Target Hospitality's Q3 2025 Earnings Call: Contradictions Emerge on West Texas Assets, Data Center Contracts, and Economic Expectations

Date of Call: November 6, 2025

Financials Results

• Revenue: $99.0M total revenue in Q3 2025, with adjusted EBITDA of ~$22M; declines vs prior year attributed to termination of the PCC contract (included an $11.8M closeout reimbursement recognized in Q3)

Guidance:

• Reaffirmed 2025 outlook: total revenue $310M–$320M; adjusted EBITDA $50M–$60M.
• Dilley: projected to generate ~ $30M in 2025, ~ $50M annualized at full 2,400-bed run-rate and ~ $246M over its expected 5-year term; full ramp completed and Q4 will reflect full economics.
• Data center contract: ~ $5M revenue in 2025; ~$43M committed minimum through Sept 2027, with remaining revenue split roughly evenly between 2026 and 2027.
• West Texas assets: carrying costs of ~$2M–$3M per quarter while kept ready for reactivation or remarketing.
• Q3 included an $11.8M PCC closeout payment; no further PCC payments expected.

Business Commentary:

* Revenue and Segment Performance: - Target Hospitality reported total revenue of approximately $99 million for Q3 2025, with adjusted EBITDA of approximately $22 million. - The WHS segment generated approximately $37 million in revenue, mainly from construction activity related to the Workforce Hub contract. - The revenue growth in the WHS segment was driven by expanded contracts and increased scope, such as a 19% increase in the contract value for the Workforce Hub.

• Government Segment and Capacity Utilization:
• The government segment contributed approximately $24 million in revenue, a decline from the previous year due to the termination of the PCC Contract.
• The company completed the ramp-up of the Dilley, Texas assets, making them fully operational for up to 2,400 individuals, which is projected to generate $30 million in revenue in 2025.
• 

• The utilization and potential repurposing of assets in West Texas, driven by data center and power projects, are expected to increase capacity utilization.

• Contract Awards and Growth Opportunities:

• Target Hospitality secured over $455 million in new multiyear contract awards in 2025, supporting long-term growth trends.
• The focus on expanding and diversifying the business portfolio, particularly in sectors like data centers and critical minerals, is expected to drive continued growth.

• The company is positioned to benefit from strong market fundamentals and long-term growth trends in the data center and AI infrastructure investment cycles.

• Financial Outlook and Liquidity:

• The company ended the quarter with $30 million in cash and a strong liquidity position of approximately $205 million, supporting its strategic growth initiatives.
• Target Hospitality reaffirmed its financial outlook, expecting $310 million to $320 million in total revenue and $50 million to $60 million in adjusted EBITDA for 2025.
• The robust cash conversion and financial flexibility are expected to continue as the company evaluates its growth pipeline.

Sentiment Analysis:

Overall Tone: Positive

• "strongest and most active growth pipeline we have ever seen"; management highlighted >$455M in new multiyear contracts in 2025 and added >$55M in committed revenue since Q2; reaffirmed 2025 guidance and emphasized strong liquidity ($30M cash, 0 net debt, ~$205M total available liquidity) supporting growth execution.

Q&A:

• Question from Scott Schneeberger (Oppenheimer & Co. Inc., Research Division): Update on repurposing the Pecos/West Texas assets — what are you hearing from government customers and other potential customers about repurposing that asset?
  Response: Management: Government dialogue remains active but timing uncertain; multiple large data-center and power projects in the Permian offer alternative, non-government paths to redeploy underutilized West Texas assets for long-term leases.

• Question from Scott Schneeberger (Oppenheimer & Co. Inc., Research Division): Can you discuss the Target Hyper/Scale brand — what are you doing with branding and the marketing approach?
  Response: Management: Launched a dedicated Hyper/Scale brand and hired data-center specialists after two years of research to focus on hyperscalers/GCs building remote sites; the targeted brand/team has been well received.

