By M. Marin
NYSE:CXW
READ THE FULL CXW RESEARCH REPORT
New contracts, balance sheet measures and cost optimizations
CoreCivic (NYSE:CXW) CXW has implemented cost optimization and balance sheet measures that have contributed to improved operating leverage and financial flexibility. The company will report 3Q24 results after market close on November 6, 2024, and host a conference call at 9:30 a.m. ET on November 7, 2024. We forecast 3Q24 revenue of $473.6 million compared to $483.7 million in 3Q23, an expected 2.1% year-over-year decline. The consensus estimate is $469.8 million. We model adjusted EPS of $0.09, in-line with consensus of $0.13 and compared to $0.14 in 3Q23.
We believe the underlying momentum in CXW’s operations, reflecting rising average compensated occupancies at CXW facilities – occupancies reached 74.3% in 2Q24 compared to 70.3% in 2Q23 – and normalizing costs, are obscured in the near-term by two recent contract expirations. The company’s lease at its California City Correctional Center expired on March 31, 2024, primarily because prison populations in the state of California have declined in recent years and are projected to decrease further. In addition, the company’s lease at its South Texas Family Residential Center in Dilley, Texas expired in August 2024. The facility had been operated under a costly Family Residential Standards (FRS) model versus CXW’s standard model because the facility was initially designed to house families seeking asylum when the company originally entered into the contract in 2014. At that time, ICE sought to provide solutions for the high volume of families seeking to enter the U.S. However, subsequently in 2021, the facility transitioned primarily to detention of single adults, although it continued to operate under the original FRS model.
These expirations are expected to result in lower 3Q24 revenue relative to 3Q23 but we see this as a short-term headwind and expect occupancies / revenue to be replaced in the near- to medium-term. In fact, notably retention rates on owned and controlled facilities is over 95% over the past 5-years.
The company has indicated that it is engaged in discussions for its California City Correctional Center. The facility is relatively new, having been constructed in 1999. By comparison, more than half (about 57%) of the Federal Bureau of Prisons’ (BOP) prison infrastructure is over 30 years old and nearly a third (about 31%) of the institutions are more than 50 years old, according to the U.S. Department of Justice (DOJ). The BOP is a relatively small customer for CXW accounting for about 2% of total 1H 2024 revenue, but we believe that the overall state of its facilities provides insight into the state of detention facilities in the U.S. generally, reflecting budgetary constraints and other challenges to constructing newer facilities. In fact, management has indicated that the limited supply of and older state of many government owned correctional facilities means that government and state partners generally need to find more cost effective solutions.
In terms of the South Texas Family Residential Center, we believe that ICE terminating this expensive contract gives ICE greater flexibility to meet its needs at other facilities. In fact, 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, ICE is 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. CXW’s 1,033 bed Midwest Regional Reception Center, which is located in Leavenworth, Kansas, has capacity and the company believes it could potentially represent a well-positioned solution.
New contracts coming online & discussions continue for additional contracts …
The company has indicated that the prospective pipeline for new contracts is robust. In addition, the company was recently awarded a new management contract with the state of Montana on July 25, 2024. CXW had indicated that roughly 120 residents were expected to arrive at its 1,896-bed Saguaro Correctional Facility in Eloy, Arizona 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.
… as CXW continues to strengthen its balance sheet and has significant liquidity
At the same time, CXW continues to strengthen its balance sheet. CXW’s leverage ratio measured as net debt-to-TTM adjusted EBITDA was 2.5x at the end of 2Q24, within its target leverage range of 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. CXW had $60.2 million of cash at the end of 2Q24 and $232 million available under its revolver. We also optimistic about CXW’s opportunity to continue generating stable cash flow, reflecting the company’s renewal rate on its facilities over the past five years.
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