Target Hospitality Announces Third Quarter 2019 Results

• Revenue of $81.6 million, up 35%
• Net income of $9.6 million and Adjusted net income⁽¹⁾ of $11.3 million, up 14%
• Adjusted EBITDA⁽¹⁾ of $40.6 million, up 30%, with Adjusted EBITDA margin⁽¹⁾ of 49.7%
• Net cash provided by operating activities of $25.5 million; $42.6 million when excluding $17.1 million in cash paid for interest

THE WOODLANDS, Texas–(BUSINESS WIRE)–Target Hospitality Corp. (“Target Hospitality” or the “Company”) (NASDAQ:TH), the largest provider of vertically-integrated specialty rental accommodations with premium catering and value-added hospitality services in the U.S., today reported results for the third quarter ended September 30, 2019.

Financial and Operational Highlights for the Third Quarter 2019

• Revenues increased to $81.6 million, up 35% year-over-year, led by growth in the Permian Basin
• Net income of $9.6 million, and Adjusted net income of $11.3 million, up 14% year-over-year
• Basic and diluted earnings per share of $0.10, and Adjusted earnings per share⁽¹⁾ of $0.11
• Adjusted EBITDA of $40.6 million, up 30% year-over-year with Adjusted EBITDA margin of 49.7%
• Increased average utilized beds to a record 10,340, up 41% year-over-year, driven by a combination of acquisitions and organic bed additions
• Continued robust cash generation; excluding cash paid for interest of $17.1 million, net cash provided by operating activities of $42.6 million for the quarter
• Integration of communities acquired from Superior Lodging and ProPetro progressing according to plan; converted all four recently acquired communities into full turnkey facilities
• Two new communities in Carlsbad, New Mexico and Orla, Texas became operational for a total of 600 beds, with expansion activities for an additional 200 beds on track

“Our third quarter 2019 results demonstrate the resiliency of our business as we made meaningful progress in executing our growth plans. Target Hospitality crossed 13,000 total beds and operated over 9,000 total beds in the Permian Basin, which were all time records for the company,” said Brad Archer, President & Chief Executive Officer of Target Hospitality.

“Target Hospitality also successfully integrated two acquisitions, completed construction and started operations at two brand new communities, and generated a record amount of cash flow from operations. These achievements are noteworthy, and the Company remains focused on executing highly accretive growth initiatives, which is a core tenet of our business strategy. Looking ahead, our revenue visibility remains strong with no significant contract roll-offs next year. We remain focused on factors within our control, and look forward to executing our business strategy and delivering exceptional results,” concluded Mr. Archer.

Financial Results – Third Quarter 2019⁽²⁾

Summary Highlights

Refer to exhibits to this earnings release for reconciliation of non-GAAP financial measures to GAAP financial measures

Total revenue for the third quarter of 2019 increased by 35% to $81.6 million compared to $60.3 million for the third quarter of 2018. This revenue growth was driven by new bed additions resulting primarily from acquisitions, new communities, and expansions, partially offset by lower ADR. Net income for the third quarter of 2019 was $9.6 million, or $0.10 per share. This compares to net income for the third quarter of 2018 of $0.8 million, or $0.02 per share. Excluding certain after-tax charges of approximately $1.8 million, Adjusted net income for the third quarter of 2019 was $11.3 million, or $0.11 per share.

Adjusted EBITDA increased by 30% to $40.6 million for the third quarter of 2019 compared to $31.2 million for the third quarter of 2018. Adjusted EBITDA margin was 49.7% compared to 51.8% for the third quarter of 2018. Adjusted EBITDA margin declined primarily due to slightly higher selling, general and administrative expense in the third quarter of 2019, partially offset by lower operating costs due to improved cost optimization.

ADR decreased by approximately $1.9, or 2%, to $80.8 for the third quarter of 2019 compared to ADR of $82.7 for the third quarter of 2018. This decrease in ADR was primarily due to a lower average ADR from the acquired Signor communities. Excluding the Signor communities, ADR at the remaining communities remained relatively stable on a year-over-year basis. Average available beds were 12,485 for the third quarter of 2019, an increase of 3,890 beds or 45%, compared to 8,595 average available beds for the third quarter of 2018. Average utilized beds, which represents contracted and paid for beds, were 10,340 for the third quarter of 2019, an increase of 2,982 utilized beds or 41%, compared to 7,358 average utilized beds for the third quarter of 2018. Utilization, which represents the proportion of average available beds that are contracted and paid for, was 83% for the third quarter of 2019 compared to 86% for the third quarter of 2018. The year-over-year decrease in utilization was due to a comparatively higher number of new bed additions in the third quarter of 2019 that had not been contracted as of quarter end.

