CXW: Potential Impact of Title 42 Repeal

By M. Marin

NYSE:CXW

READ THE FULL CXW RESEARCH REPORT

Expect recent positive trends continued in 1Q22

CoreCivic CXW will report 1Q22 results on May 4, 2022. We forecast revenue of $463.8M compared to $454.7M in 1Q21, an anticipated 2% year-over-year advance. The expected quarterly improvement is consistent with trends in recent quarters. In fact, CXW ended 2021 with only a 2.2% decline in total revenue despite a 7.4% fall in 1Q21, as occupancy rates improved over the year and reflecting revenue from new contracts.

Expect potential revenue upside once Title 42 ends

Separately, in our view, the potential termination of Title 42 next month portends possible revenue upside for CXW. Government officials expect the flow of migrants to increase once Title 42 ends. Preliminary U.S. Customs and Border Protection data indicates that authorities detained 200k+ people along the southern border last month. This would represent the highest monthly total since August of 2021 even before Title 42's repeal. We expect ICE demand for capacity will increase once Title 42 is lifted. Thus, we see the potential for occupancy rates at several CXW facilities to increase, leading to incremental revenue.

Title 42 was enacted during the pandemic under the Trump administration to deter immigration into the U.S., with a stated public health justification to deter the spread of COVID-19. It was based on legislation authorizing the government "power to prohibit, in whole or in part, the introduction of persons and property" to curb a contagious disease from spreading. Earlier this month, the Biden administration announced that Title 42 will cease by May 23, 2022, which has spurred concern that the administration might not be prepared for a potential increase in immigration along the southern border once Title 42 ends. In fact, several states have sued to block termination of the immigration measure.

According to CBS News citing government statistics as of the end February 2022, the U.S. has expelled more than 1.7 million migrants under Title 42 since March 2020. The majority of immigrants expelled under Title 42 are sent to Mexico, the Mexican government having agreed to accept expelled migrants who are Mexican, Guatemalan, Honduran or Salvadoran nationals. Originally authorized as a short-term stopgap measure, as the pandemic persisted, Title 42 was extended indefinitely. Now, citing increased vaccination rates in the U.S. and migrants' countries of origin, the CDC endorses the termination of Title 42, although the measure has been extended previously during the pandemic in the face of rising case numbers.

Government officials expect the flow of migrants at the southern border to increase once Title 42 ends. There is concern that ICE does not have adequate detention capacity if the flow of people seeking entry into the U.S. rises, as expected. The Washington Post cites preliminary U.S. Customs and Border Protection (CBP) data indicating that authorities were on-track to detain more than 200,000 people along the Mexican border last month, which would represent the highest monthly total since August of 2021. Concurrent with the expected rise in flows of people seeking asylum in the U.S., ICE has also recently closed older detention centers that were deemed inadequate. This is consistent with recent directives from the Homeland Security Secretary for an overall reform of detention facilities. While phasing out privately managed detention capacity is a stated goal for the current administration, in our view it is unlikely that ICE can move towards this target in the near- to mid-term.

Expect incremental revenue if detention capacity rises post-Title 42, as anticipated

We expect ICE demand for capacity will increase once Title 42 is lifted. Thus, we expect occupancy rates at several CXW facilities to increase. Many (an estimated roughly two-thirds) CXW centers are operated under occupancy guarantees that exceed current actual occupancy levels. Once actual occupancy reaches – and then passes – guaranteed levels, we expect CXW to garner incremental revenue.

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