Good morning, and welcome to the GEO Group Second Quarter 2017 Earnings Conference Call. All participants will be in listen-only mode. [Operator Instructions] After today’s presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note today’s event is being recorded. I would now like to turn the conference over to Pablo Paez. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for today’s discussion of the GEO Group’s second quarter 2017 earnings results. With us today is George Zoley, Chairman and Chief Executive Officer; Brian Evans, Chief Financial Officer; Ann Schlarb, President of GEO Care; and Dave Donahue, President of GEO Corrections & Detention. This morning, we will discuss our second quarter results 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 investor website at investors.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?

Thank you, Pablo, and good morning to everyone joining us on today’s conference call. We’re reasonably pleased with our financial results and the continued growth of our company. The first half of this year has been off to a fast start within number of different moving parts. We’ve completed a number of strategic milestones, which we believe position the company for continued growth. In March, we completed both an equity offering and the refinancing of our credit facility, increasing our liquidity by approximately $426 million and lowering our leverage. Following these transactions, we also closed on our acquisition of Community Education Centers known as CEC, comprised of 12,000 beds in the nation’s largest provider of community residential centers. With the CEC acquisitions, we now have 98,000 beds worldwide. GEO is the largest corrections and detention provider in the private sector, and to our knowledge, the fifth largest among all unified corrections organizations in the world. In total, we now have approximately 62,000 beds that are owned or controlled through long-term leases. We have approximately 7,000 idle beds, which could generate between $50 million and $60 million in incremental annual adjusted EBITDA at full utilization. We continue to actively market our available beds capacity, and believe there are a number of significant opportunities to deploy our assets over the next year. There are separately publicly known new business development opportunities, which are involved – in which we are involved in at this time. The Bureau of Prisons CAR 18 procurement provides an opportunity for us to compete for the management of the 2,355-bed Taft California facility currently under rebid. The Taft facility is owned by the BOP, and it’s been privately managed since 1997. The proposals were submitted in June, and award is expected by the end of 2017. The BOP…

Thank you, George. Good morning to everyone. This morning, we reported second quarter GAAP EPS of $0.25 and AFFO per share of $0.61 and quarterly revenues of $577 million, including $34 million in construction revenue. Excluding M&A related expenses, we reported adjusted net income of $0.32 per share. Compared to second quarter 2016, our second quarter 2017 results reflects several items, including the activation of the new ICE contract at our company-owned 780-bed Folkston, Georgia facility in January; the issuance of 10.4 million shares of common stock in March; the refinancing of our credit facility in March; and the acquisition of CEC, which closed in April. Our second quarter results reflect lower than expected revenues from our CEC New Jersey reentry business as a result of a temporary reduction in utilization rates, due to the recent budget impasse and temporary government shutdown in New Jersey. Our second quarter results also reflect lower populations at a few of our ICE facilities compared to last year. Our ICE populations usually experience seasonal declines during the first quarter and begin to improve during the second quarter. This year, our ICE population at a few facilities remained seasonally lower during the second quarter compared to prior years. It is well-known that illegal border crossings have declined in 2017, compared to 2016. ICE began in 2017 fiscal year with an average daily population of more than 40,000 and has averaged close to 39,000 through three quarters of the fiscal year. However, as of early July, the average daily population was around 34,000. In response to reduced ICE populations, we have adjusted our staffing levels accordingly to lower labor costs. Further, as we have discussed in the past. Many of our contracts have a significant fixed-price component designed to cover our fixed operating costs which are…

Thanks, Brian, and good morning, everyone. Looking at our GEO Corrections & Detention segments from the United States, our state segment has remained stable throughout the first half of the year. We have long-standing partnerships in nine states, including Florida, Georgia, Louisiana, Oklahoma, Arizona, New Mexico, California, Virginia and Indiana. In four of these states, California, Georgia, Oklahoma and New Mexico, we own and manage our facilities. And the remaining five states, Florida, Arizona, Virginia, Indiana and Louisiana, we operate one or more state-owned facilities through managed-only contracts. As we look at the state budget picture, all but one of our state customers has stable budgets. And our correctional facilities have been able to provide high-quality services without being impacted by budgetary constraints. The lone exception has been the state of Louisiana where we have managed the state-owned Allen Correctional Center for the last two decades. Due to state budget constraints, over the last year, the Allen Correctional Facility has been operating as a jail facility, which we had hoped would be temporary. Unfortunately, continued state budgetary constraints will not support returning the center to a full-service correctional facility with robust rehabilitation programs. For this reason, we reached a difficult decision to discontinue our management contract at the Allen Correctional Center at the end of August. We appreciate the partnership and support of the Louisiana Department of Corrections over the last two decades, and we are committed to ensuring a smooth transition of the center. Across our remaining eight-state customers, we have been expanding the delivery of our GEO Continuum of Care programs over the last year, and we are excited about the opportunity to expand our relationships within those states. In Florida, the state legislature recently allocated $2.9 million in funding to expand the GEO Continuum of Care programs…