Continued strong operating performance and reduced working capital requirements resulted in significant cash generation during the third quarter of 2019. The Company reported $25.5 million of net cash provided by operating activities for the third quarter of 2019. Excluding $17.1 million in cash interest paid, net cash provided by operating activities was $42.6 million for the quarter.

Portfolio Expansions and Acquisitions

The Company commenced operations at two new communities during the third quarter of 2019 – a 400-bed community in Carlsbad, New Mexico previously announced in February 2019 and a 200-bed community in Orla, Texas previously announced in May 2019. Like the Company’s other communities, these two new communities are underwritten by multi-year contracts that include Target Hospitality’s full suite of turnkey accommodations and hospitality services. Expansion activities to add 100 beds at each of these two new communities are currently underway. The additional 200 rooms are expected to be operational in the fourth quarter of 2019.

Integration of three Texas communities in Orla North, Orla South, and Kermit acquired from Superior Lodging late in the second quarter, and one community in Midland, Texas acquired from ProPetro early in the third quarter is progressing according to plan. Target Hospitality signed a long-term contract with ProPetro concurrent with the acquisition transaction closing and continues to focus on contract conversions for the former Superior Lodging communities. In addition, Target Hospitality completed the conversion of all four communities into full turnkey facilities with 24-hour catering and value-added hospitality services.

Capital Management

Capital expenditures for the third quarter of 2019 were approximately $27.0 million. Capital expenditures related to investments in new community development and expansion, along with upgrades and conversions at the Signor communities were $21.6 million. Capital expenditures also included the $5.0 million purchase price for the acquisition of one community in Midland, Texas from ProPetro on July 1, and maintenance capital expenditures of $0.4 million.

As of September 30, 2019, the Company had $3.5 million of cash and cash equivalents, and $410.0 million of long-term debt, which included $340.0 million in aggregate principal amount of its Senior Secured Notes due 2024 and borrowings of $70.0 million under its $125.0 million revolving credit facility. The Company had consolidated net leverage of 2.4x as defined in the credit facility.

As of November 12, 2019, the Company repurchased 2,080,900 shares of its common stock for approximately $13.1 million. The stock repurchases were executed pursuant to the $75.0 million stock repurchase program announced on August 16, 2019 and represent approximately 17.5% of total share repurchase authorization executed to date. This repurchase program may be suspended from time to time, modified, extended or discontinued at any time. Purchases under the repurchase program may be made from time to time in open market or privately negotiated transactions, and will be subject to market conditions, applicable legal requirements, contractual obligations and other factors. Any shares of common stock repurchased will be held as treasury shares.

For the third quarter of 2019, the Company had 100,102,641 weighted average shares of common stock outstanding, excluding the 5,015,898 shares of common stock issued and held in escrow.

Segment Results – Third Quarter 2019

Permian Basin

Refer to exhibits to this earnings release for reconciliation of non-GAAP financial measures to GAAP financial measures

Revenue for the third quarter of 2019 increased by 65% to $56.5 million compared to $34.3 million for the third quarter of 2018. The revenue growth was attributable to a higher number of average utilized beds as a result of acquisitions, along with the expansion of communities in response to stronger demand year-over-year for full turnkey accommodations and hospitality services. Adjusted gross profit margin was 58.9% for the third quarter of 2019 compared to 59.6% for the third quarter of 2018, reflecting lower ADR, partially offset by improvement in operating costs per person.

ADR decreased by $3.7, or 4%, to $84.2 compared to $87.9 for the third quarter of 2018, primarily due to lower average ADR at the communities acquired from Signor and year-over-year reduction in ADR at legacy Target Lodging communities, partially offset by higher ADR at recently added communities. Average available beds for the third quarter of 2019 more than doubled to 8,610 from 4,105 in the third quarter of 2018. Average utilized beds increased by 2,923 beds, or 72%, to 6,994 beds for the third quarter of 2019 compared to 4,071 average utilized beds for the third quarter of 2018.

Bakken Basin

Refer to exhibits to this earnings release for reconciliation of non-GAAP financial measures to GAAP financial measures

Revenue for the third quarter of 2019 decreased by 19% to $6.0 million compared to $7.4 million for the third quarter of 2018. The revenue reduction was primarily attributable to lower ADR and fewer average utilized beds reflecting a reduced activity level on a year-over-year basis. Adjusted gross profit margin for the third quarter of 2019 was 48.1%, a 292 basis points increase, compared to 45.2% for the third quarter of 2018, mainly due to effective cost controls and higher utilization of available beds.

