Life Time Group Holdings, Inc. (LTH) Earnings Call Transcript & Summary

Awesome. Well, thanks, everyone, for joining. Welcome to day 1 of the Morgan Stanley's Second Annual Travel & Leisure Conference. I'm Megan Alexander, Morgan Stanley's Leisure Analyst here in the U.S. I'm glad to be here today with Life Time and the company's Founder and CEO, Bahram Akradi. Life Time went public in 2021 and is one of the country's largest operators of health and fitness clubs. And for those of you familiar with them, which I'm sure many of you are, you know they're in a league of their own, very large clubs, over 100,000 square feet with pools, tennis and rocket sports, cafes, spas, basketball and yes, pickleball too. Life Time has over 170 locations today with over 800,000 center memberships. So just a quick disclaimer before we start. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/researchdisclosures. If you have any questions, please feel free to reach out to your Morgan Stanley sales representative. So with that, Bahram, you hosted your first Investor Day since your 2021 IPO last week at your corporate headquarters in Minnesota. You laid out a long-term financial algorithm, 10% to 12% top line and EBITDA growth. So it would be great if you could just start with a brief overview of what you shared with us last week and the overarching message, do you hope that we walked away from the event list.

Thank you. A couple important things that we hope to accomplish during the Investor Day was to expose the amazing team of the executives and passionate drivers of the company. So the folks don't think that this is a one-man band. So I think that came through pretty nicely. I'm sure people were impressed with the quality of the talent and executives, and the other thing is the company is much broader than fitness. We have tried to eliminate the fitness out of this, not to be confused by other fitness companies. We are a healthy -- living healthy aging company with the focus on delivering an experience equivalent of what you get in the most high-end country clubs, deliver a high quality and high volume at the same time. That has worked extremely well for the company. We're broad in terms of the offering, from just like Megan said, from sports, tennis, pickleball, basketball, leisure pools, outdoor pools, beach clubs. So you don't join Life Time just to go work out. You join Life Time to achieve a variety of different section of your kind of a lifestyle. As a lifestyle brand, the company is really well poised to achieve the -- what you mentioned, the growth that you're talking about is simple. We wanted to make sure we map out for people how they can see the free cash flow positive going forward from here, and how they can see that 10% to 12% growth top line, bottom line.

Okay. Awesome. And I just wanted to mention that we will open for questions. So I think there's microphones around here. You can just raise your hand if you do have any questions. Wanted to talk a little bit. We'll start with the top line, just about your membership and pricing strategy. I think sometimes there's a perception that a face value membership can be expensive. You're looking at $300 rack rates in some cases. Perhaps what's underappreciated is the deliberate changes you've made to the membership and the pricing structure. So can you talk through some of the decisions that went into those changes, both to the price of the membership but also the offering and how you think about the value proposition for a consumer today?

Yes, that's a great question. So the question for that for the investor is to make sure they have the right set of comparisons. This is not a gym. It's not the Planet Fitness, it's not LA Fitness, 24-hour fitness. We offer so many different programs. As an example, like Ultra Fit, GTX, Alpha, MB360, these are programs that you would pay equivalent of $250 to $300 a month for any one of them when you go through specific studios for those. So when you actually look at all that is offered, the value proposition is fantastic. Furthermore, our prices over the last 5 years are basically up less per use. So if you take our customer who's using the club, almost 12x a month right now, the price per utilization, which was about 8x in 2019 and was less than that before that. So basically, they're -- per visit, they're paying slightly less than if you had just taken the accumulated inflation from 2019. So -- and the fact that we have more clubs on a wait list, we have more demand, we're spending less money in advertising, it just pretty much delevers the message that the customer sees the value proposition very much intact for a Life Time. But it is the fact that you're getting the beach club and all those programs and pickleball, all of those things under 1 roof.

So that's a good segue into my next question, which broadly is just how do you think about that pricing power going forward and where do you think you can take a membership. I know it will depend by market. But is there anything you look at to use to benchmark how much a member is paying today? And do you think you need to constantly enhance the offering and the programming to justify taking more price?

Yes. So I think the key for that is really the variety of the 170-some clubs. Some clubs are executing extremely well and across all fronts, experience, the programming, the number of classes. The visits are 90,000, 75,000, 80,000 visits per month in a club. And really, in those clubs, the opportunity is just on the pricing is because we have more demand than we have supply in those clubs. The clubs may be about 1/3 of our clubs that we can tighten the execution, teach better classes, have more frequency. Those are the clubs that they could basically gain some more memberships in. But the average membership price right now, if you take a look at what the rack rate is to what the average price is across the whole system, is about a $30 gap, right? And as these memberships that they are paying less either churn and the new person comes and pays the full price or the current members get some legacy pricing, we're going to see about a 4% to 5% same-store comp for the foreseeable future. So we don't see a need having to make any drastic shift in anything. It's just adjusting to the customer experience.

