CXW: 2Q21 Underscores Recent Balance Sheet Improvements & Strong FFO

By M. Marin

NYSE:CXW

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• CXW continues to strengthen its balance sheet

• Recent asset divestitures enabled acceleration of debt repayments

• Average occupancy declined y/y but was up sequentially from 1Q21 as vaccine rates increased

• CXW has minimal exposure to executive orders …

• … while several new contracts are expected to boost revenue

• CXW expects USMS needs to remain relatively steady; USMS accounts for ~23% of CXW revenue

CoreCivic's CXW 2Q21 results mirror improving trends in its core operations, as occupancies rebound, although occupancies have still not recovered to pre-COVID levels. The lower occupancies reflect ongoing government and ICE measures to curb the spread of COVID-19 among prison and detainee populations. CXW's average compensated occupancy for the Safety and Community units was 71.6% compared to 74.9% in 2Q20, but up sequentially from 69.9% in 1Q21. The quarter-to-quarter improvement notwithstanding, with cases on the rise in many areas of the country and emerging variants of the virus, the company expects the COVID-19 pandemic could continue to impact utilization levels of CXW's facilities in the near-term.

Revenue of $464.6 million was down 1.7% year-over-year. This decline primarily reflected lower occupancy rates noted above, as well as the recent divestiture of assets. Revenue from recently signed contracts partially offset these factors. With only one prison contract with the Bureau of Prisons (BOP), which accounts for only about 2% of total revenue, CXW has minimal exposure to the executive order to not renew DOJ contracts with private operators. Conversely, contracts with the U.S. Marshals Service (USMS) represent about 23% of CXW's annual revenue and CXW expects USMS need to remain relatively steady.

Despite the slight revenue decline compared to the same period in 2020, adjusted EBITDA was $101.7 million, up from $101.1 million in 2Q20. Normalized FFO, excluding non-recurring items, was $0.46 per share compared with $0.56 in 2Q20. However, the company is now structured as a C Corp. and was structured as a REIT in 2020 and the decline in FFO reflects the tax impact from CXW's conversion to a taxable C Corp. On an apples-to-apples basis, normalized FFO of $0.46 per share was down only slightly from pro forma 2Q20 $0.47 per share, after applying a tax rate of 27.5% to last year's 2Q FFO.

Strengthening balance sheet

The company has sold several non-core assets over the past few quarters, consistent with its objective to focus on the core business and strengthen its balance sheet. Recent asset sales helped accelerate debt repayments. Long-term debt declined to $1.48 billion from $1.75 billion at year-end 2020, through the combination of cash flow generation and proceeds from asset sales. The total leverage ratio was 3.3x TTM adjusted EBITDA, down from 4.3x at the end of 2Q20. CXW targets a leverage ratio of 2.25x to 2.75x. CXW had $162.9 million of cash at the end of 2Q21, plus an additional $8.9 million of restricted cash and about $688 million available under its $800 million revolver. Recent refinancing measures enabled CXW to extend the weighted average debt maturity from 5.3 years to 6.0 years. Moreover, the company now has no major debt maturities coming due before 2023.

10-year historical average renewal rate exceeds 90% per annum

Several recent contracts and renewals and potential new ones coming up are expected to help offset the decline in occupancies and revenue caused by the pandemic. For instance, ICE has notified CXW that it intends to exercise its renewal option to extend a contract that was set to expire in 3Q21 at the Elizabeth Detention Center through 3Q23. Over the past decade or so, contract renewals have averaged over 90% per annum. This renewal rate has been steady regardless of the administration in office. We anticipate that it will remain steady in the foreseeable future, as government entities need to house prison populations and also face budgetary issues that likely constrain construction of new facilities.

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