ADR decreased by $1.7, or 2%, to $77.4 compared to $79.1 for the third quarter of 2018. Average available beds for the third quarter decreased to 1,017 compared to 1,597 average available beds for the same period last year. This reduction of 580 average available beds was primarily due to the closure of the Dunn County community in the fourth quarter of 2018. Due to year-over-year reduction in average available beds, utilization for the third quarter of 2019 improved to 76% from 53% for the third quarter of 2018.

Government

Refer to exhibits to this earnings release for reconciliation of non-GAAP financial measures to GAAP financial measures

Revenue for the third quarter of 2019 effectively remained unchanged at $16.8 million compared to the third quarter of 2018. Adjusted gross profit margin for the third quarter of 2019 was 76.2%, a 514 basis points increase, compared to 71.0% for the third quarter of 2018. This was mainly due to lower occupancy in the third quarter of 2019 that reduced the variable costs of service compared to the third quarter of 2018. The 2,400 average available beds were fully utilized for the quarter, while ADR of $74.5 for the third quarter of 2019 was essentially flat compared to ADR of $74.7 for the third quarter of 2018.

All Other

Refer to exhibits to this earnings release for reconciliation of non-GAAP financial measures to GAAP financial measures

The operations of this segment consist primarily of revenue from the construction phase of the TC Energy Pipelines (“TCPL”) project as well as vertically integrated specialty rental and hospitality services revenue not included in our other segments. A full TCPL contract release remains subject to a final investment decision by TC Energy. Revenue for the third quarter of 2019 increased to $2.3 million compared to $1.8 million for the third quarter of 2018. Adjusted gross profit margin increased to 34.4% for the third quarter of 2019 compared to 21.8% for the third quarter of 2018.

2019 Financial Outlook

For the 2019 fiscal year, based on performance to date, and updated outlook for customer activity levels in the Company’s energy end market, combined with a reduction of initial phase construction activities and timing variability on the TCPL project, the Company is updating its full year 2019 financial outlook for both revenue and Adjusted EBITDA.

Excluding any impact from future acquisitions, the Company now expects combined pro forma revenue to grow 5% to 8% and be in the range of $318 to $328 million, and combined pro forma Adjusted EBITDA to grow 5% to 8% and be in the range of $157 to $162 million.

The Company continues to expect maintenance capital expenditures for the full year 2019 of approximately 1% of total revenues, with the remainder of capital expenditures primarily expected to fund organic growth initiatives that are underwritten by multi-year customer contracts.

Conference Call

The Company has scheduled an audio conference call for Wednesday, November 13, 2019 at 8:00 a.m. Central Time (9:00 am Eastern Time) to discuss the third quarter 2019 results.

The conference call will be available by live webcast through the Investors section of Target Hospitality’s website at www.TargetHospitality.com or by dialing in as follows:

Domestic: 1-877-423-9813

International: 1-201-689-8573

Reference: Target Hospitality

Please register for the webcast or dial into the conference call approximately 15 minutes prior to the scheduled start time.

A replay of the conference call will be available for approximately 30 days and can be accessed through the Investors section of Target Hospitality’s website or by dialing 1-844-512-2921 (for Domestic callers), or 1-412-317-6671 (for International callers), with passcode 1369 5501#.

⁽¹⁾ Non-GAAP Financial Measures

This press release contains historical and forward-looking non-GAAP financial measures including Adjusted net income, Adjusted earnings per share, Adjusted gross profit, Adjusted gross profit margin, Adjusted EBITDA, and Adjusted EBITDA margin. Reconciliations of these historical measures to the most directly comparable GAAP financial measures are contained herein. To the extent required, statements disclosing the definitions, utility and purposes of these measures are also set forth herein.

Information reconciling forward-looking Adjusted EBITDA to GAAP financial measures is unavailable to Target Hospitality without unreasonable effort. We cannot provide reconciliations of forward-looking Adjusted EBITDA to GAAP financial measures because certain items required for such reconciliations are outside of our control and/or cannot be reasonably predicted, such as the provision for income taxes. Preparation of such reconciliations would require a forward-looking balance sheet, statement of income and statement of cash flow, prepared in accordance with GAAP, and such forward-looking financial statements are unavailable to us without unreasonable effort. Although we provide a range of Adjusted EBITDA that we believe will be achieved, we cannot accurately predict all the components of the Adjusted EBITDA calculation. Target Hospitality provides Adjusted EBITDA guidance because we believe that Adjusted EBITDA, when viewed with our results under GAAP, provides useful information for the reasons noted below.

