Life Time Group Holdings, Inc.

Good morning and welcome to the Lifetime Group Holdings conference call to discuss financial results for the first fiscal quarter of 2022. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will follow 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. This is a comprehensive list of risk factors in the company's SEC filings which you 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 gap measures, are included in the earnings release issued this morning and the company's 8K filed with the SEC and on the investor relations section of the Lifetimes website. On the call from 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. Please go ahead, sir.

Good morning and thank you for joining our first quarter earnings call. Our long-term strategy has been and remains to build and uphold the most premium, most loved and respected brand in the healthy way of life, live, work, play ecosystem. As a result of executing this strategy, lifetime was at an inflection point for very accelerated growth pre-COVID. Despite the impact of government-mandated shutdowns and masks, vaccines, and other restrictions, we continued to build and strengthen our brand, reputation, systems, and programs. And we are seeing great results and rewards from the way we treated our team members, members, landlords, vendors, and communities. This has put us in a great position not only to recover but to exceed our past performance. Lifetime is once again at an inflection point with great outlook. Our fundamentals have not only been improving each month, they also have been accelerating. Tom will provide full color on this call. Now I'm going to break down our short-term strategy in three parts. First, our most capital and investment light opportunity is to grow our existing athletic country clubs to their highest potential in revenue and profitability. We're seeing approximately 4% month over month dues revenue growth in our athletic country clubs at which we have implemented numerous initiatives over the last 18 months. These initiatives are paying off and we believe will continue to improve throughout the rest of the year. We believe it will bring the majority of our clubs to exceed our 2019 dues revenue by year end. Second, we continue to evaluate opportunities to make our company more asset light and strengthen our balance sheet. In this area, we are actively exploring additional sell-leaseback transactions and other structures to achieve this objective. Third, we are leveraging our brand equity and reputation to capture additional asset light real estate locations for our athletic country clubs, along with potential health and well-being growth opportunities where our membership-based and trusted brand gives us a natural advantage to succeed. For our first priority on growth, our first quarter results were right in line with our expectation. And we're continuing to accelerate as we rapidly grow our revenue and profitability at our existing Athletic Country Club locations. From mid-February onward, we have seen strong growth in visits, revenue, and membership recovery at our Athletic Country Clubs. And we believe This will continue throughout the second quarter. Tom and I look forward to sharing those results with you next quarter. As I mentioned, we have invested in a range of initiatives that complements our premium athletic country clubs and provide fuel to accelerating our revenue and profitability recovery. Our aggressive nationwide rollout of pickleball, active aging, and small group training are just three of the many, many initiatives we have underway. Members are increasingly engaging in these programs, and our membership base is both growing and becoming more diverse. This also has put us in a strong position to capture significant additional membership at substantially higher average dues. Average membership dues were $145 in the first quarter, a sequential increase of $10 from the $135 we reported just in the fourth quarter of last year. And we see these numbers growing to the $150 to $160 range by end of the year. The new joint dues rate for memberships sold during the first quarter averaged $166 compared to $135 in the first quarter of 2021 and $115 during the first quarter of 2019. For the second priority, to further strengthen our balance sheet, we're evaluating alternatives for sell-leaseback transactions involving a significant amount of owned real estate portfolio. As a reminder, we currently own approximately 60 athletic country clubs. As we mentioned on our fourth quarter 2021 call, we closed on two sell-leaseback transactions with proceeds of $80 million in the first quarter and expect to close another two transactions on or about May 13th with proceeds of 95 million, bringing the year-to-date total to 175 million. We're currently evaluating sell-leaseback and other opportunities to monetize up to an additional $500 million of owned real estate by the end of the third quarter this year. We will provide you with updates as we progress. For our third priority, we will continue to explore asset light growth opportunities that are natural extension to our brand. We have built a healthy way of life ecosystem and a premium brand that is extremely well positioned to grow and capture new growth opportunities. As I turn it over to Tom, I want to reinforce my confidence in the power of lifetime, our brand, and the experiences we deliver. We feel very good about the underlying trends in our business and the strategic initiatives we have in place driving these trends. Thank you for your time today and your continuous support in Lifetime. Looking forward to the Q&A. Tom?

