The GEO Group, Inc. ($GEO)

Good day, and welcome to the GEO Group First Quarter 2026 Earnings Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Pablo Paez, Executive Vice President, Corporate Relations. Please go ahead.

Thank you, operator. Good morning, everyone, and thank you for joining us for today's discussion of the GEO Group's first quarter 2026 earnings results. This morning, we will discuss our first quarter results as well as our outlook. 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 the supplemental disclosure that 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, CEO and founder, George Zoley. George?

Thank you, Pablo. Good morning to everyone, and thank you for joining us on this call. I will conduct the entire conference call due to Shayn being out for the next couple of weeks. . Our diversified business units delivered strong financial and operational performance during the first quarter of 2026. Our better-than-expected performance reflects significant revenue growth from the contracts that we entered into throughout 2025. As we have previously discussed in 2025, we were awarded new or expanded contracts that represent up to approximately $520 million in new incremental annual revenues, which represents the largest amount of new business we have won in a single year in our company's history. In our Secure Services segment, we entered into new contracts to house ICE's at four facilities, totaling approximately 6,000 beds, including three previously idle company-owned facilities in New Jersey, Michigan, Georgia and a management services contract in Florida. We also reactivated our company-owned Adelanto ICE Processing Center in California, which was already under contract, but had been severely underutilized due to a long-standing COVID-related court case. These facility activations represent annual revenues of approximately $300 million and increased our total beds under contract with ICE to approximately 26,000 beds. The census across our ICE facilities reached a high of 24,000 early this year but has since declined to approximately 21,000, but still representing more than 1/3 of the national ICE population of approximately 58,000. We believe that this recent decline is likely due to several factors, including the recent transition in leadership at the Department of Homeland Security, and the 82-day partial government shutdown of DHS resulting in a lapse in annual appropriations for ICE. During this lapse in annual appropriations, we believe ICE Detention operations have been supported with funding from the one big beautiful bill. As a reminder, under the budget reconciliation bill, ICE received approximately $45 billion for detention available through September 30, 2029, and this funding is not impacted by the partial government shutdown. Congress has approved legislation that reopened most of DHS, excluding ICE and Customs and Border Protection, through an annual cooperations bill while proposing legislation through reconciliation for $70 billion to fund ICE and CPB through the next 3.5 years. Consistent with prior shutdowns, the services rendered under our contracts with ICE have continued uninterrupted as they are considered essential public safety services. However, the timing of payments and collections has been somewhat delayed, requiring us to carefully manage our liquidity and working capital needs. With the expansion of our revolving credit facility by $100 million earlier this year, we believe we have substantial liquidity. Our first quarter 2026 results also reflected significant expansion in our secure transportation services on behalf of both ICE and the U.S. Marshals Service. In 2025, we entered into a new or amended contracts to expand secured ground transportation services at four existing ICE facilities and add our three newly activated ICE facilities. And the support services that we provide under our ICE air transportation subcontract have continued to steadily increase. In addition, in 2025, we signed a new 5-year contract with U.S. Marshals Service covering 26 federal judicial districts in spanning 14 states. Overall, these new and expanded transportation contracts are valued at approximately $60 million in incremental annual revenue. Importantly, in 2025, we also secured a new 2-year contract for the ISAP 5 program. ISAP is the only ICE program currently in place to provide electronic monitoring and case management services for individuals on the non-detained docket. The program relies on several forms of monitoring, including GPS, ankle bracelets or risk worn devices that provide real-time tracking as well as the SmartLink phone app, which relies on facial recognition, Voice ID and GPS to confirm a person's location during predetermined check-ins. ISAP counts remained relatively stable during the first quarter of 2026 at approximately 180,000 to 181,000 participants. Consistent with the trend we highlighted last quarter, we have continued to see steady technology shift to more intensive and higher priced and monitoring devices such as ankle monitors. The number of ISAP participants on GPS ankle monitors has increased to more than 48,000 currently from 17,000 in early 2025. Correspondingly, the number of ISAP participants on the SmartLink mobile app has declined to approximately 131,000 today from approximately 159,000 in early 2025. We also continue to experience a steady increase in the number of ISAP participants assigned to case management services, which involve staff interaction and monitoring for approximately 111,000 individuals currently. If this trend continues, the technology and case management mix shift would continue to increase the revenues and earnings generated