And how does the unit expansion strategy and what markets they're going into play in to that, right, because New York has perhaps been a newer market for you, and you can charge more than you can here. So how does the kind of mix of unit opens going forward plans you're thinking about price?

So right now, last I checked, we have about 85 different deals in the pipeline. And those deals are all different signed contracts on the land or they are basically LOIs that they have been negotiated ready to get to the purchase agreement. They're all kinds of -- so we -- our mixture of clubs are going to come from doing facilities within big, large apartment complexes like the Life Time Living model. They could be office buildings, could be ground up. And because of the nature of the size of our clubs are so large, and the nature of the real estate, these deals will move from timetable. In order for us to deliver 10 -- to average of 10 clubs a year, 8 to 12, 10 clubs a year, we just need to have a pipeline. And that -- there is no way anybody could say to you we're going to open this many of this one, that many of that one, and this many in this market. The other thing for us is we will never pay market rates going to Boston or Manhattan or anywhere else for that matter. But therefore, the deals have to be structured the way we like it from a rent standpoint and when we get those type of deals we get them. But the growth is going to come I would say, just a normal distribution to what our distribution is today. It's going to be from L.A. to New York and from North to South.

And just a follow-up on something you said before. You said that 4% to 5% mature comp can come from price. How does the opportunity? Is the in-center spend opportunity included in that? Or is that...

That's included in the mature stores. And then the other 7%, 8% is new stores or the ramping stores, all embedded. So all of those growth are both dues and in center revenue.

Got it. So it's a revenue per membership type of number. Okay. And then from the in-center spend and how do you think about share of wallet for your customers today? I think you talked about they're doing all of these things in 1 place, right, or separate places, right? And they can come to Life Time and do it all in 1 place. So when you get someone to do whether it's personal training or perhaps MIORA in the future, is that something that you think you're doing -- they're doing elsewhere? And so it's just a shift wallet and perhaps or even saving money by coming to Life Time? Or is it you have to get the numbers to start doing new things in order to get that [indiscernible].

Yes. Look, I think the customers -- so you have some customers who want to be inside the Life Time so bad that they are basically doing anything they can to just give enough money for their dues. And when they get in the club, they don't spend money on anything else, just they don't have it. We -- I couldn't tell you we don't have some of those members, we certainly do. And then we have members who basically -- if they could spend another $2,000, $3,000 a month, they do it. And they'll do medi-spa services, they do spa services, they do MIORA, and/or personal training. Our personal training, we just had our best month since COVID that in May we broken record, April, we broke record. So while personal training is the second largest revenue after dues for the company, and it's doing extremely well right now. I'm not seeing the customer like holding back. We're not seeing any resistance. It's really just a function of as the club or cafe in Miami did $245,000 last month. Now we have similar sized club with similar traffic to Cafe the 60. So it's on us. When sometimes it's just unfair to think that the company will do such a great job across 170 locations and all the programs. Some of our clubs need more work, and we're working on them. And we're constantly trying to identify the top 25 best performing in every category, in every business, and then the bottom 25 and then how do we go to the bottom 25 and help them lift it. So there's quite a bit of opportunity from our execution. We're seeing a resistance from the customer. We give them the right product, the right services, they want to spend the money.

Is there something common about the 25 top performers or bottom performers? Is it just...

It's casting. It's when we spend significant amounts of energy and time and making sure we cast correctly, and we have the right leaders in the seat, they work.

Makes sense. Shifting gears a bit. We did talk a lot last week spending a bit of time, I guess, they should say, about the digital strategy and the opportunity to expand the Life Time brand through that offering. Can you maybe just spend some time talking about your vision and what this looks like over the next 3 to 5 years?

