Good day, ladies and gentlemen, and welcome to Quarter 2's 2014 The GEO Group Inc. Earnings Conference Call. My name is Annette, and I will be your coordinator for today. [Operator Instructions] Please be advised that this conference is being recorded for replay purposes. I would now like to turn the call over to Mr. Pablo Paez, Vice President of Corporate Relations. Please proceed.

Thank you, operator. Good morning, everyone, and thank you for joining us for today's discussion of The GEO Group's Second Quarter 2014 Earnings Results. With us today is George Zoley, Chairman and Chief Executive Officer; Brian Evans, Chief Financial Officer; John Hurley, President of GEO Corrections & Detention; and Ann Schlarb, Senior Vice President of GEO Community Services. This morning, we will discuss our second 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, George Zoley. George?

Thanks, Pablo, and good morning to everyone. Thanks for joining us, as we review our second quarter results and provide an update of our efforts to pursue quality growth opportunities and create value for our shareholders. In addition to Brian and John, we've been joined today by our new Senior Vice President of GEO Community Services, Ann Schlarb, who has previously served as Divisional Vice President for BI and has been with BI and GEO for approximately 20 years. We are very pleased with our second quarter results, as well as our improved outlook for 2014, which are representative of the continued growth in our earnings and cash flows. Our financial performance continues to be driven by sound operational and financial performance from our diversified business units in the U.S. and internationally. Our strong quarterly results and improved outlook reflect improved occupancy at a number of facilities across our real estate portfolio, particularly at the federal level. Our quarterly results also reflect the activation of several important projects by our GEO Corrections & Detention division in California, Florida and in Texas, as well as the opening of approximately a dozen day reporting centers in Pennsylvania and California by our GEO Community Services division. Since the beginning of the year, we have activated new contracts or have announced a [ph] contract awards, totaling more than 6,000 beds in the U.S. and internationally. Most recently, we announced earlier this week that our wholly-owned subsidiary, GEO Australia, has been selected by the State of Victoria as the preferred tenderer for the development and operation of a new 1,000-bed prison in Ravenhall near Melbourne. This large-scale project involves an unprecedented level of in-prison rehabilitation and community reentry services, aimed at reducing reoffending rates and helping offenders reintegrate into society, under the GEO Continuum of…

Thank you, George. Good morning, everyone. We are very pleased with our second quarter results and improved outlook for 2014. As disclosed in our press release today, our adjusted funds from operations for the second quarter 2014 increased to $0.85 per share from $0.73 per share last year. On a GAAP basis, we reported second quarter 2014 net income of $0.54 per share, compared to $0.48 per share a year ago. Our revenues for the second quarter increased to approximately $413 million from $382 million a year ago. For the second quarter 2014, we reported NOI of $119 million, up from $108.5 million in the second quarter last year. Compared to 2013, our second quarter results were flat. The activation of 1,500 company-owned beds at 3 facilities in California in November 2013, the assumption of management at 3 managed-only facilities totaling 3,854 beds in Florida in February 2014, the 400-bed contract capacity expansion at our company-owned Rio Grande Detention Center in Texas during the first quarter this year, the opening of a new -- of new day reporting centers in Pennsylvania and California during the fourth quarter of last year and the first quarter of this year, and generally improved occupancy rates across our diversified real estate portfolio. Moving to our improved outlook for 2014, which is reflective of our expectations for continued growth in our earnings and cash flows. We have increased our 2014 revenue outlook to a range of $1.63 billion to $1.64 billion, and our 2014 AFFO per share guidance to a range of $3.18 to $3.24 or $229 million to $234 million. On a GAAP basis, we have increased our 2014 net income to a range of $1.93 to $1.98 per share. We have also increased our 2014 NOI guidance to a range of $465 million…

Thank you, Brian, and good morning, everyone. I'd like to address select publicly known business development opportunities in our key segments, starting with the federal market and the 3 federal government agencies that we serve. As we have previously reported, GEO has long-standing partnerships with the Federal Bureau of Prisons, the United States Marshals Service and the U.S. 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 3 of these federal agencies. The Federal Bureau of Prisons continues to face capacity constraints, and ICE and the U.S. Marshals continue to consolidate existing populations into larger, more modern facilities, which has driven the need for additional private beds. With respect to recent project activations and contract awards earlier this year, we activated a 400-bed contract capacity expansion at our company-owned Rio Grande Detention Center in Laredo, Texas, bringing the center's capacity to 1,900 beds, under our existing contract with the United States Marshals Service. Under the expanded contract, the U.S. Marshals will house up to 1,228 offenders at the center, with 672 beds reserved for the use by ICE. The 1,900-bed center is expected to generate approximately $38 million in annual revenues. Additionally, the U.S. Marshals Service recently awarded a contract to our GEO Transport division for the provision of secure transportation services in the Southern District of Texas, with estimated annualized revenues of approximately $3 million. In Louisiana, we are developing a new $20 million, 400-bed transfer center in Alexandria as an annex to our LaSalle Detention Facility, under our existing contract with ICE. We expect the new company-owned center will be completed in the fourth quarter of 2014 and will generate an additional $8.5 million…

