Shares of Target Hospitality Corp. (NASDAQ: TH) plummeted 31.5% on June 11th after the U.S. Immigration and Customs Enforcement (ICE) agency announced it would terminate a service agreement between it and CoreCivic, Inc. (NYSE: CXW), a company that leases a Texas housing facility from TH.   Under the now-terminated accord, CXW operated the South Texas Family Residential Center (STFRC) which served as a detention facility for single adults detained at the U.S.-Mexico border.  The facility housed 1,561 people as of June 9, 2024.  (CXW stock fell nearly 20% on June 11th.)

The details of ICE’s accord with CXW allow the government agency to terminate the agreement with 60 days advance notice for essentially any reason, so the ICE-CXW deal will end around August 9, 2024.  Unfortunately for TH, the CXW-TH lease agreement similarly allows CXW to terminate the lease with 60 days notification.  CXW gave TH such notice, and the lease will also end around August 9th.

Given both TH’s now fairly modest valuation, and the private equity company TDR Capital’s interest in TH (see below), we are surprised investors pressed TH stock down with as much fervor as they did.

Company Description

TH is one of the largest vertically integrated and specialty rental and hospitality services companies in the United States.  Its units have an aggregate total of nearly 17,000 beds in 26 communities.  TH’s customers are U.S. government service providers and major companies which support natural resource development.  About 65% of TH’s 2023 revenue stemmed from specialty hospitality and lodging revenue, and the balance, or 35%, from leasing of lodging facilities (which seems likely to have included the CXW lease agreement described above).

Investment Considerations

When TH reported its 1Q 2024 earnings, management issued full-year 2024 revenue and adjusted EBITDA guidance of $410-$425 million and $195-$210 million, respectively.  A Stifel analyst today estimated that the STFRC lease contributes about $55 million to TH’s annual revenue and $35-$37 million of its gross profit, so if TH cannot lease the facility to anyone else (a very conservative assumption), TH’s annualized adjusted revenue and adjusted EBITDA could be around $365 million and $165 million.  TH has said it will provide details on the financial impact of the lease termination by June 30.

Factoring in the sharp decline in its stock price today, TH’s enterprise value (EV) is just under $800 million.  This implies that TH now trades at adjusted EV-to-revenue and EV-to-EBITDA multiples of around 2.2x and 5.0x, respectively.  TH’s adjusted 5.0x cash flow multiple looks quite reasonable versus that of the average stock (which is well over 10x).  Furthermore, TH generates significant free cash flow; in 2023, the company generated nearly $90 million of free cash flow and over $40 million in 1Q 2024.

On March 25, TH received a non-binding takeover offer at $10.80 per share from TDR Capital, a private equity firm based in London, England.  Since that date, TH has been reviewing that bid.  Certainly, the ICE-CXW June 11th news may alter TDR Capital’s plans, including whether to continue to pursue TH and, if so, at what price.

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