By M. Marin
NYSE: CXW
READ THE FULL CXW RESEARCH REPORT
Resuming operations at the South Texas under new ICE contract
CoreCivic (NYSE:CXW) has entered into an amended intergovernmental services agreement (IGSA) with ICE and the City of Dilley, Texas to resume operations at the South Texas Family Residential Center in Dilley and care for up to 2,400 people. The amended contract runs through March 2030 and may be further extended through bilateral modification. The company has also entered into a new lease agreement with Target Hospitality Corporation, which owns the facility. As with the prior agreement between CXW and Target, the period contracted for leasing of the facility is co-terminus with the ICE agreement so that CXW has no exposure at the back-end of the contract once it ends. CXW will be able to largely match lease costs with expected revenue.
The Dilley Facility was constructed specifically for ICE in 2014 to provide occupancy for families seeking entry into the U.S. CXW managed the facility from inception until August 2024, when funding for the contract ended and the facility was idled. In addition to all the prior services it offered through August 2024, CXW will also now provide onsite medical care.
Once it is completely active and with the provision of medical services, the new agreement is expected to result in annual revenue to CXW of about $180 million. The company indicated that pre-activation activities commenced earlier this year and the company expects it to be accretive beginning in 2Q25. The company also entered into four contract modifications with ICE last week. We have increased our projections for CXW and believe our revised 2025 estimates still might prove conservative. Reflecting the limited supply of and older state of many government-owned correctional facilities, among other factors, we anticipate that the company will continue to sign new business that, in turn, will further enhance operating leverage, results and lead to multiple expansions.
Believe new management contracts support view that CXW guidance was conservative
CXW’s relationship with ICE, its largest government partner, continues to be strong, in our view. The recently passed Laken Riley Act requires DHS (Department of Homeland Security) to detain certain non-U.S. nationals who have been charged, arrested, or convicted of certain crimes. According to CXW, ICE estimates that the act could require 60,000 to 110,000 incremental detention beds. The new administration also reversed an executive order implemented during the prior administration that directed the Justice Department to not renew direct contracts with private detention facilities.
The South Texas amended contract is important, we believe, for several reasons. First, it is expected to have a benefit from the incremental revenue - when the company issued guidance last month, it did not incorporate the potential impact of new contracts coming online in 2025. Moreover, we believe this supports our view that CXW’s relationship with ICE, its largest customer, remains solid and that when the prior lease expired in August 2024, it reflected funding and financial factors. The facility had been operated under a costly Family Residential Standards (FRS) model versus CXW’s standard model because of the initial designation drove relative costs higher than the average ICE contract.
Recent business activity has been strong
New contracts have come online over the past several quarters and, as noted, CXW entered into contract modifications to add capacity for up to a total of 784 ICE detainees at its 2,016-bed Northeast Ohio Correctional Center, its 1072-bed Nevada Southern Detention Center, and its 1,600-bed Cimarron Correctional Facility in Oklahoma. CXW also obtained a contract modification for ICE to potentially use up to 252 beds at its 2,672-bed Tallahatchie County Correctional Facility in Mississippi.
CoreCivic currently cares for approximately 650 residents under a contract with the U.S. Marshals Service ("USMS"), as well as 925 residents under a contract with the Ohio Department of Rehabilitation and Correction at the Northeast Ohio Correctional Center. CoreCivic currently cares for approximately 800 residents under a contract with the USMS at the Nevada Southern Detention Center, and approximately 1,100 residents under a contract with the USMS at the Cimarron Correctional Facility. CoreCivic currently cares for approximately 1,400 residents at the Tallahatchie County Correctional Facility under contracts with eight different customers.
Separately, in July 2024, the company was awarded a new management contract with the state of Montana that contributed to 4Q24 revenue. In addition, CXW’s 1,896-bed Saguaro Correctional Facility in Eloy, Arizona, which accepted additional residents from Montana, which also houses about 1,000 residents from Hawaii, and nearly 600 residents from Idaho. Under a separate contract with the state, CXW also manages the fully occupied Crossroads Correctional Center in Shelby, Montana. Other recent management contracts include with Wyoming for up to 240 beds at its 2,672-bed Tallahatchie County Correctional Facility in Tutwiler, Mississippi, a new management contract with Hinds County, Mississippi for up to 250 beds at this facility and another with Harris County, Texas for up to 360 beds at the company’s Tallahatchie County Correctional Facility. The company also has a new contract with the U.S. Marshals Service at the 4,128-bed Central Arizona Florence Correctional Complex.
Subsequent to 4Q24, CXW was awarded a new management contract with Montana for additional inmates outside the state. The company expects 240 inmates to arrive at its 2,672-bed Tallahatchie County Correctional Facility in Tutwiler, Mississippi in 1Q25. The incremental Montana inmates are expected to boost the company’s occupancy, bed utilization and efficiency at the Tallahatchie County Correctional Facility, which also serves the state of Wyoming, Harris County, Texas and Hinds County, Mississippi.
Reflecting the limited supply of and older state of many government owned correctional facilities, CXW’s facilities are relatively new compared to about 57% of the Federal Bureau of Prisons (BOP) infrastructure built 30+ years ago (and about 31% 50+ years old). The BOP is a relatively small customer for CXW but we believe that the overall state of its facilities provides insight into the general state of government detention facilities in the U.S., reflecting budgetary constraints and other challenges to constructing newer facilities. Thus, over the past 5-years, retention rates on owned and controlled facilities is over 95% and the company is engaged in discussions for additional contracts with existing and potential partners, including federal, state, and local agencies. CXW has indicated that the prospective pipeline for new contracts is robust. Reflecting the additional capacity required by ICE and potentially other government partners, we anticipate new contracts to be signed. We expect the results of RFIs and RFPs, as well as other ongoing business discussions, to lead to new business and anticipate the company’s momentum to continue in 2025.
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