Thank you, Dave, and good morning everyone. Our GEO Care segment has had a very active first half of the year. During the second quarter, we completed the operational integration of the CEC business into our reentry segment. Following the acquisition, our reentry division now oversees more than 10,000 reentry beds along with over 90 nonresidential programs, providing day reporting and in-prison treatment services. While our integration of CEC has gone very well, we recently experienced a temporary decline in utilization rates in our New Jersey reentry programs. This was a result of the recent state budget impasse and government shutdown in early July. Ultimately, the budget deal that was passed by the legislature restored the funding for our programs, and we expect the utilization of our facilities to ramp up again over the next two months. More generally, we’re excited about our expanded reentry platform following the CEC acquisition. In the last quarter, we’ve been working diligently to maximize the opportunities we’re pursuing across the country. We submitted several proposals for residential and nonresidential programs. These new potential projects represent more than $75 million in incremental annual revenue opportunity. In terms of our Youth Services business, we’ve experienced stabilization rates across our facilities throughout the first half of the year. In fact, our youth segment has been stable for the past couple of years after our team undertook a number of consolidation and marketing initiatives. These initiatives successfully increased the overall utilization of our 10 active residential facilities, totaling approximately 1,200 beds. As it relates to our family case management program with ICE, as Brian mentioned, the federal government decided to discontinue this pilot program at the end of June. Moving to our BI electronic monitoring division. As we have updated you over the past several quarters the utilization…

Thank you, Ann. As I said earlier, we are reasonably pleased with our financial performance and the continued growth of our company. And as we’ve discussed today, we’ve had a very active first half of the year with a number of different moving parts. As a management team, we remain focused on capturing new organic growth and on successfully integrating our recent CEC acquisition. We continue to carefully evaluate capital allocation to create sustainable long-term value for our shareholders. It is rewarding and gratifying to us to see the continued success of our company, and I’d like to thank all of our employees worldwide, many of whom are listening in on this call. Their dedication and professionalism has allowed us to become the fifth-largest corrections organization in the world and to be recognized by our customers as best in class. We remain optimistic about the demand for our diversified services and our continued growth potential. And we look forward to continuing our commitment to better the lives of those entrusted to us through the GEO Continuum of Care, as we strongly believe that we are at our best when we’re helping those in our care reenter society as productive and employable citizens. We would now be happy to open the call to your questions.

Thank you. We’ll now begin the question-and-answer session [Operator Instructions] Today’s first question comes from Michael Kodesch of Canaccord Genuity. Please go ahead.

Hi, thanks for taking my question guys. I just wanted to start with ICE. I guess, how should we think about updated guidance as it pertains to ICE here? Kind of considering all else equal, on the BOP, United States Marshals stake, even the Continuum of Care and the alternative corrections, I guess where should we be thinking ICE is now within guidance?

Well, as I think we said earlier, we characterize the situation as a transition from seeing lower populations earlier in the year due to a significant reduction in illegal border crossings. We’ve now seen a steadily increase week after week of those populations in our facilities. So I think we’ve put out a projection for the balance of the year, that is – that shows incremental increases continuing through the balance of the year and to finally achieve normalization. Okay. And then I guess, could you just remind us of your ICE contracts, beginning with what percentage of those are fixed-price contracts?

Well, I don’t think any of our ICE contracts are fully fixed-price contracts. The BOP contracts are – there’s two recent ones – the Folkston contract is a fixed price and there’s one other facility. But the bulk of the ICE…

Karnes family.

Which one?

Karnes family.

Karnes family residential. But the other ICE contracts are all – have a majority fixed-price revenue or fixed component to their revenue, and then a variable component related to occupancy above that.