under the ISAP contract even if overall volume remains constant. Thus we continue to be optimistic about the importance and growth potential of the ISAP 5 contract, we believe that is well positioned to scale up to higher overall accounts. In the fourth quarter, we were also awarded a new 2-year contract by ICE for the provision of skip tracing services valued at up to $60 million in revenues per year. We began providing skip tracing services under this new 2-year contract in the month of March and are optimistic that the contract can ramp up to higher volumes later this year. Finally, at the state level, we were awarded two new management-only contracts in 2025 from the Florida Department of Corrections valued at approximately $100 million in combined annual revenues. They include the 1,884 bed Graceville facility and the 985-bed Bay facility and are scheduled to transition to GEO management on July 1, 2026. Moving to our updated guidance. We have increased our outlook for 2026 to reflect the strength of our first quarter results, and we believe there are still several sources of potential upside that are not currently included in our guidance. On the revenue side, sources of potential upside include additional growth in our Secure Services segment from the reactivation of additional idle facilities and/or higher overall populations across our active facilities. Additional volume increases and/or accelerated technology service mix in our ISAP 5 contract. Additional revenue from a higher utilization of our skip tracing contract, and additional growth potential in our secure transportation segment. On the expense side, our guidance assumes more moderate contribution from labor savings in subsequent quarters. Moving to our outlook for new business opportunities in 2026. We will continue to be in active discussions with ICE and the U.S. Marshals Service regarding the potential reactivation of additional idle facilities. It is our understanding that the present ICE Detention census is approximately 58,000 distributed over 2025 separate locations, which are primarily short-term GL facility. We believe the federal government is continuing to pursue the priority of increasing immigration detention capacity to approximately 100,000 beds or more and consolidate to fewer larger facilities. As a 40-year partner to ICE, we expect to be part of the solution. We have approximately 6,000 idle beds at 6 company-owned facilities, which are primarily former U.S. Bureau of Prisons facilities, and therefore, high security, making them ideally suited for the current needs of the federal government. At full capacity, these 6,000 beds could generate more than $300 million in combined incremental revenues. Before moving on to a more detailed review of the first quarter results, I'd like to highlight our continued progress towards strengthening our capital structure and enhancing shareholder value. During the first quarter, we purchased approximately 3.6 million shares for approximately $50 million, bringing the total number of shares repurchased to $8.5 million for approximately $141 million. Our current total outstanding share count is approximately 133.7 million shares, and we have approximately $359 million still available under our $500 million share repurchase authorization. We believe our stock continues to trade at historically low multiple despite the intrinsic value of our assets and our significant growth opportunities. And we recognize that the imbalance creates a unique opportunity to enhance value for our shareholders through share repurchases. Moving to a more detailed review of our financial results. Revenues for the first quarter of 2026 increased to approximately $705.2 million, up from approximately $604.6 million in the prior year's first quarter, reflecting a 17% increase. For the first quarter of 2026, we reported net income attributable to GEO operations of approximately $38.3 million or $0.29 per diluted share. This compares to net income attributable to GEO operations of approximately $19.6 million or $0.14 per diluted share for the first quarter of 2025, reflecting a 96% increase this year. Our adjusted EBITDA for the first quarter of 2026 increased to approximately $131.4 million, up from approximately 99.8 million in the prior year's first quarter, reflecting a 32% increase. Looking at revenue trends, our own and leased secured services revenues increased by approximately $70 million or 23% increase compared to the prior year's first quarter. This increase was driven by the activation of our 3 company-owned facilities under new contracts with ICE, which was offset by revenue loss from the sale of the Lawton, Oklahoma facility and the depopulation of Lea County, New Mexico facility. Quarterly revenues for our managed-only contracts increased by approximately $33 million or 22% from the prior first year's quarter. This increase was driven by the joint venture agreement for the management of the North Florida ICE detention facility as well as certain transportation revenue increases that are reported in this segment. Quarterly revenues for our reentry services increased by approximately 5%, offset by a 5% decline in nonresidential services revenues compared to the prior year's first quarter. Finally, first quarter 2026 revenues for our electronic monitoring and supervision services decreased by approximately 4% from the prior year's first quarter. This decrease was driven by the reduced pricing for our ISAP 5 contract, which was offset by favorable technology and case management mix shift and some modest skip tracing revenues. Turning to the expenses during the first quarter of 2026. Our operating expenses increased by approximately 15% as