facility, the company also houses about 1,000 residents from Hawaii, and nearly 600 from Idaho. If Montana needs additional capacity, it might approve the utilization of other CXW centers, subject to availability. The new contract expands CXW’s existing relationship with the state of Montana, as the company also manages the Crossroads Correctional Center in Shelby, Montana for the state under a separate contract. Crossroads is fully occupied.
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