Business context and reporting period
Life Time Group Holdings, Inc. filed this unaudited Form 10-Q for the three months ended March 31, 2023, compared with the first quarter of 2022. It operates premium health, fitness and wellness clubs, a digital platform, events, and related work and residential businesses. At quarter-end it operated 164 centers across 29 U.S. states and one Canadian province.
Financial and operating performance
Amounts are in U.S. dollars; financial statement figures are in millions unless otherwise noted.
| Metric | Q1 2023 | Q1 2022 |
|---|---|---|
| Total revenue | $510.9 | $392.3 |
| Center revenue | $497.8 | $381.6 |
| Operating income (loss) | $67.4 | ($10.9) |
| Net income (loss) | $27.5 | ($38.0) |
| Net margin | 5.4% | (9.7%) |
| Adjusted EBITDA and margin | $120.1; 23.5% | $40.6; 10.4% |
| Operating cash flow | $74.3 | $9.1 |
| Free cash flow before growth capital expenditures | $26.6 | ($35.3) |
- Revenue rose 30.2%; center revenue rose 30.4%. Membership dues and enrollment fees increased $85.6 million, while in-center revenue increased $30.6 million.
- Center memberships grew 13.4% to 764,173; total memberships, including digital on-hold, were 813,506, up 9.3%. Average center revenue per center membership rose to $667 from $580.
- Center operations costs increased to $274.1 million, but declined as a share of revenue to 53.7% from 61.1%. Rent was $66.5 million, or 13.0% of revenue, versus $56.0 million, or 14.2%.
- Net interest expense rose to $31.2 million from $29.9 million. The income tax provision was $8.9 million; the reported effective tax rate was 24.4%.
- Capital expenditures were $170.8 million, including $123.0 million of growth capex, net of construction reimbursements. Cash used in investing activities was $136.9 million.
Balance sheet, debt and liquidity
- At March 31, cash and cash equivalents were $35.3 million. Debt was $1,908.0 million before $17.5 million of unamortized discounts and issuance costs; reported debt carrying value was $1,890.5 million, of which $65.6 million was current.
- Revolver borrowings were $85.0 million, with $30.5 million of letters of credit and $359.5 million of reported availability. Management reported $382.7 million of cash and revolver availability using cash of $23.2 million, exclusive of restricted cash; the filing does not clearly reconcile this cash figure to the $35.3 million balance-sheet amount.
- Debt includes a $273.6 million term loan maturing December 2024, $925.0 million of secured notes at 5.75% and $475.0 million of unsecured notes at 8.00%, both maturing in 2026, plus revolving, construction and mortgage debt. The filing reports covenant compliance in all material respects or that covenants were not applicable.
- Operating lease liabilities were $2,242.3 million; total lease-related liabilities, including finance leases and financing obligations, were $2,264.9 million. Undiscounted lease payments and financing obligations totaled $4,500.6 million. Executed leases for future locations not yet commenced represent about $380 million of undiscounted payments.
Material changes, outlook and risks
- Results improved substantially year over year as membership and center usage recovered, centers continued to ramp, and average dues increased. Lower share-based compensation and operational efficiency efforts reduced general, administrative and marketing expense by $24.1 million.
- Other operating results included a $6.7 million sale-leaseback gain in Q1 2023, compared with $28.4 million of sale-leaseback gains in Q1 2022. The Q1 2023 transaction generated $32.7 million of net proceeds from a property sold for $33.0 million.
- Management plans 18–20 new centers during 2023 and 2024. At quarter-end, 10 centers were under construction and 20 centers had been open for less than three years; the company said $401 million of growth capital expenditures had already been invested in centers yet to open. Management expects further revenue growth as new and existing centers ramp and sees scope for margin expansion, but provided no quantified earnings or revenue guidance in the supplied filing text.
- Management cited elevated inflation, wage and construction costs, labor and supply-chain issues, higher interest rates, possible recession, and potential pressure on margins and capital spending. Higher rates increase costs on variable-rate debt; assuming the revolver were fully drawn, a one-percentage-point rate change would affect annual interest expense on the credit facilities by approximately $7.5 million. The company planned to replace LIBOR with Term SOFR by June 30, 2023.
- Liquidity priorities include funding center development, lease and debt service, technology and maintenance spending, while improving the balance sheet and reducing leverage. Management expects to rely on operating cash flow, sale-leasebacks and revolver capacity, while noting that future financing may not be available on acceptable terms.
- The company is pursuing insurance coverage and damages from Zurich related to COVID-19 business interruptions and construction suspensions; the case was in discovery and its outcome was not predictable. A separate sale-leaseback for $45.5 million gross proceeds closed April 20, 2023; another $45.5 million transaction was expected to close by September 30, 2023.
Important facts for investors to verify
- Reconcile the $35.3 million balance-sheet cash balance with management’s $23.2 million liquidity cash figure, and confirm restricted-cash treatment.
- Assess whether membership growth, pricing increases and higher usage can continue to offset labor, utility, rent and other inflationary costs.
- Track growth-capex commitments, center opening schedules and ramp-up performance against the planned 18–20 openings and the $401 million already invested in unopened centers.
- Monitor debt refinancing and maturity exposure, variable-rate borrowing costs, revolver availability and covenant conditions, alongside substantial lease commitments.
- Evaluate reliance on sale-leasebacks for liquidity and leverage reduction, including their effect on future rent expense and execution of the announced transactions.
- Review the Zurich litigation’s progress and any material developments in other legal proceedings.