This week, Durig Capital looks at a company that primarily provides private prison services for governmental agencies here in the United States. CoreCivic (NYSE:CXW) has also recently added two additional business segments to its portfolio – CoreCivic Community, which consists of residential reentry centers, and CoreCivic Properties, which is a portfolio of government-leased properties. The company recently posted a solid first quarter, registering increases in many of its financial metrics.
- Net income was up 31% year-over-year.
- Adjusted EBITDA increased 19% over first quarter 2018.
- Total revenues grew by 10%.
- Funds From Operations (FFO) increased by 22% over the previous year’s quarter.
- Robust interest coverage of 3.4x.
Results for the first quarter were so positive that management increased guidance for both the company’s second quarter and full year 2019. And even with this increase, there are still several growth opportunities that could materialize before the end of the year. CoreCivic’s 2027 bonds, couponed at 4.75% are currently trading at a discount, giving them a yield-to-maturity of about 6.7%. Given the company’s outstanding first quarter as well as management’s extremely positive outlook for the balance of 2019, these bonds look to be an ideal addition to Durig Capital’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, the aggregated performance of which is shown below.
First Quarter Results
CoreCivic had an outstanding first quarter. In fact, the quarter was so good, the company increased guidance for 2019. The company showed increases across many of its financial metrics including those highlighted here.
- Total revenues for the first quarter increased by 10% year over year, growing from $440.9 million in the first quarter 2018 to $484.1 million in the first quarter 2019.
- Adjusted EBITDA of $109.7 million in the first quarter increased 19% over the prior year quarter. This exceeded the midpoint of CoreCivic’s guidance by $6.7 million.
- Funds from Operations (FFO) in the first quarter were $75.9 million as compared to $62.2 million a year ago.
- Net income for the first quarter was $49.3 million, up 31% from the first quarter of 2018.
As mentioned above, CoreCivic increased its full year guidance due to its solid performance in the first quarter. For adjusted EBITDA, the company increased its guidance range for 2019 to $428 million to $434 million, up 9% at midpoint from the comparative periods in the prior year. Damon Hininger, CoreCivic’s President and CEO commented on the company’s outstanding first quarter results. “We are increasing our full year guidance as a result of our strong momentum and attractive outlook. In addition, we continue to evaluate market opportunities across our diversified portfolio of real estate assets that can contribute to continued earnings and cash flow growth.”
(Source: CoreCivic First Quarter 2019 Investor Presentation)
About CoreCivic Inc.
CoreCivic is a diversified government solutions company with the scale and experience needed to solve tough government challenges in flexible, cost-effective ways. The company provides a broad range of solutions to government partners that serve the public good through corrections and detention
management, a growing network of residential reentry centers to help address America’s recidivism crisis, and government real estate solutions. CoreCivic is a publicly traded real estate investment trust (REIT) and the nation’s largest owner of partnership correctional, detention and residential reentry
facilities. CoreCivic believes it is the largest private owner of real estate used by U.S. government agencies. The company reports its business results over its three business units – CoreCivic Safety (correctional and detention facilities), CoreCivic Community (residential reentry centers), and CoreCivic Properties (government-leased properties). The Company has been a flexible and dependable partner to government for more than 35 years.
Growth Opportunities for CoreCivic
There are several opportunities for growth for CoreCivic in the near future, with a number of state level opportunities coming to light recently. Alaska, Idaho and Kansas have all indicated an interest in pursuing procurement this year for out-of-state capacity. In Kentucky, the company is in talks right now about the potential activation of two of its idle facilities in that state. Also, the government of Puerto Rico is now considering options for rebuilding its correctional facilities after the severe damage sustained in the 2017 hurricane season. CoreCivic management is engaged with the leadership there and will continue to provide updates as the situation progresses. Finally, the state of Alabama is looking to the private sector to replace many of its outdated and overcrowded facilities. CoreCivic will submit a proposal over the summer, with Alabama’s stated goal to award contracts prior to year end to begin construction in early 2020.
The Increasing Use of Private Prisons
In 1986, the first private state prison began operating in Kentucky. Since then, private prisons have increasingly been used, not only state levels, but at the federal level as well. Throughout the 1980’s and 1990’s, the rates of incarceration and lengths of criminal sentences increased in part due to stricter sentencing laws. As a result, state prisons reached 115% of their capacity levels. While many voters have overwhelmingly supported policies to increase prison sentences for criminals, they don’t always approve the general obligation bonds required by the states to fund construction of new prisons. As an example, voters rejected about 60% of prison bond referenda in the 1980’s. So the state is faced with increasing prison populations and no place to put them.