Okay. Thanks it’s helpful. I guess just maybe moving on to United States Marshals. We don’t hear a lot about trends in this regard. I’m just wondering if you can just talk a little bit about more kind of what you’re seeing, especially with the administration walking back some previous policies. And I guess being a little bit more tough on crime, what are you guys seeing there?

Well, this is Dave, Michael. I appreciate the question. We see U.S. Marshals, obviously, being the transportation and service provider primarily for the Bureau of Prisons, but they use a significant capacity around the country in local jails and local correctional facilities. There’s an ongoing discussion about regionalization or centralization of those services, and that’s where we believe our company is well positioned to provide additional capacity to the Marshals service around the country.

Have they reached out to you at all about that? Is that a near term or is it more conceptual in nature?

It’s conceptual in nature, but we have continual dialogue with our clients. And in anticipation of their need, we’re always being able to position ourselves, with the flexibility that they need.

Okay. I mean, is there any, like, idea of or – I know it’s more, like, local and regional at this point, so they could find smaller facilities. But I mean, are they at capacity? Or have they kind of been operating up to their able capacity, I guess you could say? Or is there continued space for them to kind of utilize at this point?

Well, again, they’ve had a historical relationship with local judicial systems, specifically county jails and smaller facilities. As those facilities age out, continually, our challenge on meeting national standards, the Marshals service is just like the Bureau of Prisons and Immigration and Customs Enforcement, they want to ensure that we have efficient facilities to meet the needs of the prison population. So our facilities are, as you know, in compliance with all national standards and available to meet that need. So as local, smaller facilities become somewhat obsolete, or not able to meet with the current standards, our facilities are positioned to meet that obligation.

All right, great. That’s helpful. Just one last one for me and then I’ll jump back in the queue with anything else. But electronic monitoring population kind of fell a little bit this quarter, as Ann mentioned, largely related to the ISAP program. I was wondering if you guys had looked at the 3M deal. 3M sold a large portion of their electronic monitoring, I think, maybe all of it to Apax. I was wondering if you guys looked it all – at that at all, considered purchasing that as well or kind of your thoughts there.

Well, that was a public process, so obviously we received some of the material and we reviewed that. I don’t know if I can comment further on it than that and why they made the decision that they made. But we certainly looked at the opportunity, and we’re interested but it just didn’t work out at this point in time.

Hi, thanks Brian. I appreciate that color. I’ll hop back in queue, if anything else.

And our next question today comes from Mark Strouse of JPMorgan. Please go ahead.

Yes. Hi, good morning. Thanks for our taking questions. Just following up on an earlier question regarding ICE. Can you just talk about what gives you the confidence that the utilization rates will be closer to normalize by year-end? What’s to prevent this temporary transition from being a bit longer, stretching into 2018?

Well, we received daily census reports on our facilities, so we track it daily, weekly, monthly, and we chart the progress of the increasing census. So it’s just by a virtue of our – history of this year and where the low point was and where we are today, we see a steady progress. So we have that factual information ourselves. And we are in discussions with ICE additionally as to their expanded needs. As I said, in part, during my presentation that because of interior enforcement, it will be conducted on a national basis, the previous clustering of detention beds has been along the southern border. And there’s now a need for additional facilities in the north and the northeast, that they will need as processing centers. So while we’ve had a dip in populations in this past quarter and we think we’ll level out by the end of the third quarter and normalize in the fourth quarter, going forward, as consistent with ICE’s own budget request, we think there’ll be a need for new capacity and new locations around the country going into next year.

All right. Okay, thanks. And then I understand that the second-half guidance does not include any new contracts, but can you just talk about – are there any contracts out there that should potentially have a material impact to numbers this year? Or is it kind of – a better way to think about it, that awards could happen this year but not necessarily can start contributing to the numbers until 2018?

Well, I think there are one or two opportunities that could be awarded this year and could result in a startup this year. And the other factor is that we may have been conservative in our ICE occupancy projections and we could well exceed those.

All right. Okay. That’s it for us. Thank you very much.

And our next question today comes from Tobey Sommer of SunTrust. Please go ahead.

Thank you. I’m curious, your perspective in public procurements as well as your kind of direct dialogue with potential customers for new business, has it declined in immigrants, kind of border crossings and ICE populations, affected the urgency of those other conversations for new business? Thank you.

I’m not clear as to what your question is.

