Life Time Group Holdings, Inc.

Good morning, and welcome to the Lifetime Group Holdings conference call to discuss financial results for the fourth quarter and full year fiscal 2021. At this time, all participants are in listen-only mode. Later, we'll conduct a question and answer session, and instructions will be given at that time. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this call is being recorded. During this call, the company will make forward-looking statements, which involve a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. There is a comprehensive list of risk factors in the company's SEC filings, which are encouraged to review. Also, the company will discuss certain non-GAAP financial measures, including adjusted EBITDA and free cash flow before growth capital expenditures. This information, along with reconciliations to the most directly comparable GAAP measures, are included in the earnings release issued this morning and the company's 8K file with the SEC, and on the investor relations section of Lifetime's website. On the call for management today are Baram Akradi, founder, chairman, and chief executive officer, and Tom Bergman, president and chief financial officer. I will now turn the call over to Mr. Akradi to get started. Please go ahead, sir.

Good morning, and thank you for joining our fourth quarter and year-end earnings call. I am pleased to share that we had a very good fourth quarter. Our revenue was slightly ahead of guidance and adjusted EBITDA was in line with our previous guidance despite the heavy headwinds from Delta and Omicron. The timing of these COVID variants coupled with significant mask and vaccine mandate was very disruptive to membership recovery trends in December, January and early February. However, from mid-February onwards, we are seeing great momentum in club traffic and membership recovery. Our main focus for 2022 is a steep revenue growth throughout the year to levels in fourth quarter that positions the company extremely well for 2023. We made a very decisive decision to continue the offensive strategy we started in 2021 through the Delta and Omicron headwinds. We believe that these strategies have put us in fantastic position to capture significant additional memberships at substantially higher average dues. Our center growth pipeline is the most robust I have seen in nearly 30 years. Throughout the pandemic, we established a high trust level with our real estate partners by paying 100% of the required rent, resulting in even closer relationships. In addition, our partners are experiencing the very positive impact of lifetime and the financial benefits it brings as a country club in their development. We continue to see an increasing number of urban and suburban opportunities from these relationships. For 2022, we plan to open 12 new athletic country clubs and our pipeline for 2023 and beyond continues to become stronger than ever. We remain committed to further strengthening our balance sheet Earlier this year, we entered into a non-binding letter of intent for the sell-leaseback of four of our properties for aggregate proceeds of $175 million. We expect to close on two of these properties by the end of this month and the other two properties by the end of September. We continue to evaluate opportunities for additional sell-leaseback transactions. As a reminder, our owned real estate has estimated market value of more than $3 billion, which exceeds the company's current debt levels of approximately $1.8 billion. I'm looking forward to the Q&A portion of this call after Tom's remarks. Here you go, Tom.

Great. Thank you, Baram. I'll provide some additional detail on our 2021 fourth quarter and full year results, as well as our initial outlook for the first quarter and a few comments on fiscal year 2022. In the fourth quarter, total revenue increased 57.8% to $360.5 million, driven by increases in both center revenue and to a lesser extent other revenue. Total center revenue increased 56.8% to $352.9 million and was driven by increases in both membership dues and in-center revenue. Average center revenue per center membership increased to $536 from $414 in the prior year period, reflecting increased spending with our in-center businesses the continued execution of our pricing strategy, and the opening of new clubs in more affluent markets. On a same store basis, comparable center sales increased 52%. Center memberships increased approximately 30% to just over 649,000 as of December 31st, 2021, compared to just over 500,000 as of December 31st, 2020. As we discussed on the last call, on a sequential basis, we typically lose members from the third quarter to the fourth quarter due to normal seasonality related to kids going back to school and our pools closing in the fall. The sequential decline of 19,000 center memberships from the end of the third quarter to the end of the fourth quarter was in line with our expectations and included the loss of