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CORECIVIC : MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. (form 10-Q)

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08/08/2017 | 06:40pm CEST

The following discussion should be read in conjunction with the financial statements and notes thereto appearing elsewhere in this report.


This quarterly report on Form 10-Q contains statements as to our beliefs and
expectations of the outcome of future events that are forward-looking statements
as defined within the meaning of the Private Securities Litigation Reform Act of
1995, as amended. All statements other than statements of current or historical
fact contained herein, including statements regarding our future financial
position, business strategy, budgets, projected costs and plans, and objectives
of management for future operations, are forward-looking statements. The words
"anticipate," "believe," "continue," "estimate," "expect," "intend," "could,"
"may," "plan," "projects," "will," and similar expressions, as they relate to
us, are intended to identify forward-looking statements. These forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from the statements made. These include, but are
not limited to, the risks and uncertainties associated with:

• general economic and market conditions, including the impact governmental

        budgets can have on our contract renewals and renegotiations, per diem
        rates, and occupancy;

• fluctuations in our operating results because of, among other things,

changes in occupancy levels, competition, increases in costs of

operations, fluctuations in interest rates, and risks of operations;

• changes in the privatization of the corrections and detention industry and

the public acceptance of our services;

• our ability to obtain and maintain correctional, detention, and reentry

facility management contracts because of reasons including, but not

limited to, sufficient governmental appropriations, contract compliance,

        effects of inmate disturbances, and the timing of the opening of new
        facilities and the commencement of new management contracts as well as our

ability to utilize current available beds and new capacity as development

and expansion projects are completed;

• increases in costs to develop or expand correctional, detention, and

reentry facilities that exceed original estimates, or the inability to

complete such projects on schedule as a result of various factors, many of

        which are beyond our control, such as weather, labor conditions, and
        material shortages, resulting in increased construction costs;

• changes in government policy regarding the utilization of the private

        sector for corrections and detention capacity and our services;


    •   changes in government policy and in legislation and regulation of

corrections and detention contractors that affect our business, including,

but not limited to, California's utilization of out-of-state contracted

correctional capacity and the continued utilization of the South Texas

Family Residential Center by U.S. Immigration and Customs Enforcement, or

ICE, under terms of the current contract, and the impact of any changes to

        immigration reform and sentencing laws (Our company does not, under
        longstanding policy, lobby for or against policies or legislation that
        would determine the basis for, or duration of, an individual's
        incarceration or detention.);

• our ability to successfully integrate operations of our acquisitions and

realize projected returns resulting therefrom;

• our ability to meet and maintain qualification for taxation as a real

estate investment trust, or REIT; and

• the availability of debt and equity financing on terms that are favorable

to us.



Any or all of our forward-looking statements in this quarterly report may turn
out to be inaccurate. We have based these forward-looking statements largely on
our current expectations and projections about future events and financial
trends that we believe may affect our financial condition, results of
operations, business strategy, and financial needs. Our statements can be
affected by inaccurate assumptions we might make or by known or unknown risks,
uncertainties and assumptions, including the risks, uncertainties, and
assumptions described in "Item 1A Risk Factors" disclosed in Part II hereafter,
as well as in our Annual Report on Form 10-K as of and for the year ended
December 31, 2016 filed with the Securities and Exchange Commission, or the SEC,
on February 23, 2017 (the "2016 Form 10-K") and in other reports we file with
the SEC from time to time. Readers are cautioned not to place undue reliance on
these forward-looking statements, which speak only as of the date hereof. We
undertake no obligation to publicly revise these forward-looking statements to
reflect events or circumstances occurring after the date hereof or to reflect
the occurrence of unanticipated events. All subsequent written and oral
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the cautionary statements contained
in this report and in the 2016 Form 10-K.

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OVERVIEW

The Company

We are a diversified government solutions company with the scale and experience
needed to solve tough government challenges in cost-effective ways. Through
three business offerings, CoreCivic Safety, CoreCivic Properties, and CoreCivic
Community, we provide a broad range of solutions to government partners that
serve the public good through high-quality corrections and detention management,
innovative and cost-saving government real estate solutions, and a growing
network of residential reentry centers to help address America's recidivism
crisis. We have been a flexible and dependable partner for government for more
than 30 years. Our employees are driven by a deep sense of service, high
standards of professionalism and a responsibility to help government better the
public good.

Structured as a REIT, we are one of the nation's largest owners of partnership
correctional, detention, and residential reentry facilities and one of the
largest prison operators in the United States. As of June 30, 2017, we owned or
controlled 46 correctional and detention facilities, owned or controlled 28
residential reentry centers, and managed an additional 10 correctional and
detention facilities owned by our government partners, with a total design
capacity of approximately 87,400 beds in 20 states. In addition to providing
fundamental residential services, our facilities offer a variety of
rehabilitation and educational programs, including basic education, faith-based
services, life skills and employment training, and substance abuse
treatment. These services are intended to help reduce recidivism and to prepare
offenders for their successful reentry into society upon their release. We also
provide or make available to offenders certain health care (including medical,
dental, and mental health services), food services, and work and recreational
programs.

We are a Maryland corporation formed in 1983. Our principal executive offices
are located at 10 Burton Hills Boulevard, Nashville, Tennessee, 37215, and our
telephone number at that location is (615) 263-3000. Our website address is
www.corecivic.com. We make our annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, definitive proxy statements, and
amendments to those reports under the Securities Exchange Act of 1934, as
amended, or the Exchange Act, available on our website, free of charge, as soon
as reasonably practicable after these reports are filed with or furnished to the
SEC. Information contained on our website is not part of this report.

We began operating as a REIT effective January 1, 2013. We provide correctional
services and conduct other business activities through taxable REIT
subsidiaries, or TRSs. A TRS is a subsidiary of a REIT that is subject to
applicable corporate income tax and certain qualification requirements. Our use
of TRSs enables us to comply with REIT qualification requirements while
providing correctional services at facilities we own and at facilities owned by
our government partners and to engage in certain other business operations. A
TRS is not subject to the distribution requirements applicable to REITs so it
may retain income generated by its operations for reinvestment.

As a REIT, we generally are not subject to federal income taxes on our REIT
taxable income and gains that we distribute to our stockholders, including the
income derived from providing prison bed capacity and dividends we earn from our
TRSs. However, our TRSs will be required to pay income taxes on their earnings
at regular corporate income tax rates.

As a REIT, we generally are required to distribute annually to our stockholders
at least 90% of our REIT taxable income (determined without regard to the
dividends paid deduction and excluding net capital gains). Our REIT taxable
income will not typically include income earned by our TRSs except to the extent
our TRSs pay dividends to the REIT.

CRITICAL ACCOUNTING POLICIES


The consolidated financial statements in this report are prepared in conformity
with U.S. generally accepted accounting principles. As such, we are required to
make certain estimates, judgments, and assumptions that we believe are
reasonable based upon the information available. These estimates and assumptions
affect the reported amounts of assets and liabilities at the date of the
financial statements and the reported amounts of revenue and expenses during the
reporting period. A summary of our significant accounting policies is described
in our 2016 Form 10-K. The significant accounting policies and estimates which
we believe are the most critical to aid in fully understanding and evaluating
our reported financial results include the following:

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Asset impairments. The primary risk we face for asset impairment charges,
excluding goodwill, is associated with correctional facilities we own. As of
June 30, 2017, we had $2.8 billion in property and equipment, including $217.7
million in long-lived assets, excluding equipment, at eight idled correctional
facilities. The impairment analyses we performed for each of these facilities
excluded the net book value of equipment, as a substantial portion of the
equipment is easily transferrable to other company-owned facilities without
significant cost. The carrying values of the eight idled facilities as of
June 30, 2017 were as follows (in thousands):



               Prairie Correctional Facility$  16,585Huerfano County Correctional Center           17,201
               Diamondback Correctional Facility             40,948
               Southeast Kentucky Correctional Facility      22,287
               Marion Adjustment Center                      11,982
               Lee Adjustment Center                         10,243
               Kit Carson Correctional Center                57,948
               Eden Detention Center                         40,473
                                                          $ 217,667




We also have two idled non-core facilities containing 440 beds with an aggregate
net book value of $3.9 million. We incurred operating expenses at the idled
facilities of approximately $2.5 million and $2.0 million for the three months
ended June 30, 2017 and 2016, respectively. We incurred operating expenses of
approximately $5.4 million and $4.1 million at the idled facilities for the six
months ended June 30, 2017 and 2016, respectively.

We evaluate the recoverability of the carrying values of our long-lived assets,
other than goodwill, when events suggest that an impairment may have
occurred. Such events primarily include, but are not limited to, the termination
of a management contract or a significant decrease in inmate populations within
a correctional facility we own or manage. Accordingly, we tested each of the
idled facilities for impairment when we were notified by the respective
customers that they would no longer be utilizing such facility.