a result of the activation of our new ICE facility contracts and increased occupancy compared to the prior year's first quarter. Operating expenses were favorably impacted by lower-than-expected labor costs compared to our prior guidance for the first quarter of 2026. Our general and administrative expenses for the first quarter of 2026 decline to 8.6% of revenue as compared to 9.6% of revenue in the prior year's first quarter. Our first quarter 2026 results reflect a year-over-year decrease in net interest expense of approximately $4 million as a result of the reduction of our total net debt. Our effective tax rate for the first quarter of 2026 was approximately 28.5%. Moving to our outlook. We have increased our guidance for the full year of 2026 and issued guidance for the second quarter of 2026. We expect full year 2026 GAAP net income to be $153 million to $166 million or a range of $1.15 to $1.25 per diluted share on annual revenues of $2.95 billion to $3.1 billion based on effective tax rate of approximately 30%, inclusive of known discrete items. We expect full year 2026 adjusted EBITDA to be in the range of $525 million to $545 million. We expect total capital expenditures for the full year of 2026 to be between $137.5 million and $162.5 million. For the second quarter of 2026, we expect GAAP net income to be $33 million to $39 million or a range of $0.25 to $0.29 per diluted share on a quarterly revenues of $715 million to $725 million. We expect second quarter 2026 adjusted EBITDA to be between $130 million and $135 million. Moving to our balance sheet. We closed the first quarter of 2026 with approximately $80 million in cash on hand and approximately $1.61 billion in total debt. At the end of the first quarter of 2026, our total net debt was approximately $1.53 billion, and our total net leverage was below 3.2x adjusted EBITDA. With the expansion of our revolving credit facility by $100 million, which we announced in January, we believe we have substantial liquidity to support our diverse capital needs as we manage through the current partial government shutdown. In closing, we are very pleased with our first quarter results and improved full year outlook. Our strong performance has been driven by the new growth opportunities we captured in 2025 and are normalizing in 2026. Last year was the most successful period for new business wins in our company's history, and we expect 2026 to be a very active year as well. We have, therefore, believe we have upside potential across our diversified business segments. We have approximately 6,000 idle high-security beds that remain available, which could generate in excess of $300 million in annual revenues at full occupancy. The continued shift in technology and case management mix and potential increases in accounts under our ISAP 5 contract could also provide additional upside through 2026. We are also well positioned to continue to expand our delivery of secure ground and air transportation services for ICE and the U.S. Marshals beyond the significant growth we have already experienced. Finally, as we discussed last quarter, ICE has purchased 11 commercial warehouses that we -- that were to be retrofitted as detention facility while contracting with private sector companies for operations. These purchases were part of a plan to acquire 24 warehouses and retrofit them as detention facilities using funds from the $45 billion provided for detention in the one big beautiful bill. At this time, the warehouse project has been paused, and DHS is evaluating how to proceed with this initiative to increase and consolidate the tension capacity. It has also been widely reported that ICE is considering the purchase of approximately 10 privately owned turnkey ICE processing centers. ICE has approximately 40 existing detention sites nationwide that are owned and operated by private contractors. CoreCivic owns and operates approximately 15 detention facilities, while GEO owns and operates 23 ICE detention facilities. I can respectfully acknowledge that we have been in discussions with ICE regarding the potential sale of multiple facilities subject to mutual agreement on price and our continued management of those facilities under long-term support services contracts. We consider ourselves primarily a support services operator and will place particular importance on our ability to continue our support services at any facility sold to ICE. There will also be a need to renegotiate select contracts so as to eliminate the ownership costs such as depreciation in property Texas embedded in our present contracts in the event of ICE ownership. At this time, there is no definitive agreement in place with ICE and no precise time line for the closing of any such transactions. And of course, we can give no assurances that these transactions will take place at all. But if select facilities are sold to ICE, GEO would use the proceeds to reduce debt and continued stock repurchases as well as other corporate purchase purposes. The potential sale of multiple facilities to ICE could represent a significant liquidity and shareholder value enhancing the event for our company. While the exact timing of government actions is always difficult to estimate, we remain focused on pursuing new growth opportunities and allocating capital to enhance our long-term value for our shareholders. Given the intrinsic value of our assets, including 50,000 owned beds at 70 facilities and our current and expected future growth, we believe that our stock is significantly undervalued and offers a very attractive investment opportunity. That completes my remarks, and I would be glad to take on any questions from our audience. Thank you.

