GEO
#Thank you, operator.
Good morning, everyone, and thank you for joining us for today's discussion of The GEO Group's first-quarter 2015 earnings results.
With us today is <UNK> <UNK>, Chairman and Chief Executive Officer; <UNK> <UNK>, Chief Financial Officer; <UNK> <UNK>, President of GEO Corrections & Detention; and <UNK> <UNK>, President of GEO Care.
This morning we will discuss our first-quarter performance and current business development activities.
We will conclude the call with a question-and-answer session.
This conference call is also being webcast live on our website at www.Geogroup.com.
Today we will discuss non-GAAP basis information.
A reconciliation from non-GAAP basis information to GAAP basis results is included in the press release and supplemental disclosure we issued this morning.
Additionally, much of the information we will discuss today, including the answers we give in response to your questions, may include forward-looking statements regarding our beliefs and current expectations with respect to various matters.
These forward-looking statements are intended to fall within the Safe Harbor provisions of the securities laws.
Our actual results may differ materially from those in the forward-looking statements as a result of various factors contained in our Securities and Exchange Commission filings, including the Form 10-K, 10-Q, and 8-K reports.
With that, please allow me to turn this call over to our Chairman and CEO, <UNK> <UNK>.
<UNK>.
Thanks, <UNK>, and good morning to everyone.
Thanks for joining us as we review our first-quarter results and provide an update of our efforts to pursue quality growth opportunities and create value for our shareholders.
As we disclosed in our earnings announcement this morning, we reported $0.72 per share in adjusted funds from operations for the first-quarter 2015, which is at the top end of our previously issued guidance.
This represents a year-over-year increase despite the impact from the strengthening of the US dollar on our international operations and higher interest expense and share count compared to a year ago.
We are pleased with our strong first-quarter results, and we continue to be optimistic regarding the outlook for our Company and for several reasons.
First, as we have previously announced, we are scheduled to activate our 1,940-bed Great Plains Facility in Oklahoma.
This Company-owned facility was awarded a 10-year contract with the Federal Bureau of Prisons and we expect to start intake in June.
We are also scheduled to complete our $45 million expansion of our Company-owned Adelanto, California, ICE detention facility.
This expansion will provide 640 additional beds and a new capacity of 1,940 beds with intake scheduled to begin in July.
In addition, earlier this week, we announce the mobilization of our Company-owned North Lake Correctional Facility in Michigan during the second quarter.
The decision to mobilize this facility was made as a result of the current demand for out-of-state correctional bed space.
The mobilization will entail hiring staff and purchasing supplies in order to prepare the previously idle facility to receive inmates.
While we do not currently have a contract to house inmates at the facility, we believe that we may secure one or more contracts in the near future and expect we may need to activate the facility in the next 60 to 90 days.
Our $36 million expansion of the Karnes, Texas, residential center is scheduled for completion by the end of the fourth quarter.
The expansion will add 626 beds at this Company-owned facility and achieve a new capacity of 1,158 beds.
In Australia, we've begun construction of the $700 million Ravenhall correctional facility for the state of Victoria.
GEO's consortium is the developer of the facility, which will include a $100 million investment by GEO.
The 1,300-bed facility is on schedule for completion in the fourth quarter of 2017.
Subsequently, GEO will begin a 25-year contract providing secure residential care and state-of-the-art offender rehabilitation services during custody as well as post-release.
We are also pleased with our recent announcement regarding the state of Victoria's 19-year extension of our 947-bed Fulham Correctional Centre, which GEO developed, financed, and has been operating for almost 18 years.
This important contract extension is indicative of the stable nature of our unique business.
While these are all very positive developments, these activations will result in significant startup activity during the second quarter which, coupled with slightly lower and slower ramp-up schedule at our Mesa Verde Detention Facility which opened in March, have resulted in higher than expected startup costs during the second quarter.
Second, our international operations for the balance of the year are expected to continue to be impacted by the strengthened US dollar.