We re-perform the impairment analyses on an annual basis for each of the idle
facilities and evaluate on a quarterly basis market developments for the
potential utilization of each of these facilities in order to identify events
that may cause us to reconsider our most recent assumptions. Such events could
include negotiations with a prospective customer for the utilization of an idle
facility at terms significantly less favorable than those used in our most
recent impairment analysis, or changes in legislation surrounding a particular
facility that could impact our ability to care for certain types of inmates at
such facility, or a demolition or substantial renovation of a facility. Further,
a substantial increase in the number of available beds at other facilities we
own could lead to a deterioration in market conditions and cash flows that we
might be able to obtain under a new management contract at our idle facilities.
We have historically secured contracts with customers at existing facilities
that were already operational, allowing us to move the existing population to
other idle facilities. Although they are not frequently received, an unsolicited
offer to purchase any of our idle facilities at amounts that are less than the
carrying value could also cause us to reconsider the assumptions used in our
most recent impairment analysis.

Our impairment evaluations also take into consideration our historical
experience in securing new management contracts to utilize facilities that had
been previously idled for substantial periods of time. Such previously idled
facilities are currently being operated under contracts that continue to
generate cash flows resulting in the recoverability of the net book value of the
previously idled facilities by material amounts. Due to a variety of factors,
the lead time to negotiate contracts with our federal and state partners to
utilize idle bed capacity is generally lengthy and has historically resulted in
periods of idleness similar to the ones we are currently experiencing at our
idle facilities. As a result of our analyses, we determined each of the idled
facilities to have recoverable values in excess of the corresponding carrying
values. However, we can provide no assurance that we will be able to secure
agreements to utilize our idle facilities, or that we will not incur impairment
charges in the future.

By their nature, these estimates contain uncertainties with respect to the
extent and timing of the respective cash flows due to potential delays or
material changes to historical terms and conditions in contracts with
prospective customers that could impact the estimate of cash
flows. Notwithstanding our customers' fluctuating demand for prison beds which
led to our decision to idle certain facilities, we believe the long-term trends
favor an increase in the utilization of our correctional facilities and
management services. This belief is based on our experience in operating in
difficult economic environments and in working with governmental agencies faced
with significant budgetary challenges, which is a primary contributing factor to
the lack of appropriated funding since 2009 to build new bed capacity by the
federal and state governments with which we partner.

On April 30, 2017, the contract with the Federal Bureau of Prisons, or BOP, at
our 1,422-bed Eden Detention Center expired and was not renewed. We idled the
Eden facility following the transfer of the offender population, and have begun
to market the facility. We can provide no assurance that we will be successful
in securing a replacement contract. We performed an impairment analysis of the

                                       26

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Eden facility, which had a net carrying value of $40.5 million as of June 30,
2017, and concluded that this asset has a recoverable value in excess of the
carrying value.

As a result of declines in federal populations at our 910-bed Torrance County
Detention Facility and 1,129-bed Cibola County Corrections Center, during the
third quarter of 2017 we expect to obtain customer consent to consolidate
offender populations into our Cibola facility in order to take advantage of
efficiencies gained by consolidating populations into one facility. We have
begun to market the Torrance facility, which had a net carrying value of $37.3
million at June 30, 2017, to other potential customers.

Revenue Recognition - Multiple-Element Arrangement. In September 2014, we agreed
under an expansion of an existing inter-governmental service agreement, or IGSA,
between the city of Eloy, Arizona and ICE to provide residential space and
services at our South Texas Family Residential Center. The amended IGSA
qualifies as a multiple-element arrangement under the guidance in Accounting
Standards Codification, or ASC, 605, "Revenue Recognition". We evaluate each
deliverable in an arrangement to determine whether it represents a separate unit
of accounting. A deliverable constitutes a separate unit of accounting when it
has standalone value to the customer. ASC 605 requires revenue to be allocated
to each unit of accounting based on a selling price hierarchy. The selling price
for a deliverable is based on its vendor specific objective evidence, or VSOE,
of selling price, if available, third-party evidence, or TPE, if VSOE of selling
price is not available, or estimated selling price, or ESP, if neither VSOE of
selling price nor TPE is available. We establish VSOE of selling price using the
price charged for a deliverable when sold separately. We establish TPE of
selling price by evaluating similar products or services in standalone sales to
similarly situated customers. We establish ESP based on management judgment
considering internal factors such as margin objectives, pricing practices and
controls, and market conditions. In arrangements with multiple elements, we
allocate the transaction price to the individual units of accounting at
inception of the arrangement based on their relative selling price. The
allocation of revenue to each element requires considerable judgment and
estimations which could change in the future. In October 2016, we entered into
an amended IGSA that extended the term of the contract through September
2021. As a result of this amendment, the deferred revenue associated with the
multiple elements will be recognized over future periods based on the delivery
of future services. If the IGSA were to be further amended or terminated before
the expiration of the five-year term, we would determine the allocation of any
deferred revenues to the separate units of accounting to be recognized
immediately for services previously provided and, if amended, over future
periods based on the delivery of future services.

Self-funded insurance reserves. As of June 30, 2017, we had $31.4 million in
accrued liabilities for employee health, workers' compensation, and automobile
insurance claims. We are significantly self-insured for employee health,
workers' compensation, and automobile liability insurance claims. As such, our
insurance expense is largely dependent on claims experience and our ability to
control our claims. We have consistently accrued the estimated liability for
employee health insurance claims based on our history of claims experience and
the estimated time lag between the incident date and the date we pay the
claims. We have accrued the estimated liability for workers' compensation claims
based on an actuarial valuation of the outstanding liabilities, discounted to
the net present value of the outstanding liabilities, using a combination of
actuarial methods used to project ultimate losses, and our automobile insurance
claims based on estimated development factors on claims incurred. The liability
for employee health, workers' compensation, and automobile insurance includes
estimates for both claims incurred and for claims incurred but not
reported. These estimates could change in the future. It is possible that future
cash flows and results of operations could be materially affected by changes in
our assumptions, new developments, or by the effectiveness of our strategies.

Legal reserves. As of June 30, 2017, we had $6.4 million in accrued liabilities
related to certain legal proceedings in which we are involved. We have accrued
our best estimate of the probable costs for the resolution of these claims based
on a range of potential outcomes. In addition, we are subject to current and
potential future legal proceedings for which little or no accrual has been
reflected because our current assessment of the potential exposure is
nominal. These estimates have been developed in consultation with our General
Counsel's office and, as appropriate, outside counsel handling these matters,
and are based upon an analysis of potential results, assuming a combination of
litigation and settlement strategies. It is possible that future cash flows and
results of operations could be materially affected by changes in our
assumptions, new developments, or by the effectiveness of our litigation and
settlement strategies.

                                       27
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RESULTS OF OPERATIONS


Our results of operations are impacted by the number of facilities we owned and
managed, the number of facilities we managed but did not own, the number of
facilities we leased to other operators, and the facilities we owned that were
not in operation. The following table sets forth the changes in the number of
facilities operated for the periods presented:



                                                        Owned
                                        Effective        and          Managed
                                          Date         Managed          Only         Leased         Total
Facilities as of December 31, 2015                            60             11             6            77
Acquisition of seven community
corrections facilities in
  Colorado                             April 2016              7              -             -             7
Lease of the North Fork
Correctional Facility                   May 2016              (1 )            -             1             -
Acquisition of the Long Beach
Community Corrections
  Center in California                  June 2016              -              -             1             1
Facilities as of December 31, 2016                            66             11             8            85
Acquisition of the Arapahoe
Community
  Treatment Center in Colorado        January 2017             1              -             -             1
Expiration of the contract at the
D.C.
  Correctional Treatment Facility
in the
  District of Columbia                January 2017            (1 )            -             -            (1 )
Acquisition of the Stockton Female
Community Corrections
  Facility in California              February 2017            -              -             1             1
Acquisition of the Oklahoma City
Transitional Center in
  Oklahoma                              June 2017              1              -             -             1
Combination of two existing
facilities in Arizona into
  one complex                           June 2017             (1 )            -             -            (1 )
Expiration of the contract at the
Bartlett State Jail                     June 2017              -             (1 )           -            (1 )
Termination of the lease at the
Bridgeport Pre-Parole
  Transfer Facility                     June 2017              -              -            (1 )          (1 )
Facilities as of June 30, 2017                                66             10             8            84



Three and Six Months Ended June 30, 2017 Compared to the Three and Six Months Ended June 30, 2016


Net income was $45.5 million, or $0.38 per diluted share, for the three months
ended June 30, 2017, compared with net income of $57.6 million, or $0.49 per
diluted share, for the three months ended June 30, 2016. During the six months
ended June 30, 2017, we generated net income of $95.5 million, or $0.81 per
diluted share, compared with net income of $103.9 million, or $0.88 per diluted
share, for the six months ended June 30, 2016.

