© 2017 REIT Stream — a product of 454 CreativeWe provide web development and media streaming solutions for leading companies across the globe.
REITWeek 2016 webcasts brought to you by NAREIT.
The GEO Group, Inc. (GEO) is the world’s leading provider of correctional, detention, and community reentry services with 106 facilities, approximately 85,500 beds, and 20,000 employees around the globe. GEO’s facilities are located in the United States, United Kingdom, Australia, and South Africa. GEO is the first fully-integrated equity real estate investment trust specializing in the design, development, financing, and operation of correctional, detention, and community reentry facilities worldwide. Our goal is to help our clients serve those assigned to their care through a wide range of diversified services including the design, construction and financing of state and federal prisons, detention centers, community reentry facilities, and other special needs institutions as well as the provision of community supervision services, with cutting-edge electronic monitoring technologies.
As a leading provider in the industry since 1984, we offer our clients high-quality, cost-effective services with state-of-the-art designs, innovative programs and ground-breaking treatment approaches.
Pablo E Paez
Vice President, Corporate Relations
Meredith: Good morning, everyone. My name is Meredith Despins. I'm with NAREIT, and I want to welcome you to the company presentation for The GEO Group this morning. The GEO Group is a public listed REIT that specializes in the design, financing, ownership, management, and development of correctional detention and community reentry facilities around the world. Joining me this morning are Brian Evans, Chief Financial Officer, and Pablo Paez, Vice President, Investor Relations.
Brian: Thanks, Meredith. Thank you for joining us here today. I'm going to go through some general information on the company and then open up the presentation for some questions and answers at the end of the presentation. We are, as Meredith mentioned, a recently converted in 2013, currently we're paying a dividend of about 65 cents a share, or $2.60 annually, yielding about 8, 8.5 percent. We are in the privatized prison industry. There's ourselves and CCA, which are two publicly listed companies in that industry, both of which converted to REITs at the same time. About 10% of that market is privatized currently.
In 2015, we activated approximately, or reactivated approximately 4,000 idle beds. We brought online a total of about 9,000 beds. We also completed an acquisition of approximately 8 facilities totaling 6,500 beds from a company, a private company, by the name of LCS, which is based out of Louisiana. We currently have approximately 4 facilities that are idle totaling 3,000 beds, and I'll talk a little bit more about those facilities in the presentation as well.
Turning to the next slide, we are the largest diversified correctional and rehabilitation services provider in the world. We're the only company that's US-based. It has operations internationally. We are positioned well in all of the market segments that we operate in, either first or tied for first, with other service providers in that area. A well-established company, a privatization began in the mid-80s. We've been a publicly listed company since 1996. As I mentioned, we became a REIT in 2013, and we are included on the major REIT indexes.
Turning to slide 6, a little more breakdown of our company. We are, as I mentioned, diversified. Our counterpart, CCA, is more specifically focused in just secure adult residential facilities. We obviously have ... The biggest component of our business is in that same sector. Approximately 2/3 of our business is in adult secure residential care, which comprises our detention facilities, as well as our correctional facilities that we own and operate. We also have non-secure residential care, which is comprised of halfway houses and our youth services that we also provide services for, and then non-residential services, which include reentry facilities at our day reporting centers, and electronic monitoring facilities.
A halfway house is, for those who aren't familiar, is a facility that's typically in an urban setting, smaller facility. It's a step down facility typically for folks who are leaving the criminal justice system, leaving, exiting prison, but they're trying to help people better reenter their local community. They'll be in those facilities for 3 to 6 months typically, allowed out during the day, but have a curfew and have to be back there at night, whereas day reporting center is the opposite. The people are on their own recognizance most of the time, but they report to those facilities periodically, from once a week and twice a week to a couple times a month maybe, for services or follow-up services. Then obviously electronic monitoring, that's our ankle bracelets, that's the monitoring division, which we acquired in 2011.
Slide 7 tries to split those divisions between the REIT assets and the non-REIT assets, approximately 73 facilities, 53,000 beds on the REIT side, US corrections and detention again being the largest component of that. Also within US corrections and detention, we have facilities that we only manage so the government owns those facilities, and then we operate them. We have the day reporting centers over there. All of our international operations for the most part are managed-only facilities. We don't own those facilities. Then obviously the electronic monitoring is also non-real estate.