So you have had dialogue with potential new customers that maybe six or eight months ago had assumed ICE would be signing contracts and potentially soaking up some idle capacity, and that hasn’t happened, so is that impacting the pace of those other conversations? Thanks.

No, I don’t – our other customers would likely be states. And no, I don’t think there’s any correlation between a lower ICE census and the nearby states. Certain states continue to grow their populations, particularly southern states, and they will need additional capacity regardless of ICE populations.

In terms of the mix of ICE populations that you foresee over the next several quarters, do you assess there to be any risk that ICE may lower its – reduce its need on the border and increase its needs in the interior and maybe yield a smaller net increase in its overall needs?

No, I don’t. The overall enforcement between the border and the interior is in the southern states, and that’s where the bulk of the facilities and detention capacity is located. And I think that the intent is still to use those facilities primarily. So we – my discussions regarding other facilities, which would be in the north and northeast, would be additive to the detention capacity of ICE in those geographic areas.

And I think one of the other things too, Tobey, that we’ve talked about in the past, is that as this number of illegal border crossings has come down, the mix of who those folks are and what type of case’s going to resolve, is there going to be tougher type of detainee, which is going to resolve also a longer average length of stay for border apprehensions, not just the interior enforcement.

And for ICE – and the cheapest cost for detention beds is in the southern states and their transportation hubs for relocating detainees from this country to another country are located in the southern states as well. So it’s all kind of networked presently together along the southern states.

Does the company have a different approach to deploying capital to satisfy potential ICE needs in the northeast where demand for such capacity may not be as long-term and capable of serving multiple customers as other capacity potentially sort of along the border?

Any facilities in the north and northeast will be fairly expensive because of cost of construction and labor in those states. And we would prefer to see a request for proposals type of procurement, which would permit long-term contracts of 10 years or more versus governmental – intergovernmental agreements, which would be of shorter duration.

Thanks. Just two more questions for me. Could you quantify the impact of the CEC kind of budget impact from New Jersey on 3Q? And Brian, could you give us a little flavor for the sequential revenue contour as we go from 4Q into 1Q with respect to Ravenhall? And remind us what the contribution is from Ravenhall next year? Thanks.

First, on the New Jersey, I think it was probably a couple of million dollars in revenue in the third quarter, which will then normalize going into the fourth quarter, so call it $2 million or so from the state of New Jersey. And then Ravenhall, remember, is about $75 million per year in annual operating revenue. So quarter of that, I guess, is about $18 million or so per quarter in operating revenue. Obviously, the construction revenue, which has been averaging at least after a quarter, will go away, but that will be operating revenue. And I think we said the margin on that is about 15% to 20%.

And the start date?

One other thing I would just to point out, Tobey, part of that revenue that is related to Ravenhall is related to our equity return on the project for making that investment. And we’ve already begun realizing that component of the project this year. So next year, it’ll just be the operating revenue and then the margin related to that operating revenue, which is more like a typical managed-only contract, which is about 10% I’d say. So the combination of our equity return and the operating return or operating margin gives us the 15% to 20% that I was talking about against that $75 million.

What’s the anticipated opening date when you’re going to start getting those operating revenues, do you think?

November of this year.

November. Okay, thanks for your help.

[Operator Instructions] Today’s next question comes from Tommy McVeigh of Deutsche Bank. Please go ahead.

Hey, it’s Kevin. Is there any way to think about – so if I heard you right, ICE is at 34,000, and I think the contract bed capacity is 44,000 for I think 2017 into 2018. Any sense to frame kind of how much of the current 34,000 is interior versus kind of border crossings? And what would that 44,000 kind of imply?

I think it’s higher than 34,000 today.

Today, we just found it’s 35,000.

Yes.

No, no, your current population is 34,000, right?

The population?

No.

When they dipped down, I think they dipped down to about 34,000, but it’s rebounded. Some of that – for the year though, average is right around 31,000.

Brian, any sense of kind of that – at the bottom, it was 34,000, how much of that was interior versus kind of border crossings? And any way to think about what that 44,000 would imply from an interior versus border crossing perspective?

I don’t think they give really good – they don’t give a lot of good information on that, but obviously, we expect that the proportion of the beds to increase more towards the interior enforcement unless something happens along the border, more normalized border activity returns, but otherwise, we’re expecting it to be more a need for interior enforcement beds that’s why there’s the increase in the budget proposal.

