By M. Marin
READ THE FULL CXW RESEARCH REPORT
Significant momentum in new contract wins with new & existing customers
CoreCivic’s (NYSE:CXW) 5-year contract renewal rate average is a high 94%, with strong momentum in new wins in recent months with both new and existing customers. We expect several new contracts announced in 2H23 will benefit 2024 results and could imply upside to our 4Q23 estimates. Management believes renewal rates remain high, reflecting the limited supply of and older state of many government owned correctional facilities, the programs the company offers inmates and the cost effectiveness of its services, among other factors. Moreover, reflecting growing demand for capacity post-pandemic, we anticipate further awards.
Overall, the company has announced several new contracts over the past few months that we expect will benefit results, including with Montana, Wyoming, Hinds County, Mississippi and Harris County, Texas, among others. This momentum reflects the strong demand CXW is seeing from new and existing government entities, including federal, state, and local agencies.
Moreover, CXW has boosted occupancies for certain facilities by signing contracts with multiple different government customers, which reflects the company’s flexibility in forming, renewing and / or extending contracts to maintain and boost occupancies, in our view. Government entities and ICE need to house the prison populations and detainees and also face budgetary issues that likely constrain construction of new facilities in the near-term and the company is engaged in discussions with existing and potential partners.
CXW’s own efficiency improvements contribute to substantially lower expense, rising margins …
The company also continues to pursue cost containment efforts, debt reductions and other balance sheet strengthening measures. CXW’s own efficiency improvements have contributed to substantially lower interest expense in recent months. CXW also has cut some labor-related costs, such as registry nursing, wage incentives and travel, and believes it can reduce these expenses further as labor market conditions improve. As occupancy levels increase and staffing-related costs normalize, the company expects to realize operating leverage and see further margin improvement, although it would not surprise us if margins were lumpy in the near-term.
Believe balance sheet measures also enhance financial flexibility, as well as lowering interest expense…
CXW’s balance sheet and refinancing measures have led to substantially lower debt levels over the past couple of years. Reflecting debt reductions over the past several quarters, interest expense was $17.9 million, down from $20.8 million in 3Q22. In the first nine months of 2023, CXW repaid $137.7 million of debt, net of the change in cash, including $65.0 million in 3Q23. In 2022, the company pared its debt balance by more than $287 million and has reduced debt by more than $1.1 billion since first putting the deleveraging strategy in place in 2020, through the combination of cash flow from operations and asset sales. The company has no major debt maturities before April 2026. As we have seen CXW do with other approaching debt maturities, it would not surprise us to see the company begin to reduce the balance in advance, depending on the interest rate environment.
Amended credit facility: larger, with extended-maturity, less restrictive …
CXW recently amended its bank credit facility, increasing the facility to $400.0 million, up from $350.0 million before. The new facility increases the company’s access to capital and extends the maturity from May 12, 2026, to October 11, 2028. The company now has available borrowings under the revolving credit facility of $275.0 million, up from $250.0 million. The term loan has increased to $125.0 million, up from $100.0 million. In addition, financial covenants are less restrictive and the company has substantial liquidity to maintain its growth and efficiency measures, with $104.7 million of cash at the end of 3Q23 and no borrowings outstanding under its revolver.
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