Just touching on the business itself, it is a highly regulated industry. Sometimes there's a lot of misconceptions put out there I think in the press regarding the level of regulatory involvement and oversight, but the contracts are very lengthy, extensive. Typically we comply with whatever rules the state correctional agency would apply, comply with if we're operating in a state, and if it's at the federal level, we're complying with the standards set by the federal agencies that we operate with.
We have full-time on-site contract monitors at all of our correctional facilities. Those are government employees that are there everyday making sure that we're in compliance with the contract requirements. We're also subject to regular audits from those agencies and from our state customers. We have accredited all of our correctional and detention facilities in the US under the American Correctional Association, which it's the same accreditation process that the state and federal customers go through as well at the facilities that they operate. Where we provide healthcare services, which we do at most of our facilities, we also go through accreditation on that as well. Internally, we have our own significant contract compliance, or quality assurance group, that audits every facility on an at least annual basis.
The next couple slides give a geographical depiction of where our facilities are located. Slide 9, as you can see, a significant number of facilities in the southwest and southeast, or the Sun Belt states. That's really followed sort of demographic growth in those areas, and as there was an increase in population and need for beds to be brought on relatively quickly, many of those states turned to the private sector for that capacity. Then additionally, as the immigration issues have continued to develop around the country, much of that has been in those areas of the country, so many of our detention centers that we operate are in those areas of the country as well.
Internationally, we have one facility in South Africa that we operate, and we have several facilities in Australia. We are currently in the process of developing a new 1,300 bed facility which will be unique in the world in the level of rehabilitation and programming services that it provides, as well as the integration of those services both pre- and post-release for inmates in that area. Then we also have operations in the United Kingdom through a joint venture. We provide approximately 75% of the transportation services for the Home Office, or the Department of Justice, in the United Kingdom.
Slide 11, just some information on who the participants in the industry are. As I mentioned, ourselves and CCA are the two public companies in the industry, and you can see we comprise about 80% of the industry overall, and probably over 80% of the owned beds in the industry. Then MTC is the next largest, really mainly only operating managed-only facilities. They do not have or ... Access or have applied much capital to the industry. I think that's important, as there's more as the development continues in the industry, it's tended towards the facilities being developed by the private sector and then operated by the private sector. That really favors ourselves and CCA.
Slide 12, some additional information on the private market. We are the largest provider to the federal government. CCA is the second largest, and then they provide more services to the state. The state's the largest component of their business. About 50% of the beds at the federal level are provided by our company and most of those are in facilities that we own.
Turning to slide 14 and getting into some of the financial highlights of the company. In the first quarter, we were at 84 cents AFFO, slightly above the street expectation, and about 12 cents ahead of last year's performance, so we've continued to have steady growth. We've steadily increased the dividends since we converted to a REIT. In 2013 we were at 50 cents a share, and as I mentioned before, we're at 65 cents a share per quarter. Annually, we revisit that in generally the fourth quarter, so with the fourth quarter dividend payment if there's going to be an increase we would expect to make it probably at that time. We evaluate that in connection with what we expect our capital requirements to be going forward, as well as trying to maintain a relatively consistent payout ratio of about 75% of our AFFO.
Again, some information on the segments from a revenue perspective. As I mentioned previously, US corrections and detention is the largest component of our business, approximately 67% of the revenue. Probably slightly more than that from an EBITDA perspective, as that's where the largest component of our own facilities are, which generate the most margin to the company. GEO Care comprises our day reporting centers, the halfway houses, the youth facilities, and the electronic monitoring business. International is obviously our operations in Australia, the United Kingdom, and South Africa. Then the construction piece is revenue that's, from an accounting perspective, we're required to record that, but it's related to the Ravenhall Project, which we've really outsourced all of the construction for that project, but because we are the primary contractor with the state, the county rules are requiring us to pass that through our income statement, but there's no profit on it. It's not typically a part of our business, but because of the size of the project we do disclose it separately.
16, some information on our customer base. As I mentioned before, the federal government is our largest customer, serving principally 3 agencies: Immigration and Customs Enforcement or ICE; the Federal Bureau of Prisons, which is the federal prison system; and then the US Marshals Service, which is more like your federal sheriff, or the federal jailer. We also have significant operations in Australia, and then you can see all the different states that we operate in.