We have included Adjusted net income, Adjusted earnings per share, Adjusted gross profit, Adjusted gross profit margin, Adjusted EBITDA, and Adjusted EBITDA margin which are measurements not calculated in accordance with US GAAP, in the discussion of our financial results because they are key metrics used by management to assess financial performance. Our business is capital-intensive, and these additional metrics allow management to further evaluate our operating performance.

Definitions:

Target Hospitality defines Adjusted net income as Net income (loss) plus adjustments to exclude certain non-cash items and the effect of transaction and events that management considers not related to its core business operations:

• Restructuring costs: Algeco US Holdings LLC (“Target Parent”) incurred certain costs associated with restructuring plans designed to streamline operations and reduce costs.
• Target Parent selling, general and administrative costs: Target Parent incurred certain costs in the form of legal and professional fees as well as transaction bonus amounts, primarily associated with a restructuring transaction that originated in 2017.
• Other (income) expense, net: Other (income) expense, net includes consulting expenses related to certain projects, financing costs not classified as interest expense, gains and losses on disposals of property, plant, and equipment, involuntary conversions and other immaterial non-cash charges.
• Transaction expenses: Target Hospitality incurred certain transaction costs, including legal and professional fees, associated with the business combination (the “Business Combination”) of Platinum Eagle Acquisition Corp., Target Logistics Management, LLC and RL Signor Holdings, LLC (“Signor”).
• Acquisition-related expenses: Target Hospitality incurred certain transaction costs associated with the acquisition of Superior Lodging and Signor.
• Stock-based compensation: Non-cash charges associated with stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy.
• Officer loan expense: Non-cash charge associated with loans to certain executive officers of the Company that were forgiven and recognized in selling, general, and administrative expense upon consummation of the Business Combination. Such amounts are not expected to recur in the future.
• Other adjustments: System implementation costs, claim settlement, and certain severance costs.
• Income tax benefits: The above described amounts are offset by the related income tax benefits at the Company’s effective tax rate for the above items.

Target Hospitality defines Adjusted earnings per share as Adjusted net income divided by weighted average shares outstanding for the period.

Target Hospitality defines Adjusted gross profit, as Gross profit plus depreciation of specialty rental assets and loss on impairment. Target Hospitality defines Adjusted gross profit margin as Adjusted gross profit divided by total revenue for the same period.

Target Hospitality defines EBITDA as net income (loss) before interest expense, income tax expense (benefit), depreciation of specialty rental assets, and other depreciation and amortization. Adjusted EBITDA reflects the following further adjustments to EBITDA to exclude certain non-cash items and the effect of transactions and events that management considers not related to its core business operations:

• Currency (gains) losses, net: Foreign currency transaction gains or losses.
• Restructuring costs: Target Parent incurred certain costs associated with restructuring plans designed to streamline operations and reduce costs.
• Target Parent selling, general and administrative costs: Target Parent incurred certain costs in the form of legal and professional fees as well as transaction bonus amounts, primarily associated with a restructuring transaction that originated in 2017.
• Other (income) expense, net: Other (income) expense, net includes consulting expenses related to certain projects, financing costs not classified as interest expense, gains and losses on disposals of property, plant, and equipment, involuntary conversions and other immaterial non-cash charges.
• Transaction expenses: Target Hospitality incurred certain transaction costs, including legal and professional fees, associated with the Business Combination.
• Acquisition-related expenses: Target Hospitality incurred certain transaction costs associated with the acquisition of Superior and Signor.
• Stock-based compensation: Non-cash charges associated with stock-based compensation expense, which has been, and will continue to be for the foreseeable future, a significant recurring expense in our business and an important part of our compensation strategy.
• Officer loan expense: Non-cash charge associated with loans to certain executive officers of the Company that were forgiven and recognized in selling, general, and administrative expense upon consummation of the Business Combination. Such amounts are not expected to recur in the future.
• Other adjustments: System implementation costs, claim settlement, and certain severance costs.

Target Hospitality defines Adjusted EBITDA margin as Adjusted EBITDA divided by total revenue for the same period.

Utility and Purposes:

We believe that EBITDA is a meaningful indicator of operating performance because we use it to measure our ability to service debt, fund capital expenditures, and expand our business.

Contacts

Investors
Narinder Sahai

832-702-8009

Narinder Sahai

Media
Jason Chudoba

646-277-1249

Jason Chudoba

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