                                       28

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Facility Operations


A key performance indicator we use to measure the revenue and expenses
associated with the operation of the facilities we own or manage is expressed in
terms of a compensated man-day, which represents the revenue we generate and
expenses we incur for one offender for one calendar day. Revenue and expenses
per compensated man-day are computed by dividing facility revenue and expenses
by the total number of compensated man-days during the period. A compensated
man-day represents a calendar day for which we are paid for the occupancy of an
offender. We believe the measurement is useful because we are compensated for
operating and managing facilities at an offender per-diem rate based upon actual
or minimum guaranteed occupancy levels. We also measure our ability to contain
costs on a per-compensated man-day basis, which is largely dependent upon the
number of offenders we accommodate. Further, per compensated man-day
measurements are also used to estimate our potential profitability based on
certain occupancy levels relative to design capacity. Revenue and expenses per
compensated man-day for all of the facilities placed into service that we owned
or managed, exclusive of those held for lease, were as follows for the three and
six months ended June 30, 2017 and 2016:



                                                 For the Three Months Ended            For the Six Months Ended
                                                          June 30,                             June 30,
                                                  2017                2016              2017               2016
Revenue per compensated man-day               $       71.80$       75.28$      71.89$      75.29
Operating expenses per compensated man-day:
Fixed expense                                         37.10               38.37            37.55              39.11
Variable expense                                      14.56               15.40            14.30              15.41
Total                                                 51.66               53.77            51.85              54.52

Operating income per compensated man-day $ 20.14$ 21.51$ 20.04$ 20.77 Operating margin

                                       28.1 %              28.6 %           27.9 %             27.6 %
Average compensated occupancy                          79.0 %              79.3 %           80.0 %             77.2 %
Average available beds                               82,447              83,399           82,711             84,297
Average compensated population                       65,160              66,169           66,170             65,077




Fixed expenses per compensated man-day for the three and six months ended
June 30, 2017 include depreciation expense of $4.1 million and $8.2 million,
respectively, and interest expense of $1.6 million and $3.3 million,
respectively, in order to more properly reflect the cash flows associated with
the lease at the South Texas Family Residential Center. Fixed expenses per
compensated man-day for the three and six months ended June 30, 2016 include
depreciation expense of $10.6 million and $21.2 million, respectively, and
interest expense of $2.7 million and $5.6 million, respectively, associated with
the lease at the South Texas Family Residential Center.

Revenue


Total revenue consists of revenue we generate in the operation and management of
correctional, detention, and residential reentry facilities, as well as rental
revenue generated from facilities we lease to third-party operators, and from
our inmate transportation subsidiary. The following table reflects the
components of revenue for the three and six months ended June 30, 2017 and 2016
(in millions):



                               For the Three Months Ended
                                        June 30,
                                2017                2016           $ Change       % Change
 Management revenue:
 Federal                    $       205.6$       242.6$    (37.0 )        (15.3 %)
 State                              182.3               174.6            7.7            4.4 %
 Local                               21.1                20.4            0.7            3.4 %
 Other                               16.7                15.6            1.1            7.1 %
 Total management revenue           425.7               453.2          (27.5 )         (6.1 %)
 Rental and other revenue            10.7                10.1            0.6            5.9 %
 Total revenue              $       436.4$       463.3$    (26.9 )         (5.8 %)






                                       29
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                                For the Six Months Ended
                                        June 30,
                                 2017               2016          $ Change       % Change
  Management revenue:
  Federal                    $      422.3$      478.3$    (56.0 )        (11.7 %)
  State                             364.1              345.8           18.3            5.3 %
  Local                              41.7               36.7            5.0           13.6 %
  Other                              32.9               30.9            2.0            6.5 %
  Total management revenue          861.0              891.7          (30.7 

) (3.4 %)

  Rental and other revenue           21.1               19.0            2.1           11.1 %
  Total revenue              $      882.1$      910.7$    (28.6 )         (3.1 %)




The $27.5 million, or 6.1%, decrease in total management revenue for the three
months ended June 30, 2017 as compared with the same period in 2016 resulted
from a decrease in revenue of approximately $20.6 million driven by a decrease
of 4.6% in average revenue per compensated man-day. The decrease in management
revenue was also a result of a decrease in revenue of approximately $6.9 million
caused by a decrease in the average daily compensated population for the three
months ended June 30, 2017 as compared with the same period in 2016. The $30.7
million, or 3.4%, decrease in total management revenue for the six months ended
June 30, 2017 as compared with the same period in 2016 resulted from a decrease
in revenue of approximately $40.0 million driven by a decrease of 4.5% in
average revenue per compensated man-day. This decrease in revenue was partially
offset by an increase in revenue of approximately $9.3 million caused by an
increase in the average daily compensated population for the six months ended
June 30, 2017 as compared with the same period in 2016, net of the revenue
generated by one fewer day of operations due to leap year in 2016. The decrease
in average revenue per compensated man-day during the three- and six-month
periods ended June 30, 2017 was primarily a result of the amended IGSA
associated with the South Texas Family Residential Center, which became
effective in the fourth quarter of 2016, as further described hereafter. The
decrease in average revenue per compensated man-day was partially offset by the
effect of per diem increases at several of our other facilities.

Average daily compensated population decreased 1,009, or 1.5%, to 65,160 during
the three months ended June 30, 2017 compared to 66,169 during the three months
ended June 30, 2016, while average daily compensated population for the six
months ended June 30, 2017 increased 1,093 from the comparable period in
2016. There were several notable factors that affected the average daily
compensated population when comparing both periods in 2017 to those in 2016.
Average compensated population during the three- and six-month periods ended
June 30, 2017 was positively affected by the activation in the third quarter of
2016 of the new contract to care for up to an additional 1,000 inmates at our
newly expanded Red Rock Correctional Center, as further described hereafter, and
the full activation of the newly constructed Trousdale Turner Correctional
Center during 2016. While we began housing state of Tennessee inmates at the
facility in January 2016, occupancy at the facility increased throughout the
year. During the six-month period ended June 30, 2017, an increase in
populations at certain other facilities, primarily from ICE, also positively
affected average compensated population. Average compensated population in both
the three- and six-month periods in 2017 was negatively affected by the decline
in California inmates held in our out-of-state facilities, the expiration of our
contract with the District of Columbia, or the District, at the D.C.
Correctional Treatment Facility in the first quarter of 2017, and the expiration
of our contract with the BOP at our Eden Detention Center on April 30, 2017, all
as further described hereafter. The expiration of our contract with the BOP at
our Cibola County Corrections Center in October 2016 also negatively affected
average daily compensated population in 2017. While we signed a new contract in
October 2016 to provide detention space and services at our Cibola facility to
ICE for up to 1,116 detainees, the transition period from the BOP contract to
the ICE contract resulted in a reduction in average compensated population at
the facility during the first six months of 2017 when compared to the same
period in the prior year.

Business from our federal customers, including primarily the BOP, the United
States Marshals Service, or USMS, and ICE, continues to be a significant
component of our business. Our federal customers generated approximately 47% and
52% of our total revenue for the three months ended June 30, 2017 and 2016,
respectively, decreasing $37.0 million, or 15.3%. Our federal customers
generated approximately 48% and 53% of our total revenue for the six months
ended June 30, 2017 and 2016, respectively, decreasing $56.0 million, or
11.7%. The decrease in federal revenues in both periods primarily resulted from
the amended IGSA associated with the South Texas Family Residential Center,
which became effective in the fourth quarter of 2016, the expiration of our
contract with the BOP at our Eden Detention Center on April 30, 2017 and, in the
six-month period, the expiration of our contract with the BOP at our Cibola
County Corrections Center in October 2016. The decrease in federal revenues in
the six-month period was partially offset by the combined effect of per diem
increases for several of our federal contracts and a net increase in federal
populations at certain other facilities, primarily from ICE.

State revenues from contracts at correctional, detention, and residential
reentry facilities that we operate increased 4.4% from the second quarter of
2016 to the second quarter of 2017 and 5.3% from the first six months of 2016 to
the comparable period in 2017.  The increase in state revenues in both periods
was primarily a result of the full activation of the newly constructed Trousdale
Turner

                                       30
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Correctional Center during 2016 and the activation of the expansion at our Red
Rock Correctional Center in the third quarter of 2016. The increase in state
revenues in both periods was partially offset by a decline in California inmates
held in our out-of-state facilities and the expiration of our contract with the
District at the D.C. Correctional Treatment Facility in the first quarter of
2017. The $5.0 million, or 13.6%, increase in revenue from local authorities
from the first six months of 2016 to the comparable period in 2017 was primarily
a result of the acquisition of Correctional Management, Inc., or CMI, in the
second quarter of 2016 and the acquisition of the Arapahoe Community Treatment
Center, or ACTC, in the first quarter of 2017, both as further described
hereafter.

