Target Hospitality Corp. current report, 15 March 2019

Vollständiges Dokument

Business Context and Reporting Period

Company: Target Hospitality Corp. (formerly Platinum Eagle Acquisition Corp.)
Reporting Date: March 21, 2019 (Event Date: March 15, 2019)
Event: Consummation of a business combination (SPAC merger) with Target Logistics Management, LLC ("Target") and RL Signor Holdings, LLC ("Signor"). The company changed its name to Target Hospitality Corp. and began trading on Nasdaq under the symbol "TH".
Industry: Vertically integrated specialty rental accommodations and hospitality services, primarily serving the oil and gas sector in the Permian and Bakken basins, as well as government contracts.

Key Financial Metrics

Transaction Consideration: Total purchase price of $1.311 billion.

  • Cash Consideration: Approximately $563.1 million.
  • Stock Consideration: Approximately $747.9 million (74,786,327 shares issued to sellers).
Debt Financing:
  • Senior Secured Notes: $340 million aggregate principal amount of 9.50% senior secured notes due 2024.
  • ABL Facility: New senior secured asset-based revolving credit facility up to $125 million (approximately $40 million drawn at closing).
  • Total Pro Forma Indebtedness: Approximately $380 million as of December 31, 2018.
Historical Performance (Combined Target and Signor, Year Ended Dec 31, 2018):
  • Total Revenue: $240.6 million (79% increase from 2017).
  • Net Income: $4.96 million.
  • EBITDA: $80.0 million.
  • Adjusted EBITDA: $116.8 million.
  • Adjusted Free Cash Flow: $93.6 million.
Assets: Approximately 12,000 beds across 20 sites in the U.S.

Material Changes vs. Prior Period

Revenue Growth: Combined revenue increased 79% to $240.6 million in 2018 compared to $134.2 million in 2017. This was driven by the acquisition of Signor (contributing $30.1 million in 2018), increased drilling activity in the Permian Basin, and revenue from the TransCanada Pipelines (TCPL) contract ($23 million).

Profitability: Operating income increased 91% to $40.9 million. However, Net Income decreased 37% to $4.96 million due to a significant increase in interest expense ($24.2 million in 2018 vs. $5.1 million interest income in 2017) and a $15.3 million impairment charge on non-strategic assets in Canada and the Bakken Basin.

Capital Structure: The company transitioned from a private entity with affiliate debt to a public company with $380 million in new institutional debt (Notes and ABL Facility).

Guidance, Outlook, and Risks

Outlook: Management expects to realize synergies from the combination, including cost savings and expanded service offerings. The company plans to self-perform hospitality services previously outsourced by Signor to increase margins. Growth is tied to oil and gas activity levels and government immigration housing needs.

Key Risks:

  • Customer Concentration: CoreCivic (government) and Halliburton (oil & gas) accounted for 22% and 8% of pro forma 2018 revenue, respectively. The top five customers accounted for 49% of revenue.
  • Commodity Prices: Demand is indirectly tied to oil and gas prices; low prices can reduce customer capital spending and workforce requirements.
  • Government Policy: Revenue from the South Texas Family Residential Center depends on federal funding and immigration policies.
  • Debt Service: High leverage ($380 million) requires significant cash flow to service debt obligations and meet covenants (minimum fixed charge coverage ratio of 1.00:1.00).
  • Project Uncertainty: The TCPL Keystone XL pipeline project is pending final investment decisions and regulatory approvals.
Unusual Items:
  • Impairment: $15.3 million loss on impairment recorded in 2018.
  • Restructuring: $8.6 million in restructuring costs in 2018.

Investor Verification Checklist

  • Debt Covenants: Verify compliance with the New ABL Facility covenants, specifically the minimum fixed charge coverage ratio and maximum total net leverage ratio (4.00:1.00).
  • Customer Contracts: Review the "take-or-pay" status and renewal dates of contracts with CoreCivic and major oil & gas clients to assess revenue visibility.
  • TCPL Project Status: Monitor the regulatory and investment decision status of the Keystone XL pipeline project, which represents a significant potential revenue stream.
  • Asset Impairment: Assess the risk of future impairment charges given the volatility in the Bakken Basin and the company's history of writing down non-strategic assets.
  • Founder Earnout: Note that 5,015,898 founder shares are in escrow, releasing only if the stock price exceeds $12.50 and $15.00 thresholds.