• Question from Scott Schneeberger (Oppenheimer & Co. Inc., Research Division): For the data center contract, what was the revenue and adjusted EBITDA run rate in Q3 and what's expected for Q4 and 2026?
  Response: CFO: Expect ~$5M revenue from that contract in 2025; the remaining ~$38M of the $43M committed minimum will be split relatively evenly between 2026 and 2027; margin profile is similar to Dilley (lease + services).

• Question from Gregory Gibas (Northland Capital Markets, Research Division): How does your existing data center community contract compare in scope and size to other opportunities you're in advanced discussions on?
  Response: Management: Pipeline opportunities generally average well above 1,000 rooms; engagements often start smaller (e.g., 250) and scale by several hundred beds over time—some opportunities are smaller, some much larger.

• Question from Gregory Gibas (Northland Capital Markets, Research Division): Any color on quarter-to-quarter dynamics implied by guidance — what's the modeling difference between Q3 and Q4?
  Response: CFO: Q4 will show the full Dilley ramp (annualized ~ $50M revenue, ~40–50% margin); the Q3-to-Q4 delta mainly reflects no repeat of the $11.8M PCC closeout payment plus Dilley becoming fully operational.

• Question from Gregory Gibas (Northland Capital Markets, Research Division): You were named on the $10B WEXMAC DOD award — how could you serve their efforts and what capacity could you provide?
  Response: CFO: Target is on the contract vehicle and will evaluate specific bid opportunities as they arise; will pursue those that fit available assets or can be structured to fit the company.

• Question from Rajiv Sharma (Unknown firm — analyst identified as Raj): How much shift in workforce EBITDA can we expect year-over-year and what do the community enhancements entail — higher bed pricing, new service modules, or client-funded CapEx?
  Response: CFO: Enhancements don't increase bed count (still ~2,000) and are mostly construction-related (recognized primarily in 2025) with lower margins (~20–25%); services (~$75M) begin next year and are expected to carry ~30% margin, so services revenue will drive EBITDA improvement in 2026–27.

• Question from Rajiv Sharma (Unknown firm — analyst identified as Raj): Is the Dilley facility fully ramped to 2,400 beds and will Q4 reflect steady-state utilization?
  Response: CFO: Yes — ramp-up completed in early September; Q4 will reflect the full quarterly economics of the 2,400-bed community.

• Question from Rajiv Sharma (Unknown firm — analyst identified as Raj): Any active RFPs or renewal discussions to replace or supplement the Pecos PCC contract?
  Response: CFO: Multiple Permian opportunities exist; management is prioritizing utilizing existing assets to drive utilization and pursuing non-government opportunities to redeploy equipment.

• Question from Rajiv Sharma (Unknown firm — analyst identified as Raj): How does Hyper/Scale differentiate from core workforce and which clients/geographies are you targeting first?
  Response: CEO: Hyper/Scale leverages the same fleet but adds a specialized team targeting remote data-center customers (hyperscalers/GCs) who need education and turnkey solutions, focusing on remote builds like the Permian/West Texas.

• Question from Stephen Gengaro (Stifel, Nicolaus & Company, Incorporated, Research Division): You referenced idle beds next year — timing for government and non-government contracts and how these may come together for 2026?
  Response: CFO: ~8,000 available beds entering next year; timing of awards is uncertain (government approvals unpredictable) but data-center expansion discussions are advanced; assets are being kept ready at a ~$2M–$3M quarterly carrying cost.

• Question from Stephen Gengaro (Stifel, Nicolaus & Company, Incorporated, Research Division): Is there urgency from customers to secure capacity now due to lack of skilled labor/capacity?
  Response: CEO: Yes — customers face constrained skilled labor and cluster projects; securing assets quickly derisks projects, creating urgency to contract accommodations.

• Question from Stephen Gengaro (Stifel, Nicolaus & Company, Incorporated, Research Division): Should we expect economics of new data-center deals to be similar to Dilley, and are you protected against inflation (food/labor) in longer-term deals?
  Response: CFO/CEO: Many pipeline opportunities have margin profiles similar to Dilley (take-or-pay, exclusive asset operations); inflation protections vary by contract—some include escalators, others limited—offset by operational efficiencies where possible.