[Operator Instructions] And the first question will come from Greg Gibas with Northland Securities.

Congrats on the execution there. I wanted to follow up on the potential facility sales and maybe how we should think about potential valuations in relation to the Lawton facility sale last year at, I believe, $130,000 per bed?

Thank you for the question. I think the Lawton bed valuation is a good baseline to be followed by several other factors that should be the result in a meaningful higher valuation of our ICE facilities. First, the physical plant at an ICE processing center is much more complicated with the addition of courtrooms and office space requirements for ICE personnel, which adds to the cost. Second, the ICE facility locations are in or near urban areas, which add to the land and construction costs. And third, several of the ICE facility locations are in blue states, which makes their development very difficult to establish and very problematic to replicate thus adding to their value. So again, the Lawton sale at Oklahoma is a good baseline, but there's many things to consider beyond that, which would drive the price to a higher level.

Got it. That makes sense. Appreciate that. And I know you mentioned it's difficult to predict the timing of these sales, but do you believe initial sales could still be, I guess, realized or announced within Q2 or is Q3 a more likely time frame?

I would guess at late Q2, maybe early Q3. But that's just the guess.

Fair enough. Fair enough. And I guess last one for me as it related to some reports that ICE was activating the Central Valley Annex facility in California, next to the gold and State Annex. I wonder if you could comment on, is that a transfer facility? Or is that new? Any color you can provide there would be helpful.

The Central Valley facility actually was under ICE to begin with in 2020. And it was led to the U.S. Marshals Services -- to only recently. And then ICE has taken it over, since then, it's a 700-bed facility. It's located in the McFarland, California area next to another ICE facility actually adjacent to it. So it's part of a complex that is entirely ICE controlled.

The next question will come from Joe Gomes with NOBLE Capital.

Thanks for the detailed overview, George. Much appreciate it.

You're welcome. Thank you for joining us.

So I just wanted to kind of circle back on the Q1 performance, especially given the decline in ICE populations over the period, they were down roughly from 24,000. I think you said in the end of the fourth quarter to 21,000 at the end of the first quarter or to today. Maybe you can give a little more color on the kind of how that progressed through the quarter? And also maybe some more color on the ramp-up of the reactivated facilities. Is that going as expected? Are they going slower than expected, given the decline in ICE populations here recently. And what that possibly means for getting those facilities up to normalized occupancy levels?

Well, two very good questions. So let me take the first questions regarding lower populations, which actually promoted an increase in our EBITDA. With respect to lower populations, it required less intake duties, less housing assignments, less off-site travel, less labor and overtime for servicing these facilities, which, at one point, we're extremely active as to the intake and outflow of detainees, which was very costly in bringing people in on an overtime basis often to handle those areas of intake, housing and off-site requirements. But it is stabilized at this point. And -- we think it will be fairly stable through the second quarter as well with a pickup starting probably in the second half of the year. The new facilities were -- had very rapid intakes at one point, and that has slowed down because of the general scale down of the populations nationally. So we're kind of in a holding pattern, I guess, to a large extent because of the change in administration and the lack of specific funding for ICE and a reevaluation of the immigration enforcement policies and programs.

Right. Okay. And then you talked about lower-than-anticipated labor cost. Maybe you could talk a little bit more -- also a little more color on where that is coming from or what is driving that?

Well, as I said, it's the lower number of intakes and lower overall population that drives -- it's primarily in the overtime costs to have additional people in the intake area, additional people serving in special needs cases, particularly in mental health case is you have to have additional staff, and that requires many cases over time. And we're seeing a population that I'm told is more strictly than we've historically had. And these people require more off-site visits, requiring more staff involvement, more overtime expense. So it's been a different situation for us. But with the pause in the overall population levels and the intake activity, it's given us a welcome breather from that very rapid intake and outflow processing that we experienced last year.

Okay. And then one more for me, if I may. Last quarter, I believe it was, you talked about looking at some additional opportunities in the mental health area. And I'm just wondering how that is progressing, those efforts.

We do have a pending proposal with the State of Florida Department of Children families for a forensic facility in the state that we, at one time, developed, constructed and operated for 8 years. So we expect there will be a decision on that procurement in the next 30 days...

The next question will come from Brendan McCarthy with Sidoti & Co.

Great. I wanted to start off on the skip tracing business. I know you're only about maybe 2 months or so into operations there. But can you give us any detail on the current volume in that program and the revenue model associated with the program?

Our guidance really reflects some modest improvement in that program. We received an initial contract. We delivered it very quickly. There are other contractors that were awarded similar contracts. They're still working on their assignments and we're waiting for them to catch up so we can get our next assignment.