Finally, we have historically discussed federal populations tend to experience seasonal fluctuations primarily during the first quarter and part of the second quarter of each year.
During the first few months of the year, we have experienced additional softness in immigration populations at three of our 11 ICE facilities.
But as we have discussed before, our federal contracts typically include contractual guarantees that ensure the delivery of high-quality services for our customers and to assist and underpin our financial performance.
Our guidance now assumes a more gradual seasonal adjustment, which primarily impacts the second quarter as populations return to more normalized levels during the second half of the year.
Both the budget that was enacted by Congress in March for fiscal-year 2015 and the President's budget request for fiscal-year 2016 provide funding for 34,000 detention beds, as in previous years.
These different factors, primarily impacting our second quarter, have resulted in slightly adjustment of approximately $0.05 per share of our AFFO guidance for the year.
We do not expect this will have a negative impact on our dividend program, which is presently between 73% and 75% of our projected AFFO guidance range.
In spite of these near-term challenges, our Company has accomplished several significant milestones so far this year.
With the potential reactivation of our North Lake, Michigan, facility, we will have successfully reactivated more than 4,000 beds in inventory so far this year.
Additionally, we have integrated approximately 6,500 additional beds from the LCS acquisition last quarter, which involve eight facilities in three states and approximately 700 employees.
With the LCS acquisition, GEO now has 106 facilities, with a total capacity of 85,500 beds, including our projects under development.
Prospectively, we will have approximately 2,000 beds in idle facilities and have several active efforts to redeploy this available capacity.
There are a number of publicly known opportunities in the US and overseas we are currently pursuing totaling several thousand beds.
We are also exploring a number of nonpublic opportunities that relate to both new project development and potential asset purchases.
We are also enthusiastic about the opportunity to expand our delivery of offender rehabilitation services.
As we announced the last quarter, we are beginning this year and making additional annual investment of $5 million to expand our GEO Continuum of Care platform.
As a REIT, GEO is obviously focused on providing infrastructure to service government agencies in the fields of detention, corrections, and post-release facilities.
But additionally, as a service provider, our commitment is to be the world's leader in the delivery of offender rehabilitation and community reentry programs, which is in line with the increased emphasis on rehabilitation around the world.
As the world's largest provider of detention and correctional services, we are pleased to have been successful in combining investments in government infrastructure with best-in-class social services.
At this time I would like to turn the call over to <UNK> <UNK>.
Thank you, <UNK>, and good morning to everyone.
Before addressing our quarterly results, for those investors new to GEO I would like to briefly touch upon our Company's attractive investment characteristics, which are underpinned by a robust real estate portfolio of Company-owned and leased facilities.
Our total real estate portfolio encompasses more than 17 million square feet in owned, leased, and managed facilities; and we own more than 4,000 acres of land across the United States.
We currently own or lease approximately 70% of our facilities worldwide, and approximately 70% of our net operating income is generated by our Company-owned and Company-leased facilities.
We have stable and sustainable income through increasingly longer-term contract arrangements.
We have a diversified base of investment-grade government customers with multiple individual contracts, with no single customer contract representing more than 5% of our revenue.
We have historically enjoyed solid occupancy rates in the mid to high 90%s and strong customer retention rates in excess of 90%.
Our long-term assets have a physical useful life of as long as 75 years or longer and require relatively low levels of maintenance CapEx, estimated at approximately 5% of our net operating income.
Moving to our financial results, we are pleased with our first-quarter results.
As disclosed in our press release today, our adjusted funds from operations for the first-quarter 2015 increased to $0.72 per share, from $0.71 per share for the first-quarter 2014.
Our adjusted EPS for the first quarter was $0.41, which reflects an adjustment for $1.6 million net of tax and one-time transaction expenses related to our previously disclosed LCS acquisition.
On a GAAP basis, we reported first-quarter 2015 net income attributable to GEO of the $0.39 per share, in line with the first quarter a year ago.
Our revenues for the first-quarter 2015 increased to approximately $427 million from $393 million a year ago.