Several of our state partners are projecting improvements in their budgets which
has helped us secure recent per diem increases at certain facilities. Further,
several of our existing state partners, as well as state partners with which we
do not currently do business, are experiencing growth in inmate populations and
overcrowded conditions. Although we can provide no assurance that we will enter
into any new contracts, we believe we are well positioned to provide them with
needed bed capacity, as well as the programming and reentry services they are
seeking.

We believe the long-term growth opportunities of our business remain attractive
as governments consider their emergent needs, as well as the efficiency,
savings, and offender programming opportunities we can provide along with
flexible solutions to match our partners' needs. Further, we expect our partners
to continue to face challenges in maintaining old facilities, and developing new
facilities and additional capacity which could result in future demand for the
solutions we provide.

Operating Expenses

Operating expenses totaled $307.9 million and $316.4 million for the three
months ended June 30, 2017 and 2016, respectively, while operating expenses for
the six months ended June 30, 2017 and 2016 totaled $623.2 million and $630.4
million, respectively. Operating expenses consist of those expenses incurred in
the operation and management of correctional, detention, and residential reentry
facilities, as well as at facilities we lease to third-party operators, and for
our inmate transportation subsidiary.

Expenses incurred in connection with the operation and management of
correctional, detention, and residential reentry facilities decreased $9.8
million, or 3.2%, during the second quarter of 2017 compared with the same
period in 2016. Operating expenses decreased $9.4 million, or 1.5%, during the
six months ended June 30, 2017 compared with the same period in 2016. There were
several notable factors that affected operating expenses when comparing the
current year periods with those of the prior year. The amended IGSA associated
with the South Texas Family Residential Center, which lowered the cost structure
effective in the fourth quarter of 2016, the expiration of our contract with the
District at the D.C. Correctional Treatment Facility in the first quarter of
2017, and the expiration of our contract with the BOP at our Eden Detention
Center in the second quarter of 2017 all resulted in a decrease in operating
expenses in both the three- and six-month periods. The decrease in operating
expenses was partially offset primarily by the additional expenses resulting
from the full activation of the newly constructed Trousdale Turner Correctional
Center during 2016 and the activation of the expansion at our Red Rock
Correctional Center in the third quarter of 2016. Additional offsetting factors
during the six-month period included the one fewer day of operations due to leap
year in 2016 and the acquisitions of CMI in the second quarter of 2016 and ACTC
in the first quarter of 2017.

Total expenses per compensated man-day decreased to $51.66 during the three
months ended June 30, 2017 from $53.77 during the three months ended June 30,
2016, and decreased to $51.85 during the six months ended June 30, 2017 from
$54.52 during the same period in the prior year. Fixed expenses per compensated
man-day for the three months ended June 30, 2017 and 2016 include depreciation
expense of $4.1 million and $10.6 million, respectively, and interest expense of
$1.6 million and $2.7 million, respectively, in order to more properly reflect
the cash flows associated with the lease at the South Texas Family Residential
Center. Fixed expenses per compensated man-day for the six months ended June 30,
2017 and 2016 include depreciation expense of $8.2 million and $21.2 million,
respectively, and interest expense of $3.3 million and $5.6 million,
respectively, associated with the lease at the South Texas Family Residential
Center. Fixed expenses and variable expenses per compensated man-day decreased
from both periods from 2016 to 2017 primarily as a result of the amended IGSA
which lowered the cost structure associated with the South Texas Family
Residential Center effective in the fourth quarter of 2016, as further described
hereafter.

As the economy has improved and the nation's unemployment rate has declined, we
have experienced wage pressures in certain markets across the country, and have
provided wage increases to remain competitive. However, these pressures have not
yet had a material impact on our margins, as salaries expense per compensated
man-day increased 2.5% over the prior year quarter and 2.4% over the prior year
six-month period, excluding the impact of the aforementioned contract
modification at the South Texas Family Residential Center. We continually
monitor compensation levels very closely along with overall economic conditions
and will set wage levels necessary to help ensure the long-term success of our
business. Salaries and benefits represent the most significant component of our
operating expenses, representing 60% for the first six months of 2017 and 59% of
our total operating expenses during 2016.

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Facility Management Contracts


We typically enter into facility contracts to provide prison bed capacity and
management services to governmental entities for terms typically ranging from
three to five years, with additional renewal periods at the option of the
contracting governmental agency. Accordingly, a substantial portion of our
facility contracts are scheduled to expire each year, notwithstanding
contractual renewal options that a government agency may exercise. Although we
generally expect these customers to exercise renewal options or negotiate new
contracts with us, one or more of these contracts may not be renewed by the
corresponding governmental agency.

During the third quarter of 2016, the Texas Department of Criminal Justice, or
TDCJ, solicited proposals for the rebid of four facilities we managed for the
state of Texas. The managed-only contracts for these four facilities are
scheduled to expire in August 2017. The four facilities have a total capacity of
5,129 beds and generated $2.3 million in facility net operating income during
2016. The four facilities generated $0.3 million and $1.2 million in facility
net operating income during the six months ended June 30, 2017 and 2016,
respectively.

On March 31, 2017, the TDCJ notified us that, in light of the current economic
climate as well as the fiscal constraints and budget outlook for the TDCJ for
the next biennium, the TDCJ would not be awarding the contract for the Bartlett
State Jail, one of the facilities included in the rebid process mentioned in the
preceding paragraph. During the first quarter of 2017, we wrote-off $0.3 million
of goodwill associated with this managed-only facility. In collaboration with
the TDCJ, the decision was made to close the Bartlett facility on June 24,
2017. During the third quarter of 2017, the TDCJ notified us that it selected
other operators for the management of the three remaining managed-only
facilities subject to the rebid. Accordingly, we expect to transfer operations
of these facilities to the other operators during the third quarter of 2017. We
expect to write-off approximately $1.0 million of assets associated with these
facilities during the third quarter of 2017.

Based on information available at this filing, notwithstanding the contracts at
facilities described above, we believe we will renew all other material
contracts that have expired or are scheduled to expire within the next twelve
months. We believe our renewal rate on existing contracts remains high as a
result of a variety of reasons including, but not limited to, the constrained
supply of available beds within the U.S. correctional system, our ownership of
the majority of the beds we operate, and the quality of our operations.

The operation of the facilities we own carries a higher degree of risk
associated with a facility contract than the operation of the facilities we
manage but do not own because we incur significant capital expenditures to
construct, renovate or acquire facilities we own. Additionally, correctional and
detention facilities have limited or no alternative use. Therefore, if a
contract is terminated on a facility we own, we continue to incur certain
operating expenses, such as real estate taxes, utilities, and insurance, which
we would not incur if a management contract were terminated for a managed-only
facility. As a result, revenue per compensated man-day is typically higher for
facilities we own and manage than for managed-only facilities. Because we incur
higher expenses, such as repairs and maintenance, real estate taxes, and
insurance, on the facilities we own and manage, our cost structure for
facilities we own and manage is also higher than the cost structure for the
managed-only facilities. The following tables display the revenue and expenses
per compensated man-day for the facilities placed into service that we own and
manage and for the facilities we manage but do not own, which we believe is
useful to our financial statement users:



                                                 For the Three Months Ended            For the Six Months Ended
                                                          June 30,                             June 30,
                                                  2017                2016              2017               2016
Owned and Managed Facilities:
Revenue per compensated man-day               $       78.74$       83.43$      78.83$      83.58
Operating expenses per compensated man-day:
Fixed expense                                         39.48               41.52            39.89              42.32
Variable expense                                      15.21               16.50            14.94              16.51
Total                                                 54.69               58.02            54.83              58.83

Operating income per compensated man-day $ 24.05$ 25.41$ 24.00$ 24.75 Operating margin

                                       30.5 %              30.5 %           30.4 %             29.6 %
Average compensated occupancy                          76.2 %              76.2 %           77.3 %             73.8 %
Average available beds                               68,630              69,501           68,854             70,399
Average compensated population                       52,313              52,938           53,232             51,971






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                                                 For the Three Months Ended            For the Six Months Ended
                                                          June 30,                             June 30,
                                                  2017                2016              2017               2016
Managed Only Facilities:
Revenue per compensated man-day               $       43.51$       42.65$      43.32$      42.42
Operating expenses per compensated man-day:
Fixed expense                                         27.42               25.75            27.92              26.41
Variable expense                                      11.94               10.97            11.69              11.03
Total                                                 39.36               36.72            39.61              37.44