The federal government, I think it's important to point out, those are typically the better contracts, longer term, better terms within the contracts, the increases in the per diems are built into the contracts so they automatically step up. There's better protections against wage inflation in those contracts, so typically the government at the federal level sets the wages that we have to pay our employees, and then when the Department of Labor adjusts those wages, we're able to go back to our customer and get an equitable adjustment in our contracts, so we have very limited exposure to wage inflation in those contracts. Our state contracts are more typical contracts where there's a step up that's tied to inflation, and then we'll have to work through the legislative budget process to make sure that that increase is appropriated for and that we receive that.
Within slide 17, our compound annual growth rate on AFFOs since conversion about 15%. Obviously, a big piece of that is the conversion, the step up in 2012 to 2013 when we became a REIT, but even since conversion to a REIT I think we're averaging about 8% growth rate in our AFFO, so steady increase in the AFFO and correspondingly we've increased our dividend in connection with that.
18, just some general detail on our guidance for 2016. AFFO mid-point of the range about 266 million, and our dividend currently is about a little under 200 million in total, and AFFO per share of approximately $3.54 to $3.62. As I mentioned previously on slide 19, the allocation of our cash flow is about 75% of it we intend to allocate towards our dividend, and hold the other 25% for either capital needs for growth, or for maybe some pay down on debt to preserve some additional capital on the balance sheet for growth when some of those projects that we expect to materialize come through.
Some information on our real estate, we do have over 18 million square feet in our portfolio. As I mentioned, we have approximately 75 facilities that we own and operate. Approximate book value of just under 2 billion dollars. When we do invest capital, we're looking typically for a cash-on-cash return of approximately 13 to 15%, and 70% of our NOI is generated by our owned assets in the US.
Some additional information, just from a useful life perspective ... I don't know if that slide's in here ... But our facilities are among the newest in the industry, both ourselves and CCA, our average facility is about 14 years old. I think the next nearest state average facility portfolio's probably 30 years old, so there's a lot of old infrastructure out there, and that's an opportunity for the industry to replace older, aging facilities, even in states where there's not necessarily a need for new beds because of capacity requirements, but more from the perspective through replace aging, inefficient infrastructure. We've done some of that in the state of Georgia, the state of Arizona, and I expect to see additional opportunities like that going forward.
Low maintenance CapEx requirements on these facilities are concrete and steel, as long as you maintain them and take of them they have a much longer useful life I think than their depreciable life, probably 75 years on average for many of these facilities. A little bit about our customers, obviously all of our customers are investment grade. All of our business, for the most part, is with state and federal customers. Through our BI subsidiary they do have a much broader customer base, so they have many contracts with local municipalities and so forth, but even the bulk of their business is still at the federal level or the state level. There's no collectibility concerns on our cash flows. All of our customers are required by law to pay us on time, and typically if they don't pay within 45 to 60 days, interest accrues automatically so in our history there's never been any problems with collections in the industry.
A lot of our contracts, a majority of them, have some sort of occupancy guarantee built into the contract, and that's especially important where we own the facilities, but even when we don't own the facilities, operating prisons there's a high fixed cost ratio, 60 to 65% of our costs are staff related, and those staff are not really ... If the population steps down a little, you can't necessarily correspondingly step down your staffing. Most of our contracts have an occupancy guarantee built into them, and within our own facilities we try to build in most of the economics into that occupancy guarantee to insure the predictability of the cash flows.
Average contract term is between 7 and 10 years, and our retention rate is in excess of 90%. As I mentioned before on slide 24, approximately 70% of our net operating income is coming from our owned and leased assets. That's a reflection of the investment of capital and the higher margins that we have on those facilities. Typically, EBITDA margins on an owned facility will be 25 to 35% of revenue, whereas on a managed-only facility where the government has made the capital investment it's 10 to 15%.
Our bed count, a little bit of detail on slide 25. We have 84,000 beds that are either active or under activation or development, for instance, the facility in Australia that we're currently developing. Then we have 3,000 beds at 4 facilities that are available for additional activation. I think I mentioned the margin profiles on the bottom of the page there, we do have a few beds that we lease that we don't own outright, but we lease those facilities under longer term leases, and those also have typically some capital investment. We've had to renovate the facilities and we do have a higher return on those facilities as well.
Slide 26, some depiction of what our per diem rates have looked like since 2008, and how they've trended and trended through some of the economic downturn, and importantly, I think you can see that they've steadily increased, so despite what may have happened in the more broader real estate market, or in the economy in general, we continue to grow through the economic downturn, and that growth has continued today and we expect to see that growth moving forward.