Our quarterly revenues include approximately $22 million in construction revenue associated with our contract for the development and operation of our Ravenhall Prison project in Australia.
For the first-quarter 2015, we reported NOI of approximately $116 million, up from $108 million in the first-quarter 2014.
Compared to first-quarter 2014, our first-quarter 2015 results reflect the reactivation of the 300-bed Company-owned McFarlane Community Reentry Facility in California during August of 2014; the opening of the 400-bed Company-owned Alexandria Transfer Center in Louisiana in November 2014; approximately $22 million in construction revenue related to our Ravenhall Prison project in Australia; and the opening of approximately a dozen new day reporting centers in Pennsylvania, California, and Virginia during 2014.
Moving to our outlook for the balance of the year, as <UNK> mentioned we have updated our guidance to reflect several factors impacting primarily the second quarter.
Additionally, as disclosed in our press release our construction revenue from the Ravenhall, Australia, project is impacted by the strengthening of the US dollar and is now expected to be approximately $120 million for the full year, versus the $137 million previously anticipated.
Therefore, our total revenue for the year is expected to be in a range of $1.87 billion to $1.89 billion.
Our 2015 AFFO per share is expected to be in a range of $3.30 to $3.39.
We expect 2015 adjusted EPS to be between $1.90 to $1.97 per share.
For the second-quarter 2015, we expect revenues to be in a range of $445 million to $450 million, including $14 million in construction revenue related to the Ravenhall, Australia, project.
Second-quarter AFFO is expected to be in a range of $0.76 to $0.80 per share.
EPS for the second quarter is expected to be between $0.40 and $0.43 per share.
With respect to our liquidity position, we continue to have ample borrowing capacity of approximately $240 million under our revolving credit facility, in addition to an accordion feature of $350 million under the credit facility and approximately $70 million in cash on hand.
With respect to our other uses of cash, we expect our project and growth CapEx to be approximately $55 million in 2015; and we have approximately $20 million in scheduled annual principal payments of debt.
With respect to our dividend payments, as we announced this morning we have declared a quarterly cash dividend of $0.62 per share, consistent with our commitment to return value to our shareholders.
As we have previously guided, we expect to maintain a dividend payout ratio of at least 75% to 80% of our AFFO, and our Board remains committed to reviewing our dividend policy at least once a year in November, to coincide with the release of our third-quarter earnings.
With that, I will turn the call to <UNK> <UNK> for a review of our market opportunities.
<UNK>.
Thanks, <UNK>, and good morning to everyone.
I'd like to address select publicly known business development opportunities in our key segments, starting with the federal market and the three federal government agencies that we serve.
As we had previously reported, GEO has a long-standing partnership with the Federal Bureau of Prisons, the United States Marshals Service, and the US Immigration and Customs Enforcement, or ICE; and we provide cost-effective solutions for them at a number of facilities across the country.
We continue to see meaningful opportunities for us to partner with all three of these federal agencies, particularly as increased emphasis is placed on offender rehabilitation programs and community reentry services.
With respect to our 2015 scheduled project activations, in March of this year we began the intake process at our 400-bed Company-owned Mesa Verde Detention Facility in California under an agreement with ICE.
We had previously completed a $10 million renovation of the Mesa Verde Facility, which is expected to generate approximately $17 million in annualized revenues.
During the second quarter we expect to begin intake at our 1,940-bed Company-owned Great Plains Correctional Facility in Oklahoma under a new 10-year contract with the Federal Bureau of Prisons, which is expected to generate approximately $35 million in annualized revenues.
In California, we are scheduled to complete the development of a $45 million expansion of our Company-owned Adelanto ICE detention facility in July 2015.
This important expansion will increase the facility's capacity from 1,300 beds to 1,940 beds and is expected to generate approximately $21 million in additional annual revenues.
Finally, in Texas we are developing a $36 million expansion to our Company-owned Karnes ICE Residential Center, which will add 626 beds, bringing the center's capacity to 1,158 beds.