Operating income per compensated man-day $ 4.15$ 5.93$ 3.71$ 4.98 Operating margin

                                        9.5 %              13.9 %            8.6 %             11.7 %
Average compensated occupancy                          93.0 %              95.2 %           93.4 %             94.3 %
Average available beds                               13,817              13,898           13,857             13,898
Average compensated population                       12,847              13,231           12,938             13,106




Owned and Managed Facilities

Facility net operating income, or the operating income or loss from operations
before interest, taxes, asset impairments, depreciation and amortization, at our
owned and managed facilities decreased by $15.5 million, from $135.7 million
during the three months ended June 30, 2016 to $120.2 million during the three
months ended June 30, 2017, a decrease of 11.4%. Facility net operating income
at our owned and managed facilities decreased by $18.2 million, from $260.9
million during the six months ended June 30, 2016 to $242.7 million during the
six months ended June 30, 2017, a decrease of 7.0%. Facility net operating
income at our owned and managed facilities in both periods of 2017 was
unfavorably impacted by the amended IGSA associated with the South Texas Family
Residential Center, which became effective in the fourth quarter of 2016, as
further described hereafter. The aggregate depreciation and interest expense
associated with the lease at the South Texas Family Residential Center for the
three months ended June 30, 2017 and 2016 totaling $5.7 million and $13.3
million, respectively, and for the six months ended June 30, 2017 and 2016
totaling $11.5 million and $26.8 million, respectively, are not included in
these facility net operating income amounts, but are included in the per
compensated man-day statistics.

In September 2014, we announced that we agreed to an expansion of an IGSA
between the city of Eloy, Arizona and ICE to care for up to 2,400 individuals at
the South Texas Family Residential Center, a facility we lease in Dilley,
Texas. The services provided under the original amended IGSA commenced in the
fourth quarter of 2014 and had an original term of up to four years.

In October 2016, we entered into an amended IGSA that provides for a new, lower
fixed monthly payment that commenced in November 2016, and extended the term of
the contract through September 2021. The agreement can be further extended by
bi-lateral modification. However, ICE can also terminate the agreement for
convenience or non-appropriation of funds, without penalty, by providing us with
at least a 60-day notice. Concurrent with the amendment to the IGSA entered into
in October 2016, we modified our lease agreement with the third-party lessor of
the facility to reflect a reduced monthly lease expense effective in November
2016, with a new term concurrent with the amended IGSA. In the event we cancel
the lease with the third-party lessor prior to its expiration as a result of the
termination of the IGSA by ICE for convenience, and if we are unable to reach an
agreement for the continued use of the facility within 90 days from the
termination date, we are required to pay a termination fee based on the
termination date, currently equal to $10.0 million and declining to zero by
October 2020.

During the three months ended June 30, 2017 and 2016, we recognized $42.6
million and $70.9 million, respectively, in total revenue associated with the
South Texas Family Residential Center. During the six months ended June 30, 2017
and 2016, we recognized $85.2 million and $141.7 million, respectively, in total
revenue associated with the South Texas Family Residential Center. The original
IGSA with ICE had a favorable impact on the revenue and net operating income of
our owned and managed facilities during 2016, with more favorable operating
margin percentages than those of our average owned and managed facilities. Under
terms of the amended IGSA entered into in October 2016, the revenues generated
at the South Texas Family Residential Center declined and operating margin
percentages at the facility became more comparable to those of our average owned
and managed facilities, resulting in a material reduction to our facility net
operating income in 2017.

Numerous lawsuits, to which we are not a party, have challenged the government's
policy of detaining migrant families. Any court decision or government action
that impacts our existing contract for the South Texas Family Residential Center
could materially affect our cash flows, financial condition, and results of
operations.

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In December 2015, we announced that we were awarded a new contract from the
Arizona Department of Corrections, or ADOC, to care for up to an additional
1,000 medium-security inmates at our Red Rock facility, bringing the contracted
bed capacity to 2,000 inmates. The new management contract contains an initial
term of ten years, with two five-year renewal options upon mutual agreement and
provides for an occupancy guarantee of 90% of the contracted beds. The
government partner included the occupancy guarantee in its request for proposal
in order to guarantee its access to the beds. In connection with the new award,
we expanded our Red Rock facility to a design capacity of 2,024 beds and added
additional space for inmate reentry programming. We began receiving inmates
under the new contract during the third quarter of 2016. The new contract
generated $5.9 million and $11.4 million of incremental revenue during the three
and six months ended June 30, 2017, respectively, when compared to the same
periods in the prior year.

During the first quarter of 2015, the adult inmate population held in state of
California institutions first met a Federal court order to reduce inmate
populations below 137.5% of its capacity. Inmate populations in the state
continued to decline below the court ordered capacity limit which has resulted
in declining inmate populations in the out-of-state program at facilities we own
and operate. As of June 30, 2017, the adult inmate population held in state of
California institutions remained in compliance with the Federal court order at
approximately 135.5% of capacity, or approximately 115,000 inmates, which did
not include the California inmates held in our out-of-state facilities. During
the three months ended June 30, 2017 and 2016, we cared for an average daily
population of approximately 4,300 and 4,900 California inmates, respectively, in
facilities outside the state as a partial solution to the State's
overcrowding. This decline in population, along with the revenue impact in the
six-month period of one fewer day of operations due to leap year in 2016,
resulted in a decrease in revenue of $2.8 million and $6.0 million,
respectively, from the three and six months ended June 30, 2016 to the
comparable periods in 2017.

Approximately 6% of our total revenue for both the six months ended June 30,
2017 and 2016 was generated from the California Department of Corrections and
Rehabilitation, or CDCR, in facilities housing inmates outside the state of
California.

In June 2017, the Governor of California signed a budget for fiscal
2017-2018. The budget contemplates that implementation of initiatives to reduce
prison populations will allow the CDCR to remove all inmates from one of our two
remaining out-of-state facilities in fiscal 2017-2018. Additionally, as a result
of such prison population reduction initiatives, the CDCR anticipates reducing
inmate populations from our other out-of-state facility in calendar year
2018. Although the budget acknowledges that estimates of population reductions
are preliminary and subject to considerable uncertainty, we can provide no
assurance that we would be able to replace the cash flows associated with our
contract with the CDCR, if CDCR inmates are removed from our Tallahatchie and La
Palma facilities. An elimination of the use of our out-of-state solutions by the
state of California would have a significant adverse impact on our financial
position, results of operations, and cash flows.

On April 11, 2017, we announced that we contracted with the state of Ohio to
care for up to an additional 996 offenders at our 2,016-bed Northeast Ohio
Correctional Center. The initial term of the contract continues through June
2032 with unlimited renewal options, subject to appropriations and mutual
agreement. We expect to begin receiving offender populations at the Northeast
Ohio facility from the state of Ohio in the third quarter of 2017, with full
contract utilization expected by the end of the first quarter of 2018. On June
30, 2017, we cared for approximately 650 detainees from the USMS and
approximately 200 detainees from ICE at our Northeast Ohio facility.

Our contract with the District at the D.C. Correctional Treatment Facility
expired in the first quarter of 2017. The District assumed operation of the
facility in January 2017. We incurred a facility operating loss of $0.5 million
during the first quarter of 2017. We incurred facility net operating losses at
the facility of $0.1 million and $0.5 million during the three and six months
ended June 30, 2016, respectively. Our investment in the direct financing lease
with the District also expired in the first quarter of 2017. Upon expiration of
the lease, ownership of the facility automatically reverted to the District.

On April 8, 2016, we closed on the acquisition of 100% of the stock of CMI along
with the real estate used in the operation of CMI's business from two entities
affiliated with CMI. CMI, a privately held community corrections company that
operates seven community corrections facilities, including six owned and one
leased, with approximately 600 beds in Colorado, specializes in community
correctional services, drug and alcohol treatment services, and residential
reentry services. We provide these services through multiple contracts with
three counties in Colorado, as well as the Colorado Department of Corrections, a
pre-existing partner of ours. On January 1, 2017, we also acquired ACTC, a
135-bed residential reentry center in Englewood, Colorado, which we integrated
along with the operations of our existing Colorado residential reentry
centers. We acquired these eight facilities as strategic investments that
further expand the network of reentry assets we own and the services we
provide. Total revenue generated from the acquisition of CMI during the three
months ended June 30, 2016 totaled $3.3 million. Total revenue generated from
the acquisitions of both CMI and ACTC during the three and six months ended June
30, 2017 totaled $3.9 million and $7.7 million, respectively.