approximately 9,000 center memberships related to the closure of four small atypical centers during the fourth quarter, each of which had an expiring lease and did not conform to our overall comprehensive lifestyle brand experience. Average monthly dues per membership was $135 in the fourth quarter compared to $104 in the fourth quarter of last year, an increase of approximately 30%. This increase was also in line with our expectations. With the closure of the four small off-brand lease centers that I just mentioned, combined with the expected opening of new higher-priced premium clubs throughout 2022 and the continued layering in of price increases to our existing members, we expect to continue to grow our average monthly dues per membership throughout this year. Other revenue, which includes revenue generated from businesses outside of our centers, more than doubled to approximately $7.6 million in the quarter and was primarily driven by our athletic events business. Moving on to operating expenses. In the fourth quarter, total operating expenses were $698.8 million and included non-cash share-based compensation expense and one-time items of $327.8 million. Excluding share-based compensation expense and one-time items, total operating expenses increased 21.4% to $371 million. Center operations expense was $218.8 million and included $12.9 million of non-cash share-based compensation expense. Excluding share-based compensation expense and a $1.4 million one-time cost recovery, center operations expense increased by 33.9% or $52.5 million due to the impact of our center closures during last year's fourth quarter. Rent expense increased 15.7% to $55.3 million, primarily driven by additional sale leasebacks compared to the prior year and additional non-cash rent expense where we've taken possession of a site to begin construction. General administrative and marketing expenses were $353.6 million and included $309.9 million of non-cash share-based compensation expense and $2.6 million of other one-time items. Excluding these items, general administrative and marketing expenses increased 27.4 percent to $41.2 million, primarily due to the restaffing of our center support overhead functions as centers reopened, and additional public company expenses. Depreciation and amortization decreased 1.8% to $58.1 million, and other operating expenses were $13 million and included $4.6 million of non-cash share-based compensation expense and $0.8 million of gains related to sale leasebacks. Excluding these items, other operating expenses decreased 21.1% to $9.2 million. Our GAAP reported loss from operations for the quarter was $338.3 million, compared with a loss of $79.7 million in the prior year period. Excluding the $327.8 million of share-based compensation expense and one-time items, the adjusted loss from operations was $10.5 million compared to an adjusted loss from operations of $77.3 million in last year's fourth quarter. NED's interest expense was $48.4 million and included $15.9 million of costs incurred in connection with the partial pay down of our term loan facility, including a $5.7 million prepayment penalty. Excluding these one-time items, net interest expense decreased approximately 0.7% to $32.5 million. Our fourth quarter effective tax rate was 21.1% compared with 25.3% in the prior year period. This lower effective tax rate is primarily a result of valuation allowances against our state, net operating loss carry forwards, and certain other non-deductible tax items. Our fourth quarter gap net loss was $304.8 million, compared with a net loss of $83.9 million in 2020. Excluding share-based compensation expense of $258.3 million and $12.9 million of one-time items, our adjusted net loss improved to $33.6 million from $82.1 million. Fourth quarter adjusted EBITDA increased to $48 million from a loss of $18 million in the prior year period. For the full year, total revenue increased 39% to $1.3 billion, driven by a 38.4% increase in center revenue and a 70.6% increase in other revenue. Comparable center sales increased to 35.3%, Average center revenue per center membership increased to approximately $2,100 versus approximately $1,300 in the prior year period. Our gap net loss was $579.4 million compared with the net loss of $360.2 million in 2020. Excluding share-based compensation expense of $269.1 million and $73.4 million of one-time items, Adjusted net loss improved to $236.8 million from $324.2 million. Adjusted EBITDA increased to $80.3 million from a loss of $63 million. Moving on to the balance sheet, cash and cash equivalents as of December 31st, 2021 was $31.6 million compared to $33.2 million as of December 31st, 2020. As we discussed on last quarter's call, we completed our IPO during the fourth quarter and used the proceeds to pay down $576 million of our senior secured term loan facility, including a $5.7 million prepayment penalty, with the remaining proceeds used for general corporate purposes. We also