GEO Group (GEO) Tops Q2 EPS by 36c, Revenues Miss; Offers FY20 EPS Guidance

GEO Group (NYSE: GEO) reported Q2 EPS of $0.36, $0.36 better than the analyst estimate of $0.00. Revenue for the quarter came in at $587.8 million versus the consensus estimate of $613.97 million.

Second Quarter 2020 Highlights

• Total revenues of $587.8 million
• Net Income Attributable to GEO of $36.7 million or $0.31 per diluted share
• Adjusted Net Income of $0.36 per diluted share
• Net Operating Income of $149.1 million
• Normalized FFO of $0.51 per diluted share
• AFFO of $0.66 per diluted share

George C. Zoley, Chairman and Chief Executive Officer of GEO, said, “During the second quarter, we experienced some favorable cost trends that resulted in better than expected financial performance. While we are encouraged by these favorable trends, our company continues to face challenges associated with the COVID-19 pandemic, which has had a negative operational and financial impact across several segments of our company. In the face of these challenges, our frontline employees have shown incredible commitment and perseverance, helping our company manage through these difficult times, and we are thankful for their dedication and daily sacrifice.

“We believe that our earnings and cash flows remain strong and our business is supported by long-term real estate assets and high-quality contracts entailing essential government services. We also recognize that political rhetoric based on the mischaracterization of our role as a government services provider has created concerns regarding our future access to capital. While we do not have any upcoming debt maturities until 2022, we have announced today an anticipated reduction to our future quarterly dividend payments in order to preserve capital and focus on paying down debt. Our anticipated new dividend payment will allow GEO to remain structured as a publicly traded REIT, thus providing continued value for our shareholders, while also focusing on debt repayment. We believe the steps we have announced today are consistent with our commitment to enhance long-term value for our shareholders.”

GUIDANCE:

GEO Group sees FY2020 EPS of $1.07-$1.11.

Updated Financial and Dividend Guidance

• FY20 Net Income Attributable to GEO expected to be $0.95-$0.99 per diluted share
• FY20 Adjusted Net Income expected to be $1.07 to $1.11 per diluted share
• FY20 AFFO expected to be $2.29-$2.33 per diluted share
• Updated financial guidance reflects the continued impact of COVID-19 pandemic, including the expiration of D. Ray James Correctional Facility contract
• Expects to reduce quarterly dividend to $0.34 per share, $1.36 per share annualized
• Expects to allocate $50-$100 million in excess cash flow annually to debt repayment

We have updated our financial guidance for the full-year of 2020 and issued guidance for the third and fourth quarters of 2020. Even though our operations as an essential government services provider have continued uninterrupted, the spread of COVID-19 continues to have a negative impact on several segments of our company.

The COVID-19 pandemic has resulted in lower occupancy levels at several of our facilities and programs beginning in late March and continuing through the second quarter. Our U.S. Immigration and Customs Enforcement (“ICE”) Processing Centers and U.S. Marshals Service facilities have continued to experience lower overall occupancy as a result of declines in crossings and apprehensions along the U.S. Southwest border, as well as, a decrease in court and sentencing activity at the federal level in the United States. Additionally, the U.S. federal government has reduced operational capacity across ICE Processing Centers to promote social distancing practices.

Our GEO Secure Services contracts typically contain fixed-price or minimum guarantee payment provisions intended to ensure adequate staffing levels and consistent service delivery. We expect a continuation of lower occupancy levels at our ICE Processing Centers and U.S. Marshals Service Facilities through the end of the year, resulting in an estimated revenue decline of approximately 9% for the full-year 2020.

Additionally, the Federal Bureau of Prisons (“BOP”) has experienced a decline in overall federal prison populations in part as a result of the COVID-19 pandemic. Due to this decline in federal prison populations, the BOP has decided to not rebid the contract for our company-owned, 1,900-bed D. Ray James Correctional Facility in Georgia, which is set to expire on September 30, 2020. Our updated guidance reflects the expiration of this contract, which generated approximately $60 million in annualized revenues.

Our GEO Reentry Services segment has also continued to experience lower occupancy levels in our residential centers and day reporting programs due to the COVID-19 pandemic. We expect lower occupancy levels for our residential reentry centers and day reporting programs to continue through the end of the year, resulting in an estimated revenue decline of approximately 10% for the full-year 2020. Our Youth Services segment has also been impacted by declining occupancy levels, which are expected to result in the closure of the Hector Garza Center in Texas at the end of September 2020 due to the COVID-19 pandemic.

We have also increased our spending on personal protective equipment, diagnostic testing, medical expenses, non-contact infrared thermometers, and increased sanitation as a result of the COVID-19 pandemic and expect to incur several million dollars in non-recurring costs during the second half of 2020.

Additionally, our updated guidance continues to assume no contribution from our 700-bed Central Valley, 750-bed Desert View, and 700-bed Golden State facilities in California, even though we remain hopeful to be able to activate these facilities as ICE Processing Center annexes, beginning as early as late third quarter or early fourth quarter of 2020.

We have updated our full-year 2020 guidance for Net Income Attributable to GEO to a range of $0.95 to $0.99 per diluted share; Adjusted Net Income to a range of $1.07 to $1.11 per diluted share; and AFFO to a range of $2.29 to $2.33 per diluted share. We expect full-year 2020 revenues to be approximately $2.34 billion.

For the third quarter of 2020, we expect Net Income Attributable to GEO to be in a range of $0.25 to $0.27 per diluted share; Adjusted Net Income to be in a range of $0.28 to $0.30 per diluted share; and AFFO to be in a range of $0.58 to $0.60 per diluted share. For the fourth quarter of 2020, we expect Net Income Attributable to GEO to be in a range of $0.18 to $0.20 per diluted share; Adjusted Net Income to be in a range of $0.19 to $0.21 per diluted share; and AFFO to be in a range of $0.50 to $0.52 per diluted share.

Beginning with our next quarterly dividend payment in October 2020, we expect to declare quarterly dividend payments of $0.34 per share, or $1.36 per share annualized, solely within the discretion of our Board of Directors and based on various factors. This new dividend payment target will allow GEO to remain structured as a publicly traded REIT, while preserving capital to be applied towards the repayment of debt. During 2020, we expect to repay approximately $100 million in debt, and starting in 2021, we expect to apply between $50 million and $100 million on average in excess cash flows towards debt repayments annually.

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