As public money for prisons has been challenging to come by, the private prison sector has exploded, with the current private prison industry valued at $5 billion. Today, private prison services now encompass the Federal Bureau of Prisons (BOP), the U.S. Marshal Service as well as Immigrations and Customs Enforcement (ICE). Approximately 9 percent of all prisoners in the U.S., as well as 19 percent of all federal prisoners are currently incarcerated in private prisons. A staggering 75 percent of all immigrants detained by the U.S. Immigrations and Customs Enforcement are held in private prisons as well.
There have been challenges to the use of private prisons. A few years ago, in 2016, then Deputy Attorney General Sally Yates pledged to end the use of private prisons by 2020. That all changed when President Trump took office. He reversed Yates’ decision on private prison use. In place of this, his newly appointed Attorney General, Jeff Sessions, has pledged to reinstate mandatory minimum sentences for even low-level criminal offenses. Combined with Trump’s zero tolerance policy on immigration, the need for private prisons looks to be increasing, not decreasing.
Interest Coverage and Liquidity
For a bondholder, interest coverage is an important financial metric. Interest coverage indicates an issuer’s ability to service its existing debt load. For its most recent quarterly results, CoreCivic had excellent interest coverage of 3.4x (operating income of $73.3 million and interest expense of $21.4 million). In terms of liquidity, as of March 31, 2019, the company had $20 million in cash and $562 million of availability on its revolving credit facility.
The risk for bondholders is whether CoreCivic can continue to grow its operations, even as its revenue streams continue to evolve. Here is a look at how the company’s revenue sources have evolved since 2010.
(Source: CoreCivic First Quarter 2019 Investor Presentation)
In the company’s most recent earnings call, company management talked about the drawdown in the use of one of its larger California facilities as well as the failure to gain a key contract from the Bureau of Prisons for one of their facilities in Mississippi. As it currently stands, the company’s Safety division accounts for approximately 90% of total revenue. Moving forward, it may be increasingly important for CoreCivic to grow its Community and Properties segments in order to provide insulation against possible changes in the political climate towards private prisons.
In recent months, there has been a move by many large banks and financial institutions to end any future financing for companies that manage private prisons and immigration detention centers. Among the list of financial institutions making this pledge: Fifth Third Bank, BNP Paribas, JP Morgan, Chase, Bank of America, Wells Fargo, and SunTrust Banks. In the long-term, the inability to find financing for current needs and future projects could affect companies like CoreCivic.
In general, bond prices rise when interest rates fall and vice versa. This effect tends to be more pronounced for lower couponed, longer-term debt instruments. Any fixed income security sold or redeemed prior to maturity may be subject to a gain or loss. Higher yielding bonds typically have lower credit ratings, if any, and therefore involve higher degrees of risk and may not be suitable for all investors.
Summary and Conclusion
CoreCivic posted an extremely strong first quarter. Each of its three business segments posted handsome increases over first quarter 2018. Company management felt so positive, they increased the guidance for 2019. And even with this guidance increase, there are still additional growth opportunities on the horizon. The company also has great liquidity and outstanding coverage. CoreCivic’s longer term 2027 bonds are trading at a discount at present, giving them a very competitive 6.7% yield-to-maturity. With a solid first quarter behind them and in anticipation of excellent growth for 2019, these 2027 bonds make an ideal addition to Durig Capital’s Fixed Income 2 (FX2) High Yield Managed Income Portfolio, shown above.
Issuer: CoreCivic Inc.
Ratings: Ba1 / BB
Price: ~ 88.40
Yield to Maturity: ~ 6.70%
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About Durig Capital
Durig Capital provides investors with a specialized, transparent fiduciary service at a very low cost. Our FX2 (Discretionary Management) Portfolio over time has greatly outperformed our FX1 (Non-discretionary) Portfolio, giving significantly higher (at times double) the returns of FX1. Our professional service enables access to a broad spectrum of bond, high yields, and lower price points that are often found in less efficient markets, but not evidenced in many bond services. Most of our client accounts are custodied in their own name at TD Ameritrade Institutional, a large discount service provider that is SPIC insured, or at Interactive Brokers. We have now started offering our highly successful FX2 service to clients of other Registered Investment Advisors through segregated accounts at TD Ameritrade. Please ask us to learn how this might work for you and your current advisor.
Disclosure: Durig Capital and certain clients may hold positions in CoreCivic’s October 2027 bonds.
Disclaimer: Please note that all yield and price indications are shown from the time of our research. Our reports are never an offer to buy or sell any security. We are not a broker/dealer, and reports are intended for distribution to our clients. The high yield strategies presented in this review by Durig Capital may not be suitable for all investors. This is not investment advice from Durig Capital, nor a specific recommendation to buy or sell securities. If you have any questions or concerns about its suitability for your personal investment, you should seek specific investment advice from a registered professional before making an investment decision.
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Randy Durig, Durig Capital, Inc.
A Registered Investment Advisor