The 626-bed expansion is expected to be completed by year-end 2015 and is expected to generate approximately $20 million in annualized revenues.
In addition to these projects under development, ICE has issued requests for information for several Company-owned and operated detention facilities ranging from 800 to 2,000 beds in different locations around the country.
Turning to our state market segment, several states continue to face capacity constraints and inmate population growth, and many of our state customers require additional beds as aging, inefficient prisons need to be replaced with new, more cost-efficient facilities.
As previously reported, in the states where we currently operate the average age of state prisons ranges from approximately 30 to 60 years old.
With respect to known opportunities, the states of Vermont and Washington have pending procurements for the housing of approximately 700 and 1,100 inmates, respectively, in out-of-state facilities.
We have submitted our proposals to both states and are awaiting a contract decision.
In Oklahoma the state had previously issued a request for proposal for up to 2,000 beds at in-state facilities.
While this particular procurement did not move forward, we believe that the state of Oklahoma continues to have a need for correctional beds, and we are continuing to monitor this opportunity.
Additionally, there are several states including Arizona, Ohio, and others which are considering public/private partnerships for the housing of inmates as well as the development and operation of new and replacement correction facilities.
With respect to our international markets, our GEO Australia subsidiary recently signed a contract with the state of Victoria for the continuing management and operation of the 947-bed Fulham Correctional Centre.
The contract will have a term of approximately 19 years and three months, effective July 1, and it is expected to generate approximately AUD58 million in annualized revenues.
GEO Australia is also continuing to work on our project for the development operation of the new 1,300-bed Ravenhall Prison near Melbourne.
This large-scale project is expected to be completed in late 2017 and will provide an unprecedented level of in-prison and post-release rehabilitation programs.
The Ravenhall facility will have a unified commitment to providing innovative approaches to reducing reoffending, including the establishment of the world's first fully integrated Good Lives Model, delivered through the GEO Continuum of Care.
The project is being developed under a public/private partnership structure, with GEO making an investment of AUD115 million, with expected returns on investment consistent with our Company-owned facilities.
The contract is expected to generate in excess of AUD100 million in annualized revenues for GEO under a 25-year contract with the state of Victoria.
At this time I will turn the call over to <UNK> for her review of our GEO Care segment.
<UNK>.
Thank you, <UNK>, and good morning, everyone.
Turning to our GEO Care segment, each of our divisions continues to pursue several new growth opportunities.
Our reentry services division continues to work with existing and prospective local and state correctional customers to leverage new opportunities in the provision of community-based reentry services in both residential facilities and nonresidential day reporting centers.
We activated two new day reporting centers in the first quarter; these are in Baton Rouge, Louisiana, and Chatham, Illinois.
We were also awarded four new Louisiana day reporting center contracts in the first quarter, which are scheduled for activation in the second quarter.
These six new contracts are expected to generate more than $3 million in annualized revenues.
With respect to our residential reentry centers, late last year we activated a new Company-leased 240-bed residential reentry center in Newark under a contract with the state of New Jersey, which is expected to generate approximately $5.5 million in annualized revenues.
Our youth services division continues to work towards maximizing the utilization of our existing asset base and has continued to undertake several marketing and consolidation initiatives to increase the overall utilization of our existing youth services facilities.
Our Ohio and Texas facilities have continued to experience a strong census, consistent with the higher occupancy rates experienced last year.
Finally, our BI subsidiary continues to market its supervision and electronic monitoring services to local, state, and federal correctional agencies nationwide.
Overall, BI continues to grow its market share of the electronic monitoring market in the United States; and during the first quarter of 2015 BI's revenues increased 11% year-over-year.
At this time I will turn the call back to <UNK> for his closing remarks.
<UNK>.
Thank you, <UNK>.
In closing, we are pleased with our first-quarter results and remain optimistic about the outlook for our Company.
We have updated our guidance for the balance of the year to reflect several factors primarily affecting our second quarter.
However, despite these near-term challenges, we are looking forward to several imminent drivers of growth.