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On April 30, 2017, our contract with the BOP at our Eden Detention Center expired and was not renewed. During the three and six months ended June 30, 2017, we generated facility net operating income of $0.5 million and $1.9 million, respectively, at this facility and $9.1 million for the full year ended December 31, 2016.


As a result of declines in federal populations at our 910-bed Torrance County
Detention Facility and 1,129-bed Cibola County Corrections Center, during the
third quarter of 2017 we expect to obtain customer consent to consolidate
offender populations into our Cibola facility in order to take advantage of
efficiencies gained by consolidating populations into one facility. During both
the three and six months ended June 30, 2017, we incurred facility net operating
losses of $0.8 million at the Torrance facility and $4.0 million for the full
year ended December 31, 2016.

Managed-Only Facilities


Total revenue at our managed-only facilities decreased $0.4 million, from $51.3
million during the second quarter of 2016 to $50.9 million during the second
quarter of 2017, and increased $0.2 million, from $101.2 million during the six
months ended June 30, 2016 to $101.4 million during the six months ended
June 30, 2017. When compared with the same periods in the prior year, revenue
per compensated man-day increased to $43.51 from $42.65, or 2.0%, for the three
months ended June 30, 2017, and increased to $43.32 from $42.42, or 2.1%, for
the six months ended June 30, 2017. Operating expenses per compensated man-day
increased to $39.36 from $36.72 for the three months ended June 30, 2017, and
increased to $39.61 from $37.44 for the six months ended June 30, 2017, when
compared with the same periods in the prior year. Facility net operating income
at our managed-only facilities decreased $2.2 million, from $7.1 million during
the three months ended June 30, 2016 to $4.9 million during the three months
ended June 30, 2017, and decreased $3.2 million, from $11.9 million during the
six months ended June 30, 2016 to $8.7 million during the six months ended
June 30, 2017. During the three and six months ended June 30, 2017, managed-only
facilities generated 3.9% and 3.5%, respectively, of our total facility net
operating income compared with 5.0% and 4.4% during the three and six months
ended June 30, 2016, respectively. We expect the managed-only business to remain
competitive and we will only pursue opportunities for managed-only business
where we are sufficiently compensated for the risk associated with this
competitive business. Further, we may terminate existing contracts from time to
time when we are unable to achieve per diem increases that offset increasing
expenses and enable us to maintain safe, effective operations.

As previously described herein, during June 2017, the TDCJ closed the Bartlett
State Jail which we managed and selected other operators for three other
facilities we managed that were subject of a competitive procurement. These four
facilities generated total revenue and net operating income of $23.8 million and
$0.3 million, respectively, for the six months ended June 30, 2017, and total
revenue and net operating income of $49.9 million and $2.3 million,
respectively, for the year ended December 31, 2016.

Other Facility Related Activity


In May 2016, we entered into a lease with the Oklahoma Department of
Corrections, or ODOC, for our previously idled 2,400-bed North Fork Correctional
Facility. The lease agreement commenced on July 1, 2016, and includes a
five-year base term with unlimited two-year renewal options. However, the lease
agreement permitted the ODOC to utilize the facility for certain activation
activities and, therefore, revenue recognition began upon execution of the
lease. The average annual rent to be recognized during the five-year base term
is $7.3 million, including annual rent in the fifth year of $12.0 million. After
the five-year base term, the annual rent will be equal to the rent due during
the prior lease year, adjusted for increases in the Consumer Price Index. We are
responsible for repairs and maintenance, property taxes and property insurance,
while all other aspects and costs of facility operations are the responsibility
of the ODOC.

On June 10, 2016, we acquired a residential reentry center in Long Beach,
California from a privately held owner. The 112-bed facility is leased to a
third-party operator under a triple net lease agreement that extends through
June 2020 and includes one five-year lease extension option. In addition, on
February 10, 2017, we acquired the Stockton Female Community Corrections
Facility, a 100-bed residential reentry center in Stockton, California. The
100-bed facility is leased to a third-party operator under a triple net lease
agreement that extends through April 2021 and includes one five-year lease
extension option. Both third-party operators separately contract with the CDCR
to provide rehabilitative and reentry services to residents at the leased
facilities. We acquired the facilities in the real estate-only transactions as
strategic investments that further expand our network of residential reentry
centers.

General and administrative expenses


For the three months ended June 30, 2017 and 2016, general and administrative
expenses totaled $26.4 million and $27.4 million, respectively, while general
and administrative expenses totaled $51.2 million and $53.8 million,
respectively, during the six months ended June 30, 2017 and 2016. General and
administrative expenses consist primarily of corporate management salaries and
benefits, professional fees and other administrative expenses. We currently
expect general and administrative expenses to continue to be lower when compared
to prior year periods as a result of a cost reduction plan we implemented at the
end of the third quarter of 2016 as part of a restructuring of our corporate
operations.

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Depreciation and amortization


For the three months ended June 30, 2017 and 2016, depreciation and amortization
expense totaled $36.8 million and $42.3 million, respectively, while
depreciation and amortization expense totaled $73.1 million and $84.4 million,
respectively, during the six months ended June 30, 2017 and 2016. Our lease
agreement with the third-party lessor associated with the 2,400-bed South Texas
Family Residential Center resulted in our being deemed the owner of the
constructed assets for accounting purposes, in accordance with ASC 840-40-55,
formerly Emerging Issues Task Force No. 97-10, "The Effect of Lessee Involvement
in Asset Construction". Accordingly, our balance sheet reflects the costs
attributable to the building assets constructed by the third-party lessor,
which, beginning in the second quarter of 2015, began depreciating over the
remainder of the four-year term of the original lease. Depreciation expense for
the constructed assets at this facility was $4.1 million and $10.6 million
during the three months ended June 30, 2017 and 2016, respectively, and $8.2
million and $21.2 million during the six months ended June 30, 2017 and 2016,
respectively. As previously described herein, we modified our lease agreement
with the third-party lessor of the facility in October 2016, which resulted in a
reduced monthly lease rate effective in November 2016 and extended the term of
the contract. As a result of the lease modification, depreciation expense for
the constructed assets at the South Texas Family Residential Center is expected
to decline in 2017 to approximately $16.6 million from $38.7 million in 2016.

Interest expense, net


Interest expense is reported net of interest income and capitalized interest for
the three and six months ended June 30, 2017 and 2016. Gross interest expense,
net of capitalized interest, was $16.9 million and $17.3 million, respectively,
for the three months ended June 30, 2017 and 2016, and was $33.6 million and
$35.0 million, respectively, for the six months ended June 30, 2017 and 2016.
Gross interest expense is based on outstanding borrowings under our $900.0
million revolving credit facility, or revolving credit facility, our outstanding
Incremental Term Loan, or Term Loan, and our outstanding senior notes, as well
as the amortization of loan costs and unused facility fees. We also incur
interest expense associated with the lease of the South Texas Family Residential
Center, in accordance with ASC 840-40-55. Interest expense associated with the
lease of this facility was $1.6 million and $2.7 million during the three months
ended June 30, 2017 and 2016, respectively, and $3.3 million and $5.6 million
during the six months ended June 30, 2017 and 2016, respectively. As previously
described herein, we modified our lease agreement with the third-party lessor of
the facility in October 2016, which resulted in a reduced monthly lease rate
effective in November 2016 and extended the term of the contract. As a result of
the lease modification, interest expense associated with the lease of the South
Texas Family Residential Center is expected to decline in 2017 to approximately
$6.4 million from $10.0 million in 2016. The decrease in interest expense in
both periods that primarily resulted from the reduction in expense associated
with the lease of the South Texas Family Residential Center was partially offset
by an increase in the London Interbank Offered Rate, or LIBOR.

We have benefited from relatively low interest rates on our revolving credit
facility, which is largely based on LIBOR. It is possible that LIBOR could
increase in the future. Based on our leverage ratio, loans under our revolving
credit facility during 2016 and the first half of 2017 were at the base rate
plus a margin of 0.50% or at LIBOR plus a margin of 1.50%, and a commitment fee
equal to 0.35% of the unfunded balance. Interest rates under the Term Loan are
the same as the interest rates under our revolving credit facility.

Gross interest income was $0.3 million and $0.5 million for the three months
ended June 30, 2017 and 2016, respectively, and $0.5 million and $0.7 million
for the six months ended June 30, 2017 and 2016, respectively. Gross interest
income is earned on notes receivable, investments, and cash and cash
equivalents. There was no interest capitalized during the three and six months
ended June 30, 2017. Capitalized interest was $0.1 million and $0.2 million
during the three and six months ended June 30, 2016, respectively. Capitalized
interest in 2016 was primarily associated with the expansion project at our Red
Rock Correctional Center.