Thank you, John. Good morning, everyone. Turning to our GEO Community Services segment, each of our community services divisions continues to pursue several new growth opportunities. Our Reentry Services division is competing for a number of formal solicitations for residential community-based reentry centers across the United States. Additionally, we're working with our existing local and state correctional customers to leverage new opportunities in the provision of community-based reentry center services in both residential facilities as well as nonresidential day reporting centers. During the first quarter of this year, we activated 6 new day reporting centers in Pennsylvania, which are expected to generate more than $5 million in annualized revenues. In California, we have recently activated 7 new day reporting centers in counties across the state, bringing our total number of day reporting centers to 22, in order to support state and county initiatives aimed at reducing recidivism and helping offenders reintegrate into the community. Additionally, during the second quarter of this year, we activated a new day reporting center in Richmond, Virginia, which marks our entry into this important state market. With respect to our residential reentry centers, we recently received a Notice of Intent to award a contract for more than 200 residential reentry beds in the State of New Jersey. We expect to activate this new facility in October of this year. Our youth services division continues to work towards maximizing the utilization of our existing asset base. We have continued to undertake a number of marketing and cost consolidation initiatives to increase the overall utilization of our existing youth services facilities in states like Pennsylvania, Ohio, Illinois, Texas and Colorado. During the second quarter of this year, we received new out-of-state placements at our existing facility in Colorado, as well as a new customer for detention services…

Thank you, Ann. In closing, we are very pleased with our second quarter results and our improved outlook, which continue to be driven by solid operational and financial performance from our core operations in the U.S. and internationally. Since the beginning of the year, we have activated new contracts and have announced contract awards for more than 56,000 beds in our GEO Corrections & Detention segment, and our GEO Community Services has opened more than a dozen day reporting centers and gained market share in its market segments. We are actively marketing our 5,800 idle beds in Victoria, which we estimate would add in excess of $0.65 per share to our AFFO. We are also pursuing several publicly known opportunities, and we are exploring a number of other growth opportunities for the development of new projects and the potential purchase of assets. We expect all of these efforts will continue to drive growth for our company and remain focused on effectively allocating capital to enhance value for our shareholders. We also believe that our diversified growth and investment strategies have positioned GEO as the leading provider of corrections, detention and offender rehabilitation services through the GEO Continuum of Care that can deliver performance-based rehabilitation programs and significant cost savings for our customers worldwide. As I have expressed to you in the past, we view all of these different initiatives to enhance shareholder value as complementary, and none are pursued to the detriment of the others. This concludes our presentation. We would now like to open the call to your questions. Operator?

Thank you, everyone, for being patient. We're trying to get the operator on to start the Q&A. Please wait for one more minute.

I'm just going to put Brian Ruttenbur. You're live into the call to ask your question, of CRT Capital.

A couple of questions on the ICE. The $405 million of reprogramming to ICE, I assume that's bridge money just to get them through the end of the September? Or is that money meant to be for all of fiscal '15? Do you know?

It's just for the balance of the current fiscal year.

Okay. And is there any information that you guys have on the percentage of that money, that's going to housing detainees?

No, we don't. There's no detail as to how it will be reprogrammed.

Okay. And then in terms of Karnes County, you moved adult males out. Did you move those to -- those adult males to other GEO facilities?

Some of them, yes.

Okay. And then I've got a lay-up question for Brian. CapEx in '15, it looks like there's -- California is $45 million. Australia, I assume that most of that $120 million will be spent next year. And then what other CapEx will you have, besides maintenance CapEx?

I think in the conference call, we said there was about $80 million or so in project CapEx, with $60 million to $65 million this year. So that would leave, to complete the different projects we're working on, probably $20 million -- $15 million to $20 million, I'll call it, without any new announced projects. And then just for clarity, on the Ravenhall project, the way that project is structured, our equity contribution won't go until closer to the end of the project, so we won't make a contribution into that project for -- during '15. We will have to put in place a letter of credit to secure the equity commitment, but we don't actually make a cash contribution until 2017.