Well, I think it’s fair to add that. I don’t – most people we talk to don’t think the current situation nor the previous situation will continue. The sharp downturn was thought to be an aberration of some sort that will fairly normalize in the future.

Got it. And then in terms of – you gave great information in terms of the federal budget. The BOP, the 4,000 increase in terms of funding for inmates, what would be the absolute number of inmates based on that? If it’s 4,000 increase from 2018 to 2017, what are the actual numbers?

Kevin, this is Dave. They’re running about 190,000 and that’s inclusive of the contract facilities that they support. So they’re seeing a forecast of slight uptick, if you will, in current run rates. And the most significant, I think, adjustment to the budget percentage is the reconsideration of the designation of where low custody offenders can be placed. And the objective is to place them in the most efficient, cost-effective facilities. And so you’ll see the bureau evaluate U.S. citizens as they have previously evaluated criminal aliens.

Got it. And then just my final question. Is it still the same sensitivity for the kind of the 7,000 beds implies $60 million of annualized EBITDA?

What sensitivity?

In terms – yes, is it if you were – if you were able to

Knowing from the 7,000-bed that’s what we’ve said.

Yes, we are, our idle beds.

Our 7,000 idle bed.

Idle bed, yes. All right, awesome. Thank you guys.

And ladies and gentlemen, our next question is a follow-up from Michael Kodesch from Canaccord Genuity. Please go ahead.

Hey, thanks for taking my follow-ups. Just really quickly, I was thinking on the state side. So with New Jersey kind of finalizing appropriations and then that being maybe a slight tailwind released over the second quarter, are there any other states where maybe you didn’t have a contract so you’re prospectively looking at a contract that recently wrapped up appropriations, and maybe they’re getting closer to either finalizing a deal or maybe even putting on an RFP?

Well, Michael, we talked about the jurisdictions that are looking at capacity options, whether it be Kansas or Wisconsin. And again, you look at jurisdictions like Alabama who had historically had some recent debates in their general assembly. We anticipate those debates to continue in Alabama in the upcoming sessions. So as jurisdictions are evaluating their age capacity, they’re also looking for more efficient physical plans to support that. And that’s where we see the opportunities in the future.

Well, the Alabama situation, there was a discussion regarding several hundreds of millions of dollars in new construction for new facilities. So we expect that to reemerge in the next legislative session.

Okay. And then, I guess, just on the community corrections front, are there any other sizeable portfolios out there that you’re looking at right now? What’s your appetite for acquiring more community corrections?

Well, we’re the largest provider of community corrections facilities by far at this point and – but we’re still looking at organic growth through competitive procurements but acquisitions as well. And the acquisitions that are left are really smaller ones kind of mom and pops spread around the country of which there’s probably over a 100.

All right, thanks. That’s all for me.

And our next question today is a follow-up from Tobey Sommer of SunTrust. Please go ahead.

Thank you. George, I was wondering if you could update us on what the volume and cadence of sort of real estate only transactions maybe. Most of these dialogues are private between yourselves and potential customers, but I was wondering if you could just maybe characterize those and contrast them with how you think they were a year ago, to see if maybe how you assess the prospects of getting one across the finish line in the next 12 months? Thanks.

Well, it’s still a modest hope. As you know, I think, Dave was saying earlier, there’s a lot of jurisdictions that have these aging facilities. I mean, they’re 50 years and over, some cases over 100 years. And they actually needed new facilities but the replacement facilities are quite substantial. They’re going to cost hundreds of millions of dollars, and it becomes a cost issue or a tax and revenue issue as how do they fund these things, either on a full-funded basis themselves or take on the carrying costs of third-party ownership. So the states even in the southern belt are struggling economically because so many of them were dependent on the oil economy. And until that improves somewhat, I think they’re going to be struggling to fund the additional revenues for building new facilities and funding them in their entirety or leasing them through third-party entities like ourselves.

So it sounds like a little less optimistic?

It’s modest optimism.

Thank you for help.

But as I said earlier, we have a number of opportunities on our plate that we can discuss publicly. Others that we’re involved in, we can’t discuss because they’re not public and we don’t want to.

And thank you sir. This concludes our question-and-answer session today. I’d like to turn it back over to management team for any final comments.

Okay. Thank you so much for joining us on this call and we look forward to addressing you in the future.