Income tax expense

During the three months ended June 30, 2017 and 2016, our financial statements
reflected an income tax expense of $3.2 million and $2.7 million,
respectively. During the six months ended June 30, 2017 and 2016, our financial
statements reflected an income tax expense of $5.7 million and $3.8 million,
respectively. Our effective tax rate was 5.7% and 3.6% during the six months
ended June 30, 2017 and 2016, respectively. As a REIT, we are entitled to a
deduction for dividends paid, resulting in a substantial reduction in the amount
of federal income tax expense we recognize. Substantially all of our income tax
expense is incurred based on the earnings generated by our TRSs. Our overall
effective tax rate is estimated based on the current projection of taxable
income primarily generated in our TRSs. Our consolidated effective tax rate
could fluctuate in the future based on changes in estimates of taxable income,
the relative amounts of taxable income generated by the TRSs and the REIT, the
implementation of additional tax planning strategies, changes in federal or
state tax rates or laws affecting tax credits available to us, changes in other
tax laws, changes in estimates related to uncertain tax positions, or changes in
state apportionment factors, as well as changes in the valuation allowance
applied to our deferred tax assets that are based primarily on the amount of
state net operating losses and tax credits that could expire unused.

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LIQUIDITY AND CAPITAL RESOURCES


Our principal capital requirements are for working capital, stockholder
distributions, capital expenditures, and debt service payments. Capital
requirements may also include cash expenditures associated with our outstanding
commitments and contingencies, as further discussed in the notes to our
financial statements and as further described in our 2016 Form
10-K. Additionally, we may incur capital expenditures to expand the design
capacity of certain of our facilities (in order to retain management contracts)
and to increase our inmate bed capacity for anticipated demand from current and
future customers. We may acquire additional correctional facilities and
residential reentry centers, as well as other real estate assets used to provide
mission critical governmental services primarily in the criminal justice sector,
that we believe have favorable investment returns and increase value to our
stockholders. We will also consider opportunities for growth, including, but not
limited to, potential acquisitions of businesses within our lines of business
and those that provide complementary services, provided we believe such
opportunities will broaden our market share and/or increase the services we can
provide to our customers.

To qualify and be taxed as a REIT, we generally are required to distribute
annually to our stockholders at least 90% of our REIT taxable income (determined
without regard to the dividends paid deduction and excluding net capital gains).
Our REIT taxable income will not typically include income earned by our TRSs
except to the extent our TRSs pay dividends to the REIT. Our Board of Directors
declared a quarterly dividend of $0.42 for the first and second quarters of 2017
totaling $50.0 million in the first quarter and $50.1 million in the second
quarter. The amount, timing and frequency of future distributions will be at the
sole discretion of our Board of Directors and will be declared based upon
various factors, many of which are beyond our control, including our financial
condition and operating cash flows, the amount required to maintain
qualification and taxation as a REIT and reduce any income and excise taxes that
we otherwise would be required to pay, limitations on distributions in our
existing and future debt instruments, limitations on our ability to fund
distributions using cash generated through our TRSs, alternative growth
opportunities that require capital deployment, and other factors that our Board
of Directors may deem relevant.

As of June 30, 2017, our liquidity was provided by cash on hand of $46.6 million, and $481.5 million available under our revolving credit facility. During the six months ended June 30, 2017 and 2016, we generated $182.8 million and $213.3 million, respectively, in cash through operating activities, and as of June 30, 2017, we had net working capital of $24.2 million. We currently expect to be able to meet our cash expenditure requirements for the next year utilizing these resources. We have no debt maturities until April 2020.


Our cash flow is subject to the receipt of sufficient funding of and timely
payment by contracting governmental entities. If the appropriate governmental
agency does not receive sufficient appropriations to cover its contractual
obligations, it may terminate our contract or delay or reduce payment to
us. Delays in payment from our major customers or the termination of contracts
from our major customers could have an adverse effect on our cash flow,
financial condition and, consequently, dividend distributions to our
shareholders.

Debt and equity


As of June 30, 2017, we had $350.0 million principal amount of unsecured notes
outstanding with a fixed stated interest rate of 4.625%, $325.0 million
principal amount of unsecured notes outstanding with a fixed stated interest
rate of 4.125%, and $250.0 million principal amount of unsecured notes
outstanding with a fixed stated interest rate of 5.0%. In addition, we had $90.0
million outstanding under our Term Loan with a variable interest rate of 2.7%,
and $411.0 million outstanding under our revolving credit facility with a
variable weighted average interest rate of 2.6%. As of June 30, 2017, our total
weighted average effective interest rate was 4.1%, while our total weighted
average maturity was 4.1 years. We may also seek to issue debt or equity
securities from time to time when we determine that market conditions and the
opportunity to utilize the proceeds from the issuance of such securities are
favorable.

On February 26, 2016, we entered into an ATM Equity Offering Sales Agreement, or
ATM Agreement, with multiple sales agents.  Pursuant to the ATM Agreement, we
may offer and sell to or through the sales agents from time to time, shares of
our common stock, par value $0.01 per share, having an aggregate gross sales
price of up to $200.0 million. Sales, if any, of our shares of common stock will
be made primarily in "at-the-market" offerings, as defined in Rule 415 under the
Securities Act of 1933, as amended. The shares of common stock will be offered
and sold pursuant to our registration statement on Form S-3 filed with the SEC
on May 15, 2015, and a related prospectus supplement dated February 26, 2016. We
intend to use the net proceeds from any sale of shares of our common stock to
repay borrowings under our revolving credit facility (including the Term Loan
under the "accordion" feature of the revolving credit facility) and for general
corporate purposes, including to fund future acquisitions and development
projects. There were no shares of our common stock sold under the ATM Agreement
during the six months ended June 30, 2017.

On August 19, 2016, Moody's downgraded our senior unsecured debt rating to "Ba1"
from "Baa3". Also on August 19, 2016, S&P Global Ratings, or S&P, lowered our
corporate credit and senior unsecured debt ratings to "BB" from
"BB+". Additionally, S&P lowered our revolving credit facility rating to "BBB-"
from "BBB". Both Moody's and S&P lowered our ratings as a result of the
Department of Justice, or DOJ, announcing its plans on August 18, 2016 to reduce
the BOP's utilization of privately operated prisons.

                                       37

--------------------------------------------------------------------------------


On February 21, 2017, the U.S. Attorney General rescinded the memorandum issued
on August 18, 2016 by the Deputy Attorney General of the DOJ. On February 7,
2012, Fitch Ratings assigned a rating of "BBB-" to our revolving credit facility
and "BB+" ratings to our unsecured debt and corporate credit.

Facility acquisitions, development, and capital expenditures


On January 1, 2017, we acquired ACTC, a 135-bed residential reentry center in
Englewood, Colorado, and on February 10, 2017, we acquired the Stockton Female
Community Corrections Facility, a 100-bed residential reentry center in
Stockton, California, in a real estate-only transaction. In addition, on June 1,
2017, we acquired the real estate operated by Center Point, Inc., or Center
Point, a California-based non-profit organization. We consolidated a portion of
Center Point's operations into our preexisting residential reentry center
portfolio and assumed ownership and operations of the Oklahoma City Transitional
Center, a 200-bed residential reentry center in Oklahoma City, Oklahoma. We
acquired the facilities for a combined total of $14.1 million in cash, excluding
transaction-related expenses, and funded the transactions utilizing available
cash on hand. We acquired the facilities as strategic investments that further
expand our network of residential reentry centers.

The demand for prison capacity in the short-term has been affected by the budget
challenges many of our government partners currently face. At the same time,
these challenges impede our customers' ability to construct new prison beds of
their own or update older facilities, which we believe could result in further
need for private sector capacity solutions in the long-term. We expect to
continue to pursue investment opportunities in residential reentry centers and
are in various stages of due diligence to complete additional transactions like
the real estate acquisitions of seven residential reentry centers in
Pennsylvania, California, and Colorado over the past two years, and business
combination transactions like the acquisitions of Avalon Correctional Services,
Inc. in the fourth quarter of 2015, CMI in the second quarter of 2016, and
Center Point in the second quarter of 2017. The transactions that have not yet
closed are subject to various customary closing conditions, and we can provide
no assurance that any such transactions will ultimately be completed. We are
also pursuing investment opportunities in other real estate assets used to
provide mission critical governmental services primarily in the criminal justice
sector as well as other businesses that provide complementary services that
further diversify our cash flows. In the long-term, however, we would like to
see meaningful utilization of our available capacity and better visibility from
our customers before we add any additional prison capacity on a speculative
basis.