Understood. And then just on the updated 2026 guidance. I know the low end of the revenue guide was brought up, but it looks like there was a more meaningful uplift in the adjusted EBITDA and EPS guidance for the year. Just curious as to what's the read-through there? And is it really just in line with your prior comments on kind of a lower cost structure at these new facilities?

It really is at this point. I think that's our view as to what taking place in the financials of these facilities, we've had one month of activity to reflect on that. And it -- I think we're on track as to our guidance and our -- the underlying assumptions in that guidance. So yes, I think we've given you good guidance.

Got it. One more question for me on the updated guidance for CapEx. I think it was up 10% to 11% at the midpoint. Any insight into that increase? And maybe what specific segment in the business is going to consume that incremental capital?

Well, we have, as I said, [ 6,000 ] idle beds and some of those facilities need some retrofitting to bring them up to date and revise them according to the new updated needs of ICE. As we get these new contracts, ICE is typically asking for more office space, more areas for their use for more staff, and we have to pay for those improvements to the capital structure of the facility.

The next question will come from Raj Sharma with Texas Capital.

Congratulations on the solid results and raising the guidance. I wanted to get some clarity on the $520 million of revenues from wins last year. Are they -- they don't seem to be fully reflected in the increase in the revenue guidance. Could you please help bridge how much of this -- the 5 wins will be fully ramped versus still to come? And also perhaps comment on the utilization at Adelanto and the other the 3 activated ICE facilities by end of year and sort of rate?

Okay. Well, $100 million of the new $520 million was related to two facilities in the state of Florida, those facilities have not yet been activated. I think they started July 1. So only half of the $100 million will take place this year. Then we had an offset of 2 facilities with the discontinuation of the Lawton, Oklahoma facility, which was approximately 2,400 beds and the Lee County facility, which was approximately 1,200 beds.

Got it. Got it. And then just I wanted to understand how soon do you see a pickup in the ICE detention staff? And has your outlook on achieving the overall -- ICE achieving the overall 100,000 detentions, has that changed at all with the change in the DHS administration...

Well, we don't have any special insight as to what the administration is doing as to how the reassessing the initiative to convert warehouses to the detention facilities. But I think there is still an objective of trying to increase overall nationwide capacity as close as possible to the 100,000, and to consolidate to less than the 250 approximately locations they have now to fewer larger scale facilities. But as I think people are aware that as I've said today, we have 6,000 beds that can be activated within a few months. I think CoreCivic has maybe 10,000 beds. So that -- and I think both have further expansion capabilities on those beds that I'm citing that we could expand our 6,000 to maybe 10,000. And so the private sector with the two major providers can provide a very material, meaningful increase in nationwide capacity at a very comparable favorable cost.

The next question will come from Kirk Ludtke with Imperial Capital.

George, you mentioned the 100,000 beds and fewer facilities. Do you have a sense for how many of those 100,000 beds ICE would want to own?

Probably as many as possible. But I think they're starting to look at the price tags of each of the facilities and doing comparisons as to whether the existing turnkey facilities maybe a better play financially, operationally, so forth than some of these other locations, which have been politically problematic. But -- so all of the plans, I think, are being reviewed, assessed and I'm sure they will come up with some reasonable conclusions.

Got it. Why do they want to own the facilities rather than contract with third parties?

I think it's been reported that through federal ownership that there is more protections from litigation -- unwarranted litigation that infringes upon the activities of the ICE processing centers. There's been a litigation regarding overseeing medical services, food services, general et cetera. And it's really unprecedented. And I believe it's fundamentally unconstitutional. And as some blue states are considering more active involvement in oversight of facilities, I think the logical solution to much of that is federal ownership of the facilities. They are federal facilities to begin with, in my opinion. It's the federal government who is paying for the operations of the facilities. But the ownership of the buildings will provide stronger credibility in the ports as to the pharmacy clause in the constitution that these are federal facilities, and they are carrying out the congressional priorities of the immigration of programs and policies that Congress has passed and that states can only have very limited involvement in those policies and programs.

Interesting. How many beds are in your 23 ICE facilities?

We have 25,000 beds in those 23 owned facilities.

Great. And then lastly, you mentioned the $45 billion. Do they -- would ICE need any type of incremental approval to do this? Or is that at their discretion, the $45 billion at their discretion?

The $45 billion is at their discussion.

This concludes our question-and-answer session. I would like to turn the conference back over to George Zoley, Executive Chairman and CEO of the GEO Group for any closing remarks.

Thank you for being on this call, and we look forward to addressing you on the next one.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.