Contradiction Point 1

West Texas Assets and Government Contracts

It involves the status and expectations related to government contracts for the West Texas assets, which are crucial for revenue projections and strategic direction.

Can you provide an update on the repurposing of the Pecos, West Texas assets? Are there other customers in discussions regarding repurposing these assets? - Scott Schneeberger (Oppenheimer & Co. Inc., Research Division)

2025Q3: We've made incredible progress on the expansion of the Pecos and West Texas facilities, including new culinary, housekeeping and management capacity. We will continue to work with the government and other potential customers to explore any opportunities to maximize asset utilization. - James Archer(CEO, President, Non-Independent Director)

What are the next steps for West Texas, including the timeline and potential for this contract to be comparable to prior contracts? - Daniel Erik Hultberg (Oppenheimer & Co. Inc., Research Division)

2025Q2: We continue to work with various government agencies on their requirements for both lodging and services and are actively pursuing the ongoing dialogue and interest in the West Texas assets. - James Archer(CEO, President & Non-Independent Director)

Contradiction Point 2

Data Center Contracts and Opportunities

It involves the nature and structure of data center contracts, which could impact the company's strategic focus and financial forecasts.

How do existing data center contracts compare to other potential opportunities in terms of scale and scope? - Gregory Gibas (Northland Capital Markets, Research Division)

2025Q3: This is a very sizable contract that includes a lot of kind of long-term structure through put, and we feel very good about it. - Jason Vlacich(CFO, Chief Accounting Officer)

How should we think about the data center opportunity’s structure compared to the Workforce Hub Contract? Can you provide more details on the timing? - Stephen David Gengaro (Stifel, Nicolaus & Company, Incorporated, Research Division)

2025Q2: The data center deal will differ from the Workforce Hub Contract; Target will own assets and margins are expected to be higher. - Jason Paul Vlacich (CFO & Chief Accounting Officer)

Contradiction Point 3

Data Center Contract Run Rate

It directly impacts expectations regarding the revenue and financial performance of the company, particularly in relation to their data center business.

What is your strategy for the Hyper/Scale brand initiative and how are you marketing it? How does the current data center contract run rate compare to future quarters? - Scott Schneeberger (Oppenheimer & Co. Inc., Research Division)

2025Q3: The contract run rate is $5 million in 2025, and future years will see revenue split relatively evenly between 2026 and 2027, mirroring Dilley's margin profile. - Jason Vlacich(CFO, Chief Accounting Officer)

How should we think about lithium contracts and their contribution this year, next year, and potential upside? - Stephen Gengaro (Stifel, Nicolaus & Company, Incorporated, Research Division)

2025Q1: Revenue generated this year is primarily from construction activities, with approximately $65 million expected. Margins are estimated to be between 25% and 30%. After construction, services will kick in through 2027. - Jason Vlacich(CFO and CAO)

Contradiction Point 4

West Texas Pecos Assets and Economic Contract Expectations

It involves differing expectations and transparency regarding the economic potential of remarketing the West Texas Pecos assets, which could impact future revenue projections and strategic decision-making.

Update on Pecos/West Texas asset repurposing? Other customers discussing potential repurposing? - Scott Schneeberger(Oppenheimer & Co. Inc., Research Division)

2025Q3: The opportunity set maximizes asset utilization across multiple paths, not just the government. The Permian Basin's growth offers substantial opportunities for utilizing idle assets. - James Archer(CEO, President, Non-Independent Director)

Do you believe the West Texas Pecos assets' specific assets or applications justify a higher economic contract compared to Dilley? - Stephen Gengaro(Stifel)

2024Q4: The best proxy for the economics at this point are the Dilley assets. It's possible they could be slightly better, but that would be what I would point you to at this point. - Jason Vlacich(CFO and Chief Accounting Officer)