No, I love that. It's one of the things we're the most excited about. So a Life Time, we have been working on our digital delivery for years but more intensely, the last 5 years, obviously. And once the COVID came, our concept was, okay, we're going to be the company that delivers health and well-being to people both physically and digitally. I personally have never been someone convinced that a digital-only company can actually survive. So we basically accepted what other people were thinking and just kept doing our thing. But today, we have about 100,000 per month additional subscribers to our LT Digital. We will deliver on that meditation, nutritional classes, exercise, on-demand streaming, everything in AI-driven, workout planner, tracking, all things that you would want from Digital platforms all under 1 -- just like our clubs, all under one of easy app to use. And so as this digital platform -- and then we just decided at the beginning of this year that we're going to make it a free option to bring Life Time's wealth of content over 30 years to everybody in the world. So while we are super excited about what that can do for people in terms of bringing all this information, all the curated data to them and then coupled it with L.AI.C, which is our LI -- our Life Time AI companion, basically try to kind of advance that with every iteration. So then give people everything they need, it will generate probably $3 million, $4 million, $5 million worth of subscribers over the next 2, 3 years. And then beyond that, we'll continue to grow. And then the way that will monetize for us is people can go LTH, digital and basically get Life Time health products, they can get our products from our partners. And basically, when they want something, they can just go to one source and get it. We're very excited about that. It also creates a very, very large base of people familiar with the company who can choose to become a member, access member, much easier if they want to. So it's one of the areas we're super excited about.

Maybe 2 follow-ups. One -- first, can you maybe just walk through the economics of how that would work, right? So you have a [indiscernible] on Life Time. Maybe just on the app, just talk about the economics of that. And then second, any infrastructure investment and margin standpoint, what that looks like too?

That's a great question. Let's start with the last question. So if you were to build what we are talking about having millions of subscribers, having 30 years' worth of content that you would have to constantly create and/or the technology to support all of that, you would be spending hundreds of million per year. The reality is we don't have to spend any incremental dollars. All of this is just natural byproduct of what we are doing already what we have been doing. So the cost of having this business is basically 0. The opportunity is to basically co-brand with companies and have them direct ship. So the customer will come through our website, through our app, they order what they want, they get shipped to them and then we get the revenue share. In some cases, it's a partnership. They pay us marketing fee, partnership marketing because of all of our athletic events as well as all of our clubs and all of our digital subscribers. They pay us partnership. We're right now doing about $15 million, $20 million a year in just partnership that people are paying to be the advertiser to our eyeballs. But that number is going to dramatically grow over the next years.

Got it. Super helpful. Maybe shifting gears a bit to financing. You did complete your first sale leaseback last week in quite some time. So how should we think about your financing strategy going forward and what do you need to see in terms of cap rates to do more sale leaseback?

That's great. So we have -- as you know, we have substantial amount of real estate that we can take the sale leaseback. The company's strategy is all new clubs that we build from ground up will go to sale leaseback. It's a question of when the timing is. We anticipate that the rates will be coming down to our favor towards by end of the year, early next year, and we'll be able to achieve the sale leaseback at exactly the same cap rates we were doing them a couple of years back. The difference right now, we can dribble some sale leaseback like we just did last week and maybe a couple of months from now to another one, these will be $40 million, $50 million, $60 million, $90 million, not huge amounts, but those sale leasebacks will be just slightly above 7%. So the difference of 40 to 50 basis points in that cap rate is miniscule to the 5% more, the 500 basis point more EBITDA we're generating right now than 2019. So the point I want the investors to really walk away with is our current business model, it's poised and ready to pounds on the current conditions of interest rates, cost of construction, labor, our business is generating the best margins it ever has generated today. And so none of these things are going to be slowing us down if they don't -- if the conditions don't improve, it doesn't change anything. We're going to continue to go forward. If they improve, if the rates go down, will be just slightly a little more helpful. But we will accelerate the sale leaseback. As soon as the rates start coming, we will do some right now and accelerate it as soon as the rates get a little bit more healthy.

That's helpful. And you talked about -- I think it was last week but also on your earnings call about $1 billion of unencumbered assets of the, I think, $3.5 billion in terms of what you have that's not under a sale leaseback today. Can you just talk about why it's only $1 billion of the $3.5 billion?

It could be all of it, Megan. It could -- we could actually decide to do 100% sale leaseback. The issue is a couple $2 billion to $2.5 billion of it has such a low tax base that you will end up having a huge amount of that cash coming in, going out in taxes. We still are benefiting from the tail end of last year. I would say we may have about another year of the losses that incurred during COVID. So we have loss carryover right now. But once we run through that, then you got to be really conscientious of not creating leakage of cash when your only focus is cash flow positive. So as of this quarter, where we will deliver cash flow positive. Going forward, we're cash flow positive, right? So the right thing to do is just to do the sell leasebacks, methodically, so it's the best efficiency of capital for us.

Makes sense. And you just mentioned it, the cash flow positive. So reducing leverage getting to that self-funding status has been a big goal of yours. I think you've laid out around $30 million of free cash flow expectation for 2024. How should we think about the pace of that going forward, right, as you bring down leverage, perhaps pay down some debt? And what's the plan for any use of access free cash flow?