Okay. So is the California facility, that $45 million, is that within that $15 million to $20 million? So some that's going out this year and next year? Is that right?

That's right. That's right. The facility is expected to be completed by June of next year, with an opening in the third quarter of next year.

Okay. And do you have an estimate on the maintenance CapEx in '15? Tax paid in the new facilities?

$20 million to $25 million still. Still in that same range.

Okay. The other question I have is the opportunity in the U.K. It sounds like a large opportunity, the probation opportunity. Can you give us some kind of size -- the number of people involved in those 5 facilities that are going to be getting privatized? Or the total size of the system? Anything that we can grab onto in terms of numbers.

Well, there are 21 regions. And I -- we are bidding on 5 regions, which they are -- they call lots. So we're bidding on 5 lots/regions. And within the 5 regions we're bidding on, I believe there's approximately 45,000 individuals that would be supervised.

Okay. You don't have any revenue estimates tied to what that would be annually?

No, this is still a competitive procurement.

Okay. And you expect an award win?

By the end of the year. So there will be multiple awards, because they will be awarding the 21 regions.

Okay. So they're going to award all 21 regions, and you're only bidding on 5 of the regions?

Five, yes.

Okay. Who's your big competition in that internationally on probation?

Well, there's a number of U.K.-based companies that will be bidding on this.

The next line of question comes from the line of Tobey Sommer of SunTrust.

A couple of my questions were asked and answered already, but I'm curious if you could expand a little bit on your comments of ICE. Have they -- I think you said made active kind of inquiries into other facilities. Is this for new facilities or a combination of new and existing?

It's -- they're looking for additional capacity for secure residential care, and we've made proposals to them with regarding expansion of existing facilities or creation of a new facilities or new sort of idle facility. All of the above.

Okay. Is there a particular geography upon which ICE is directing its efforts? Or is it fairly widespread?

I think it's mostly the Southern belt states and Western states in particular.

Okay. That's helpful. And just to make sure I followed the last -- one of the last questions. In terms of the capital projects that you already have announced, and they're in the supplemental, do you plan on financing those with cash so far, other than that letter of credit that you talked about for the Australian facility?

Well, the project that we have on hand right now will finance what any excess free cash flow that we have, and then the balance will be debt financing from [ph] our revolver.

Okay. And then, George, I wanted to ask kind of a broad question. The discussion of opportunities in the prepared remarks feels like it's a stepped up pace, kind of across the different segments. Is that a fair characterization -- interpretation on my part? And does it feel like the elevated pace is kind of sustainable for a while?

Yes, Tobey. I think you detected that there has been a lot of activity this last quarter across the board, not only Detentions & Corrections, but also Community Services. And we're particularly pleased that some of these projects are -- fall squarely in the line of the GEO Continuum of Care. And we think that, that rehabilitation concept is helping us to win correctional opportunities. It's true of -- now through the interest of various governmental organizations, as they look at their spending for corrections, they're turning their attention increasingly to the desire to see more effective rehabilitation programming in-prison, as well as post-release, to reduce recidivism and reduce the number of people going back into prison. And we think we're -- we are the world leader in that area as far as being able to provide those in-prison and post-release services on an integrated basis.

Okay. That's a helpful answer. From a pricing perspective, how has the state budget season treated you from a -- as it relates to per diems?

As far as our state clients, there has been no diminishment of our per diem rates, in general, that I can think of. We have just, I guess, completed for the majority of the states their legislative sessions. So it certainly hasn't been to a negative. In fact, it's been more so to the positive, as certain states, in particular like California, are looking for more beds, and we continue to offer them additional possibilities for expansions.

Okay. Last question for me is, what do you -- how have your discussions gone with potential customers regarding either asset sales or the kind of sale leasebacks that has been back in the industry recently? Just kind of curious. I know this is probably an ongoing process, so it will probably take some time. But how do you feel like those kind of discussions are going?

I think they're going well and in a positive nature. But those things probably take even longer than the normal course of a procurement, because they involve multiple agencies on the sale of governmental assets, and they just seem to take longer. And I think you'll see more activity in the second half of the year.

[Operator Instructions] The next line of question comes from the line of Brian Hoffman of Avondale Partners.

First off, can you give us some color regarding the population growth that you saw in the second quarter at the federal level? I don't know if you can give any sort of a breakdown among your various customers, but any color there would be helpful.