Operating Activities


Our net cash provided by operating activities for the six months ended June 30,
2017 was $182.8 million, compared with $213.3 million for the same period in the
prior year. Cash provided by operating activities represents the year to date
net income plus depreciation and amortization, changes in various components of
working capital, and various non-cash charges. The decrease in cash provided by
operating activities was primarily due to the reduction in net income and
negative fluctuations in working capital balances during the six months ended
June 30, 2017 when compared to the same period in the prior year and routine
timing differences in the collection of accounts receivables and in the payment
of accounts payables, accrued salaries and wages, and other liabilities.

Investing Activities


Our cash flow used in investing activities was $43.2 million for the six months
ended June 30, 2017 and was primarily attributable to capital expenditures
during the six-month period of $34.8 million, including expenditures for
facility development and expansions of $13.9 million and $20.9 million for
facility maintenance and information technology capital expenditures. Our cash
flow used in investing activities also included $14.1 million attributable to
the acquisitions of the two residential reentry centers in the first quarter of
2017 and the acquisition of Center Point in the second quarter of 2017. Our cash
flow used in investing activities was $72.5 million for the six months ended
June 30, 2016 and was primarily attributable to capital expenditures during the
six-month period of $39.4 million, including expenditures for facility
development and expansions of $18.7 million primarily related to the expansion
project at our Red Rock Correctional Center, and $20.7 million for facility
maintenance and information technology capital expenditures. Our cash flow used
in investing activities also included $43.6 million attributable to the
acquisitions of CMI and a residential reentry facility in California during the
second quarter of 2016. Partially offsetting these cash outflows, we received
proceeds of $8.2 million primarily related to the sale of undeveloped land.

Financing Activities


Cash flow used in financing activities was $130.7 million for the six months
ended June 30, 2017 and was primarily attributable to dividend payments of
$101.1 million and $5.8 million for the purchase and retirement of common stock
that was issued in connection with equity-based compensation. In addition, cash
flow used in financing activities included $24.0 million of net repayments under
our revolving credit facility and $5.0 million of scheduled principal repayments
under our Term Loan. These payments were partially offset by $6.4 million
associated with exercising stock options.

                                       38

--------------------------------------------------------------------------------


Cash flow used in financing activities was $135.2 million for the six months
ended June 30, 2016 and was primarily attributable to dividend payments of
$128.6 million and $3.9 million for the purchase and retirement of common stock
that was issued in connection with equity-based compensation. In addition, cash
flow used in financing activities included $6.7 million of cash payments
associated with the financing components of the lease related to the South Texas
Family Residential Center and $2.5 million of scheduled principal repayments
under our Term Loan. These payments were partially offset by $5.0 million of net
proceeds under our revolving credit facility.

Funds from Operations


Funds From Operations, or FFO, is a widely accepted supplemental non-GAAP
measure utilized to evaluate the operating performance of real estate companies.
The National Association of Real Estate Investment Trusts, or NAREIT, defines
FFO as net income computed in accordance with generally accepted accounting
principles, excluding gains or losses from sales of property and extraordinary
items, plus depreciation and amortization of real estate and impairment of
depreciable real estate and after adjustments for unconsolidated partnerships
and joint ventures calculated to reflect funds from operations on the same
basis.

We believe FFO is an important supplemental measure of our operating performance
and believe it is frequently used by securities analysts, investors and other
interested parties in the evaluation of REITs, many of which present FFO when
reporting results.

We also present Normalized FFO as an additional supplemental measure as we
believe it is more reflective of our core operating performance. We may make
adjustments to FFO from time to time for certain other income and expenses that
we consider non-recurring, infrequent or unusual, even though such items may
require cash settlement, because such items do not reflect a necessary component
of our ongoing operations. Even though expenses associated with mergers and
acquisitions, or M&A, may be recurring, the magnitude and timing fluctuate based
on the timing and scope of M&A activity, and therefore, such expenses, which are
not a necessary component of our ongoing operations, may not be comparable from
period to period. Normalized FFO excludes the effects of such items.

FFO and Normalized FFO are supplemental non-GAAP financial measures of real
estate companies' operating performances, which do not represent cash generated
from operating activities in accordance with GAAP and therefore should not be
considered an alternative for net income or as a measure of liquidity. Our
method of calculating FFO and Normalized FFO may be different from methods used
by other REITs and, accordingly, may not be comparable to such other REITs.

Our reconciliation of net income to FFO and Normalized FFO for the three and six months ended June 30, 2017 and 2016 is as follows (in thousands):



                                                       For the Three Months Ended
                                                                June 30,
FUNDS FROM OPERATIONS:                                  2017                2016
Net income                                          $      45,475$      57,583
Depreciation of real estate assets                         23,956           

23,388

Funds From Operations                                      69,431           

80,971

Expenses associated with mergers and acquisitions             301           

317

Normalized Funds From Operations                    $      69,732$      81,288




                                                        For the Six Months Ended
                                                                June 30,
  FUNDS FROM OPERATIONS:                                  2017              2016
  Net income                                          $      95,522$ 103,890
  Depreciation of real estate assets                         47,655         

46,725

  Funds From Operations                                     143,177         

150,615

  Expenses associated with mergers and acquisitions             431           1,460
  Goodwill and other impairments                                259               -
  Normalized Funds From Operations                    $     143,867       $
152,075




                                       39
--------------------------------------------------------------------------------

Contractual Obligations

The following schedule summarizes our contractual cash obligations by the indicated period as of June 30, 2017 (in thousands):

Payments Due By Year Ended December 31,

                                            2017
                                         (remainder)        2018          2019          2020          2021        Thereafter         Total
Long-term debt                          $       5,000$  10,000     $ 

15,000 $ 796,000 $ - $ 600,000$ 1,426,000 Interest on senior notes

                       21,047        42,094        42,094        35,390       28,688           36,781         206,094

Contractual facility developments and

  other commitments                             4,350             -             -             -            -                -           4,350

South Texas Family Residential Center 25,613 50,808 50,808 50,947 38,976

                -         217,152
Operating leases                                  341           605           615           563          574              290           2,988

Total contractual cash obligations $ 56,351$ 103,507$ 108,517$ 882,900$ 68,238$ 637,071$ 1,856,584





The cash obligations in the table above do not include future cash obligations
for variable interest expense associated with our Term Loan or the balance on
our outstanding revolving credit facility as projections would be based on
future outstanding balances as well as future variable interest rates, and we
are unable to make reliable estimates of either. Further, the cash obligations
in the table above also do not include future cash obligations for uncertain tax
positions as we are unable to make reliable estimates of the timing of such
payments, if any, to the taxing authorities. The contractual facility
developments included in the table above represent development projects for
which we have already entered into a contract with a customer that obligates us
to complete the development project. Certain of our other ongoing construction
projects are not currently under contract and thus are not included as a
contractual obligation above as we may generally suspend or terminate such
projects without substantial penalty. With respect to the South Texas Family
Residential Center, the cash obligations included in the table above reflect the
full contractual obligations of the lease of the site, excluding contingent
payments, even though the lease agreement provides us with the ability to
terminate if ICE terminates the amended IGSA, as previously described herein.

We had $7.5 million of letters of credit outstanding at June 30, 2017 primarily
to support our requirement to repay fees and claims under our self-insured
workers' compensation plan in the event we do not repay the fees and claims due
in accordance with the terms of the plan. The letters of credit are renewable
annually. We did not have any draws under any outstanding letters of credit
during the six months ended June 30, 2017 or 2016.

INFLATION


Many of our contracts include provisions for inflationary indexing, which
mitigates an adverse impact of inflation on net income. However, a substantial
increase in personnel costs, workers' compensation or food and medical expenses
could have an adverse impact on our results of operations in the future to the
extent that these expenses increase at a faster pace than the per diem or fixed
rates we receive for our management services. We outsource our food service
operations to a third party. The contract with our outsourced food service
vendor contains certain protections against increases in food costs.

SEASONALITY AND QUARTERLY RESULTS


Our business is subject to seasonal fluctuations. Because we are generally
compensated for operating and managing facilities at an inmate per diem rate,
our financial results are impacted by the number of calendar days in a fiscal
quarter. Our fiscal year follows the calendar year and therefore, our daily
profits for the third and fourth quarters include two more days than the first
quarter (except in leap years) and one more day than the second
quarter. Further, salaries and benefits represent the most significant component
of operating expenses. Significant portions of the Company's unemployment taxes
are recognized during the first quarter, when base wage rates reset for
unemployment tax purposes. Finally, quarterly results are affected by government
funding initiatives, the timing of the opening of new facilities, or the
commencement of new management contracts and related start-up expenses which may
mitigate or exacerbate the impact of other seasonal influences. Because of these
seasonality factors, results for any quarter are not necessarily indicative of
the results that may be achieved for the full fiscal year.

© Edgar Online, source Glimpses

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