announced during the fourth quarter that we increased the size of our revolving credit facility from approximately $357 million to $475 million and extended the maturity to December 2026. As Buram mentioned, just a few weeks ago, we announced that the company has entered into a non-binding letter of intent for the sale-leaseback of four properties with an estimated aggregate transaction price of $175 million. We plan to complete the sale-leaseback of two of these properties on or before March 31st, 2022, for approximately $80 million in gross proceeds. The sale-leaseback of the two additional properties is expected to be completed prior to September 30, 2022, for approximately $95 million in gross proceeds. We will continue to consider and evaluate additional sale-leaseback transactions in the future as a tool to continue to strengthen our balance sheet and fund the attractive growth opportunities we have in front of us. As a reminder, as we continue to execute sale-leaseback transactions and incur incremental rent expense, we look at adjusted EBITDA plus the impact of rent expense as reported in our financial statements to better understand our underlying operating performance and trends. Capital expenditures totaled $328.9 million during the year compared with $265.6 million in 2020. The increase was primarily related to the higher number of club openings and properties currently under construction. We opened six new clubs in 2021. And as Baram mentioned, we plan to open 12 new clubs in 2022. Turning to our initial outlook for the first quarter of 2022. For the first quarter of 2022, we expect revenue to be in the range of $385 to $395 million. a net loss of $64 million to $60 million, adjusted EBITDA to be in the range of $38 to $42 million. This outlook reflects the Omicron impact we experienced in late December, January, and February, and the increased strategic investments we have made in the numerous initiatives Varam previously mentioned to drive membership and revenue growth throughout 2022 and beyond. Let me provide some additional commentary on how we are thinking about the year from both a revenue and profitability standpoint. We are forecasting revenue to be in the range of $1.8 to $1.9 billion. We expect revenue to accelerate throughout the year as we move further away from the pandemic, open our pools during the second quarter, and gain momentum from our new initiatives. As you think about our revenue growth throughout the year, It's important to remember that we are different than most typical gyms or fitness companies that generate the majority of their memberships in the first couple months of the year. For example, in 2019, we sequentially grew our Net Center memberships by just over 31,000 in the first quarter and 24,000 in the second quarter, totaling Net New Center memberships of just over 55,000 in the first six months of that year. For this year, With our initiatives gaining momentum, the opening of our outdoor pools, and expecting to be free of any COVID-19 mask mandates or other restrictions, we expect second quarter net new center memberships to exceed first quarter net new center memberships. A few other comments as we think about 2022. We are forecasting full year rent expense to be in the range of $235 to $245 million, or approximately 13% of total company revenue. This includes non-cash rent expense of $35 to $40 million. As we build membership revenue throughout 2022, continue to gain operating leverage on our fixed cost base, and achieve returns on the new initiatives we are investing in, we are targeting our adjusted EBITDA margin to steadily improve and be in the 18 to 20% range during the third and fourth quarters of 2022. We think this will position us well for additional margin expansion heading into 2023. Outside of the numbers, let me just start to wrap up by saying, while the timing of Omicron disrupted our business in late December, January, and early February, we believe this is temporary and have started to see encouraging membership and usage trends over the last few weeks with the removal of mask mandates around the country. During Omicron, we had nearly 30% of our centers under mask mandates and or other COVID-19 restrictions. So we are very pleased that as of March 11th, we expect all of our U.S. clubs to be free of COVID-related restrictions. Our three Canadian clubs are the only to have remaining restrictions. There is a lot to be optimistic about as we move away from the pandemic. Look forward to our summer outdoor season. and see the momentum start to build in many of the new initiatives we have been investing in. In 2022, we will continue to focus on opening premium clubs in iconic, dense urban and suburban locations, strengthening our balance sheet, making the right long-term investments to take market share, and delivering unparalleled healthy way of life experiences for our members. With that, we will turn the call back over to the operator for Q&A. Operator?