Next couple slides, I'll touch on a couple issues that are from a sort of a macro level. There continues to be, I think, questions within our investor base, and people have questions around criminal justice reform and what would that mean, or what does that mean to our industry. There's some statistics on the page I think that are important, and when you think about the prison population, first of all, in the US there's about 2.2 million, or 2.3 million, or 2.1 million people in prison or in jail. We operate in the prison space, which is about 2/3 of that number, so about 1.5 million people are in prison in the US at any one time. That's where we operate.
Jail's a very different business. That's when you hear, I think, the talk about people maybe being in jail or in prison for low-level drug offenses. They're typically in jail. That's not where we operate. The people that are in prison are in for generally much more serious crimes. If it is drug related, it's typically drug trafficking related crimes, racketeering and things like that. The bulk of the people that are in prison are in for violent crimes or sex-related crimes. Just about half of all people that are in prison in the US today are in for serious criminal offenses of that nature. Then about 30% are in for other types of crime, like property crimes, burglary, theft, etc. Sentencing reform has typically focused on the area around drug and drug related crimes, and there's obviously been some adjustments for that. More it's been at the federal level where there's been an impact, and there's been some reduction in the federal prison population as a consequence to that, but it hasn't meaningfully affected our business, and we don't expect it to going forward.
From a reform perspective, there is an increased focus, I think, on rehabilitation programs, and we've made investments as a company in that area, and we expect to see additional opportunities as states and federal agencies look to make more investments in rehabilitation and programming to try and reduce the rate of reoffending. Part of the prison population is just people recycling back in and out. The reoffending rates are as high as 50 to 75% over a 3 to 5 year period, so if you can affect that reoffending rate to some degree you can affect the cost curve and the need for beds. Obviously, it has a overall beneficial impact to society. If you reduce the reoffending rate you're reducing criminal activity.
The next slide just shows additionally some information around minimum mandatory sentences at the federal level to show that the growth in the overall prison population at the federal level has been relatively consistent between people that are been sentenced under federal minimums, as well as those under non-mandatory sentences. Growth and where is it coming from, again, at the federal and the state market none of this is probably a surprise to most of the people in the room. There's continues to be capacity issues at the state level. Many states are overcrowded and looking for additional capacity, as well as replacement of older facilities as I mentioned earlier. At the federal level, in the US marshal side, and in the immigration side, it's been more of a consolidation away from smaller facilities to special purpose facilities that have been built specifically for their needs.
Slide 33 I mentioned already, the age of the facilities. Slide 34, again as I mentioned, there's 4 specifically idle facilities in our portfolio that we're looking to reactivate currently, and most of that is going to be either through a federal or state customer. The facility in Colorado is a leased facility. That lease expires in 2019, so up through that point we would look to reactivate it. If it's not, then we probably wouldn't renew that lease. Then the other facilities are owned and are part of a recent acquisition that we made from LCS that I mentioned earlier in the presentation. Those facilities were idle when we acquired them, and we're working both with the specific states where they're located, or for federal opportunities.
Last slide, slide 35, the yellow, the facilities highlighted in yellow, those are the beds that we activated in 2015 and that are normalizing in 2016, as well as the prison in Australia at the bottom of that grouping which we'll activate in 2017 at the end of the fiscal year. In blue are a number of opportunities within the industry that are competitive that both ourselves and CCA will be competing on, so that's the new growth opportunities. Ohio, there's an expectation that within the next couple months they'll issue an RFP to sell the facility that they own, so monetize that asset and enter into a sale-leaseback transaction. They did a similar type transaction about 5 years ago.
Hamilton county, which is in Tennessee, is a county opportunity. They have old infrastructure that they're looking to renovate and/or replace some pieces of that infrastructure, so we've talked about that type of opportunity. The ICE Houston opportunity is 1,000 beds, that's a new opportunity. New Greenfield site, that would be about 100 million dollars in construction. Then the New South Wales project is in Australia, and that would be similar to the Ravenhall Project, which we're undertaking right now, and that would require some capital, but mostly that would be a managed only type opportunity. That procurement is active and would be decided by the end of this year. With that, I'll conclude the presentation. I believe we have about 5 minutes left, so I can open that up for any questions.
Meredith: Excuse me. Would you mind stepping to the mike to ...
Brian: Or speaking loudly.
Meredith: Appreciate it.
Male: I'm the reentry/youth services side of the business. I was just curious, the returns on invested capital there versus the other parts of your business.