All right. Thanks, Baram. I'll now provide some additional detail on our three priorities Baram highlighted, first quarter results and outlook for the full year. To start with the first quarter, total revenue increased 57% to $392 million, driven mainly by center revenue growth. Total center revenue increased 56% to $382 million and was driven by a 55% increase in membership dues and a 57% increase in in-center revenue. Average center revenue per center membership increased to $580 from $459 in the prior year period, reflecting increased member spending with our in-center businesses, the continued execution of our pricing strategy, and the opening of new athletic country clubs in more affluent markets. On a same-store basis, comparable center sales increased 50.3%. Center memberships increased approximately 24% to just under 674,000 as of March 31st compared to 544,000 as of March 31st last year and approximately 649,000 as of December 31st, 2021. As we discussed on our last earnings call, the timing of the Omicron surge early this year disrupted our typical seasonal membership patterns. While January would typically be the strongest membership month in the quarter, this pattern was reversed in the period because of Omicron. While we do not intend to provide monthly memberships on a regular basis, the following breakdown will help provide some context to the progression of the quarter and momentum of the business. By month, we added 3,300 Net Center memberships in January, 4,400 in February, and 16,900 in March. To put this into context, in 2019, we added 21,400 Net Center memberships in January, 3,300 in February, and 7,000 in March. Further, the momentum we saw in March continued into April with us adding 13,800 Net Center memberships compared to just under 5,000 back in April of 2019. Given the momentum we are seeing in the business, we expect to add 50,000 or more Net Center memberships during the second quarter. Average monthly dues per membership was approximately $145 in the first quarter compared to $121 in the first quarter of last year and $135 in the fourth quarter of last year. This year-over-year and sequential increase was driven by the opening of new athletic country clubs, increases in legacy pricing, and a higher mix of family memberships. We continue to see average dues per member increasing to the targeted $150 to $160 range by the end of the second quarter and remaining in that range during the back half of the year. Other revenue, which includes revenue generated from businesses outside of our centers, more than doubled to approximately $10.6 million in the quarter and was primarily driven by our athletic events business. Total operating expenses during the first quarter were $403 million. This included non-cash share-based compensation expense of $21.4 million and a one-time gain of $28.4 million related to the sale-leaseback of two properties in the quarter. Excluding these items, total operating expenses increased 24.5% to $410 million. Center operations expense was $240 million and included $1.2 million of non-cash share-based compensation expense. Excluding share-based compensation expense, center operations expense increased 37% due to increased staffing requirements to support our investment in our programs, services, and centers and increased usage of our centers and services by our members during the quarter. Rent expense increased 10.8% to $56 million, driven primarily 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, but have not yet completed construction and opened for operation. General administrative and marketing expenses were $66.6 million and included $19.9 million of non-cash share-based compensation expense. Excluding non-operating items from both periods, general administrative and marketing expenses increased 24% to $46.2 million. This was primarily due to the restaffing of our center support overhead functions as centers reopened and usage rates continued to increase along with additional public company expenses. Depreciation and amortization decreased 5.1% to $58.1 million and other operating income was $17 million including $400,000 of non-cash share-based compensation expense and a $28.4 million one-time gain related to the sale-leaseback of two properties in the corridor. Excluding these items, other operating expenses increased $11.1 million from $6.1 million, primarily related to the increased activity in our athletic events business. Our gap reported loss from operations for the quarter was $10.9 million, compared with a loss of $82.2 million in the prior year period. Excluding the $6.6 million net impact from share-based compensation expense and other one-time items, the adjusted loss from operations was $17.5 million, compared to an adjusted loss from operations of $79.9 million in last year's first quarter. Net interest expense was $29.9 million, a 68.9% decrease compared to the $96.2 million in the prior year period. Excluding the one-time items impacting its interest expense in the first quarter of 2021, interest expense declined $7 million or approximately 19% due to lower debt levels. Our effective tax rate was 7% compared with 26% in the prior year period. This lower effective tax rate is primarily a result of an increase in the valuation allowance associated with certain of our deferred tax assets, as well as deductibility limitations associated with executive compensation. Gap net loss was $38 million, compared with a net loss of $152.8 million in the prior year period. Excluding share-based compensation expense and other non-recurring items, our adjusted net loss improved to $44.1 million from $94.1 million last year. Adjusted EBITDA increased to $40.6 million from a loss of $18.9 million in the prior year period. Moving on to the balance sheet, cash and cash equivalents as of March 31, 2022, was $41.1 million compared to $31.7 million at year end. During the quarter, as Baram mentioned, we closed on the sale leaseback of two properties for gross proceeds of approximately $80 million, and we expect to close on two additional sale leaseback properties on or about May 13th for approximately an additional $95 million in gross proceeds, bringing our year-to-date sale leaseback gross proceeds to $175 million. As Baram discussed, we continue to look at opportunities to further monetize our real estate portfolio and are currently evaluating opportunities to sale leaseback up to an additional $500 million of real estate prior to the end of the third quarter. Assuming the successful completion of an incremental $500 million of sale leaseback proceeds, we would plan to use the proceeds to pay down our term loan and put cash on the balance sheet to fund future growth. As a reminder, as we continue to execute sale-leaseback transactions and incur incremental cash and non-cash 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 $111 million during the quarter and compared with $43 million in the first quarter of last year. The increase was primarily related to the higher number of athletic country club openings and properties currently under construction. We plan to open 12 new athletic country clubs compared with just six in 2021. Turning to our outlook, last quarter, we focused our guidance around the first quarter and provided some commentary on how we were thinking about the full year. Our first quarter results were right in line with our expectations and we are seeing the type of acceleration that we anticipated moving through the second quarter. As a result, we feel very good about the progress of the business and our total revenue outlook for the full year of 1.8 to 1.9 billion has not changed. Assuming we close on the 500 million of additional sale leaseback transactions at the end of the third quarter, We expect total cash and non-cash rent expense for the year will increase from our previous range of $235 to $245 million, or approximately 13% of projected total revenue for the year, to $245 million to $255 million, or approximately 13.5% of projected full-year revenue. Even with this higher rent expense, we still expect our adjusted EBITDA margin to steadily improve into the 18% to 20% range in the back half of the year as we continue to gain momentum in our business and operating leverage on our fixed cost base. Finally, a couple of items to note as you think about our performance for the full year. First, as I mentioned earlier, we expect average monthly dues to be in the 150 to 160 range by the end of the second quarter and remain in that range during the second half of the year as our mix of family memberships begins to seasonally decline when our pools close and the kids go back to school. Second, unlike previous years where we typically lose net members in the back half of the year, We expect to gain net new center memberships in the third and fourth quarters of this year due to the opening of 10 new athletic country clubs during that period and improved member engagement and retention. 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 building in many of the new initiatives we have been investing in. With that, we will turn the call back over to the operator for Q&A. Operator?