In the next 60 to 90 days, we expect to activate approximately 4,300 beds at three facilities located in California, Oklahoma, and Michigan.
In the fourth quarter we will activate a 626-bed expansion at the Karnes, Texas, Residential Center.
In Victoria, Australia, we are developing a 700 million dollar, 1,300-bed facility that will have the most expansive offender rehabilitation program in the world.
This new organic growth activity is the most significant that we have experienced in some time.
Additionally, we have successfully integrated 6,500 new beds from the LCS acquisition and are working diligently to improve the operational and financial performance of these new assets, as we have done in the past.
We are pursuing several publicly known opportunities and also exploring a number of other nonpublic opportunities for the development of new projects and the potential purchase of additional assets.
We believe that our diversified growth and investment strategies have positioned GEO as the world's leading provider of corrections, detention, and offender rehabilitation services.
We expect all these efforts will continue to drive growth for our Company, and we remain focused on effectively allocating capital to enhance value for our shareholders.
This concludes our presentation.
I would now like to open the call to your questions.
I think, to summarize, we have assigned the eight facilities to our Eastern and Central region.
Our people had met with the new clients.
We've made some changes in the management at those facilities.
We are doing some physical plant improvements.
We are further strengthening our operations, and letting the clients know that those facilities are under new management and ready for more responsibilities.
And the responses we've gotten so far from the clients have been very positive, and we are optimistic that over some period of time we will be able to improve the operational and financial performance of those facilities, as we have done with past acquisitions.
Well, we see California as an important location for both our federal clients as well as the state of California.
I think it's known that California has met their latest objectives this year for achieving capacity milestones.
But as they approach next year's milestones, they will be considering other options.
Because facilities and capacity just doesn't appear overnight.
These things have to be planned, and it will take several months.
I am not aware of any significant existing available capacity by anybody.
Any new capacity in that state will have to be constructed by somebody.
All of our previously idle facilities have now been recommissioned either for California or for federal clients.
(technical difficulty) facilities in the state of California.
But we do have additional opportunities to (technical difficulty) additional capacity; but it will take new construction to do so.
Well, the session is, I think, abruptly stopped and will reconvene in the near future.
As most of the other states around the country, they are in session and you really don't know the outcome of any new opportunities until the sessions are completed, which is usually late June.
Well, in considering the opening of that facility, we've been focused on the timelines necessary to do an effective recruitment and training of people for an opening; and that requires approximately 8 weeks.
So that has been the focus of our planning that ---+ since we concluded we needed that minimal time period, and when you begin recruitment and training, those are public actions.
We felt obligated to give a public notice of what we're doing with that facility because we are hopeful that we can reactivate that facility over the next 60 to 90 days.
And we need to begin our preparations, which will become very quickly publicly apparent to a number of parties.
Well, we are hoping to activate the entire facility.
Well, there certainly are some states on a state-by-state basis that are continuing to experience overcrowding and in need of capacity.
We've had conversations with them about what we have available.
But as you point out, it's a declining supply, at least on our side.
And in some locations, the only solution will be new construction.
While we have, as I said previously, approximately 2,000 idle beds, I think there is much more need than that around the country.
We expect to see continued growth, notwithstanding any present discussions for judicial reform that may affect prison populations.
Yes, I would think by 2017 we hopefully will not have any idle facilities, and we will be looking at all new greenfield construction projects.
Well, right now what we've put into the guidance for Michigan is the startup costs and the startup-related activity that <UNK> discussed.
We haven't included any revenue or associated profit with potential activation of the facility.
I think FX in the first quarter was probably about $6 million to $7 million, and about half of that is related to construction.
I really can't speak for ICE, but I'm sure they've had planning sessions on how to deal with different situations with (technical difficulty) over the years.
So we don't know exactly what those scenarios are; but as we've indicated, several of our new expansions are on behalf of ICE.
I think we are still looking at that timeline.
Doesn't seem like we can hear him.
Okay.
Thank you all for joining us today.
We look forward to addressing you in the next quarterly conference call.