Male: Then as a follow-up, opportunity for someone to just simply add capacity there and the licensing requirements.
Brian: Sure. I'll touch on both of those separately. I think the youth business is a difficult business. It came to us as part of an acquisition. The returns on that business are low. From a real estate perspective, we're probably more in 15% range. I think most of that is generally due to a lack of utilization. If the facilities were better utilized, the returns would be higher. It's only about 2 to 3% of our EBITDA, and it's not an area where we're making significant investment. Our focus is on just basically improving the utilization of those facilities.
It's different from our correctional business in that it's ... I would say it's more retail in nature. You have to go out and get individual participants in the program, so as juveniles are going through some sort of process in their local community, a judge will assign them to our facility or some other facility, but there's no occupancy guarantees. There's no specific set contracts. It's just multiple or dozens of contracts that you're trying to fill those beds with. Not an area where we have a lot of focus, so a lower return, as far as from a capital investment perspective, and so as a consequence we're not looking to necessarily grow in that area.
On the reentry business in the halfway house area, those returns are analogous to our correctional facilities, so they're smaller, those facilities, 150, to 150 or 200 beds, but the same types of EBITDA margins in 25 to 30% of revenue, and 13 to 15% return on investment on a cash-on-cash basis. Then did you have a followup, what was the ...
Male: The opportunity for someone to [crosstalk 00:27:09] facilities of reentry.
Brian: In the ... You know, in the reentry area it's ... The constraint there as you can imagine most of these facilities are in urban settings. The zoning requirements are very difficult, so it's difficult to site new facilities. Once you have a location, it's pretty well established and it's hard, even in a rebid process, for people to compete against that. It's been difficult for us as we've tried to capture new business, but it's also difficult for our competitors to try and take away any of the sites that we have. We do own most of those sites. Additional questions?
Male: Just curious, in order to optimize occupancy are you able to move state incarcerated prisoners from one state to another state?
Brian: No, typically not. I mean, most of our contracts are ... Most of our facility contracts, we're housing inmates in the specific state where they're located, and those states aren't going to allow their inmates to be transferred out. We do have out of state inmates in our Michigan facility from the state of Vermont, so in a contract like that where we've got inmates from an out of state situation, we will try to have the flexibility in the contract built in that if we need to or want to move those inmates we can, but we only have about 300 inmates that are out of state inmates right now, currently.
Male: Pablo, could you just discuss safety metrics between your facilities and state-owned facilities?
Brian: You know, it's difficult because the states don't necessarily publish a lot of that information, but we do look at that annually, and it's consistent. Sometimes our numbers are a little better depending on ... You know, they have a much larger population, so they may have more of some of the older inmates, so they may have a higher death rate than we do. They may have a little bit higher violence rate, but we're relatively consistent. There are certain laws which have been established that require some of those things to be published, and we're consistent with where the states are. We look at homicide, suicides, inmate on inmate assaults, inmate on staff assaults, staff on inmate, all those types of things, and those are measured by us. Our customers will look at that information and compare it to their information, and if they think there's something inappropriate, there may be some sort of levee or something against it, but we have not experienced anything of that sort.
Male: Just one last point, because you touched on this, the demographics between your facilities and the state-owned facility?
Brian: Consistent. I mean, it's really going to be set by security level. If they've contracted for us with a medium security inmate population, then our demographic's going to look like whatever their medium security inmate population looks like.
Male: I was just curious, at least you might remember [inaudible 00:30:16], at least one of the candidates said that there should be no private prisons. I mean, probably [inaudible 00:30:24]. How controversial is this, I mean, probably political and how ... What are they doing about it?
Brian: You know, it's controversial, I guess, in the political arena. There's not a lot that we do about it. We do our job. We don't get into the politics of it. We don't typically lobby around legislation related to privatization. We obviously try to support candidates that are more supportive of the concepts of privatization and being pro-business, but other than that, not a lot. I mean, I know that on the Democratic side, Senator Sanders and Secretary Clinton both have made some negative comments about the privatization of prisons, but I think we have good relationships with our customers. As I mentioned before, it's highly regulated. There's significant contractual requirements, and I think the agencies that we work for are generally supportive of what we do, and that's why our business has continued to grow with them throughout the last 15 years under Republican and Democratic administrations.
Meredith: And with that, I'm afraid we're out of time. Thank you very much Brian and Pablo.
Brian: Thank you very much.
Meredith: [crosstalk 00:31:39] your presentation, and thank you.