Benefit of a strong balance sheet in a rising interest rate environment – Advice Eating

By M.Marin



Recent trends illustrate the stability of revenue streams

CoreCivic (NYSE:CXW) reported revenue of $453.0 million in 1Q22 compared to $454.7 million in 1Q21. Factors behind the slight decline in sales include earlier-than-expected reductions in ICE populations at CXW’s La Parma facility pending the facility’s handover to state inmates under a new contract with the state of Arizona. CXW’s recent sale of non-core real estate assets also contributed to lower earnings.

Nonetheless, the relatively flat revenue trend reflects the stability of the Company’s contracted revenue streams, in our view. Overall, properties divested and contracts under management represented approximately $15 million in quarterly revenue, which CXW was able to offset through new contracts and other initiatives.

As expected, the broader macroeconomic inflationary environment is impacting 2022 results, including rising labor costs, particularly for nursing staff, as the company increases headcount. Although CXW is proactively managing G&A spending where possible, 2022 results could be sensitive to exogenous factors such as wage inflation and fluctuating COVID-19 cases affecting occupancy rates, as well as how quickly the company hires new staff can adjust. We also believe that Title 42’s status represents a possible upside in sales.

TTM at target level; further initiatives to increase shareholder value likely

The company’s stated goal is to reduce relative debt and strengthen the balance sheet. The TTM leverage ratio (net debt to adjusted EBITDA) was 2.7x at the end of Q1 22, up from 3.7x at the end of 2020, and within CXW’s target range of 2.25x to 2.75x. With cash on hand of $378.2 million at the end of 1Q22, no major debt maturities prior to 2023 and no cash outflows from the turret, we believe the Company has significant liquidity. The company also expects to announce a new credit facility shortly.

Management has indicated that likely upcoming initiatives could include seeking approval for a new share buyback program. With no access to capital markets required in the near term and low variable rate debt, the company believes it is better positioned than many in a rising interest rate environment.

Expect potential sales increases once Title 42 ends…

Separately, we believe the potential completion of title 42 later this month indicates potential revenue growth for CXW. Government officials expect the influx of migrants to increase after Title 42 ends. Preliminary U.S. Customs and Border Protection data shows authorities detained more than 200,000 people along the southern border in March. This would be the highest monthly total since August 2021 before Title 42 was repealed. We expect ICE demand for capacity to increase once Title 42 is lifted. As such, we see the potential for increasing occupancy rates at several CXW facilities, resulting in additional revenue.

Title 42 was enacted during the pandemic under the Trump administration to prevent immigration to the United States, on a stated public health justification to prevent the spread of COVID-19. It was based on laws that gave the government the power to “prohibit the entry of persons and property in whole or in part” in order to curb the spread of a contagious disease.

Citing increased vaccination rates in the U.S. and migrants’ countries of origin, the CDC supports ending Title 42, although the measure was extended amid rising case numbers earlier during the pandemic. The Biden administration recently announced that Title 42 would be phased out by May 23, 2022, raising concerns that once Title 42 ends, the administration may not be prepared for a possible surge in immigration along the southern border. In fact, several states have sued to block the termination of the immigration measure.

… as the demand for detention capacity increases

If, as government officials expect, the inflow of migrants at the southern border increases significantly after Title 42 ends, there are concerns that ICE does not have sufficient detention capacity. Concurrent with the expected increase in people seeking asylum in the United States, ICE also recently closed older detention facilities that were deemed inadequate. This is in line with recent Department of Homeland Security directives for comprehensive prison reform. While the phasing out of privately managed detention capacity is a stated goal of the current administration, we believe ICE is unlikely to achieve this goal in the short to medium term.

We expect ICE demand for capacity to increase once Title 42 is lifted. As such, we expect occupancy rates to increase at several CXW facilities. Many (estimated to be around two-thirds) of CXW centers operate with occupancy guarantees that exceed current actual occupancy rates. Once actual occupancy reaches — and then exceeds — the guaranteed level, we expect CXW to generate additional revenue.

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