Well, the most conspicuous is, obviously, ICE. We've had additional growth there at a number of facilities as a result of the additional people at the border, and that some of whom need to be detained. And those people are distributed over a number of facilities in the Southern border states, as well as other Northern states. But it's -- ICE has been the most active federal client needing additional capacity and continues to do so.

Okay. And then, I guess, drilling down a bit deeper into ICE. Has any of that growth in the second quarter come from housing children and families? Or is it still mostly consolidation by ICE? And how sustainable is this growth going forward?

Well, none of the second quarter growth was due to that. But as we've discussed today, with our new Karnes Residential Center for family units, we expect to see a meaningful contribution from that facility as we go forward under that fixed-price contract. And there's, to our understanding, a need for more capacity by ICE for similar type services at different locations.

Okay. And at Karnes County, what's the duration of that contract?

I believe it's a 5-year initial term.

Okay. And the contract that you mentioned in New Jersey for 200 residential reentry beds, can you give us any additional color on what facility that will be managed at or any other information on that contract?

I think that facility is going to be located in Newark. It's about 200 beds. So we've acquired some property, a leased location, and we're modifying and renovating it to provide the services. And then I think once that's complete later this quarter or early next quarter, it will open up.

Okay. So later 3Q or early 4Q, it will open?

Yes.

Sorry, I couldn't hear that.

Yes.

Okay. And then last question for me. It looks like the dividend, the $0.57, is 71% of the midpoint for 2014 AFFO per share guidance, and that's down from 76% last quarter. So at what point can we think about seeing an increase in the dividend? And can you remind me? I'm not sure if you guys have provided a target payout ratio.

No. I'd think we said last quarter's a little bit of an anomaly. Because the first quarter AFFO was probably our lowest AFFO for the year, so we've paid a consistent dividend amount at the $0.57 per share range for the last couple of quarters. But I think first quarter, because the AFFO is a little bit lower, proportionally, that's higher. But we're going to review our dividend with the board, probably in the fourth quarter of this year, which should be our next meeting, and then we'll adjust accordingly in the fourth quarter or the first quarter of next year as appropriate.

The next line of question comes from the line of Manav Patnaik of Barclays.

This is actually Greg, calling on for Manav. On the heels of the Ravenhall project, I was wondering if you could talk about the opportunity in Australia as a whole, how big that opportunity is, the rate of outsourcing versus the U.S. and maybe just some general similarities and differences with the U.S. market.

Unfortunately, I'm not able to reveal the financial profile of the project at this time because it -- we haven't finalized negotiations, and there hasn't been an authorized governmental public announcement of it. But the scope of the outsourcing is, to a greater extent, there than we have seen in the U.S., encompassing what we've said in our prepared remarks today. It's an unprecedented level of in-prison and post-release programming. This will be unlike any other correctional facility in the world. It'll be a step change as far as the quantity and quality of rehabilitation services in the prison, as well as post-release.

Okay. And maybe on the leverage. Because you probably have to use some debt to finance the Ravenhall project, and you're at about 5x now. As additional opportunities come along, how comfortable are you raising the leverage level? And at what time do you start thinking about potential equity raises or something of that like?

I think when we look at the projects that we've got online and in the pipeline and where our EBITDA is coming out right now, I think our leverage with the growth will hold right around this 4.5 to 5x.

Okay. Yes, I guess, the last one for me, just kind of trying to bridge the revenue. You had $413 million in the second quarter. You're guiding for $410 million to $415 million in the next few quarters, with some sounds like some activation of some projects that should bring incremental revenue. So I'm just trying to think about the seasonality in the second half and what to expect there.

Well, as you know, if you -- as you've been following the company for a while, we -- the industry generally has some seasonality in populations across -- in our case, across all of our divisions. And so we've already accounted for that in the guidance, and that does offset some of the revenue and some of the earnings from the new projects. There's also some start-up associated with bringing some of those projects online. So we're opening the Alexandria facility in the third quarter, and there'll be some start-up associated with that. When the facility in the reentry area comes online, then we start up with that. And there's some McFarland associated startups. So some of that start-up is a little bit of a drag in the third and fourth quarter, plus you've got some of the cyclicality that we expect around certain populations in the fourth quarter as well. And of course, that goes into the first quarter of next year some as well.

Okay, thank you for your questions. Ladies and gentlemen, that now concludes the question-and-answer session. I would like to turn the call over to Mr. Zoley for closing remarks. Thank you.

Well, thank you to everyone who have joined us today, and I apologize for the brief delay that we experienced and for taking your questions. But hopefully, it will not occur again, and we look forward to addressing you in the next call. Thank you.