Yes. So, I think the free cash flow after interest and maintenance CapEx should grow substantially next year over this year. So I anticipate over $400 million there. This is, again, to over $400 million of free cash flow after. So even if we do 10 clubs at $30 million net invested capital, that would be about $300 million. So the question is, what do you do with the extra $100 million the following year. Would you put another $50 million of it into growth and maybe raise going from $300 million -- from $30 million, maybe to $50 million or $60 million of free cash flow and then the rest of it will be invested in additional growth. So those are not something that I can commit to or I want to commit to because sometimes opportunity come and you want to use it. What I want to commit to is that we will not spend more than we will produce. And therefore, the EBITDA will grow, the debt will shrink slightly or doesn't grow but debt-to-EBITDA will continue to go down.

Okay. And is there a scenario where it seems like you could do more than that 8 to 12 opens in a year if the opportunity arises?

Definitely. I think there are going to be moments in time where you would have to take some opportunities either now or you don't -- you can't and you may end up having the opportunity to grab 4, 5 more locations and you have to do it. That's what basically is you want to be in a financial situation where when a great opportunity comes, you can pull the trigger.

Makes sense. We have about 7 minutes left. I wanted to open it up to the room to see if there's any questions from the audience. Okay. I can keep going. The recession question. You brought it up a little bit earlier. How do you think about -- what are you looking for, right? I mean your membership base has changed a lot, attrition is a lot lower than it was in the past. Is it in-center spend? Is it attrition? What are some of the -- what's the canary in the coal mine that would suggest consumers might be pulling back?

So I'm going to go back to when I first started the business, selling memberships for $50, $60 a month. And we had probably 50%, 60% of our members weren't regularly using the club. But the dues was low enough for the big, huge 100,000 square feet that would hang in there. As we raise the prices to the $100, $120, $130 a month memberships, we had more users. Those clubs had more of the people paying that using the club and fewer people not using it. This is inverse to the clubs that they're charging $10 a month or $15 a month. We're maybe about 80%, 85% of their members who are paying the dollars aren't using the club. So when big financial moments like a Great Recession comes, big things happened, big recession kind of hefty recession comes in, the easiest things to give up are the things you're not using, right? So when we look back at 2008, those customers who were in our $120 a month club, which is now equivalent of $250 a month club, those customers had 30% better retention than the clubs that they were $50, $60, $40 a month. So because they were more of a user. Today, we are using -- the members are using the club amount. They're using the club 12x a month on average. This is the last thing they will give up. It's part of their life, it's part of their lifestyle. Their kids are using it, some husband and wife. They literally have to be the lasting they cut out. So my belief is the business that we have today is substantially more recession-proof than the one we had 10 years back. Really not worried about it. Not afraid of it. Inflation is our friend. It actually because when the costs go up, our rates can go up accordingly but not all of our cost will go up. Some of the costs are fixed. So the -- and recession is really not a factor.

Okay. Helpful. And you talked a lot about desirability and it kind of plays into the dues and the pricing work you've done. I guess when you think about the maintenance CapEx, which I think you said $10 a square foot, is that inclusive of the constant enhancements you need to make to the gym whether it's adding pickleball, right? I mean that's been a huge investment over the last couple of years. And maybe just -- I know you've broken it up, so maybe just kind of walk through...

As if you think about you want to have a club have the right parking lot, the right roof, the right HVAC and updated, everything looks new. Like we call it like new condition. That costs about $6 a foot. And then the other $4 a foot on average is modernization. We spent $45 million in a given normal year, $50 million in modernizing the club, changing the floor plan to provide like the space for the GTX or Ultra Fit or so -- or convert some courts to some basketball courts and some tennis courts to pickleball. So this modernization and maintenance -- intense maintenance CapEx for the signature of Life Time. We've done that since the inception is why the company is commanding such big -- I mean clubs that they're 15 years old on a wait list as well as the brand new clubs and a waitlist because every club looks new. And that's what we're going to continue. But the breakdown is about -- of the 10 is 60-40.

Okay. That's helpful. Maybe we can, in the last couple of minutes, maybe talk about MIORA, which is a new initiative for you. I was lucky to experience it in Minneapolis.

Did you like it?

Loved it. We had a nice IV drip. I was lucky to experience it last week. Maybe talk about -- it's 1 center right now, so in your downtown Minneapolis location. Maybe talk about the strategy going forward, how many you envision having? What it will look like? Is this a '25, '26? Or should we think about it more longer term?

So then the hormone replacement therapy is here to stay. Once people recognize what it does -- the problem with it is that it's like 1 of those things when people get something gets hot, there's also a lot of snake oil. People are making a lot of promises that they're not true and unfortunately. So we are very focused on delivering. We just brought on Dr. Laval, who is our Chief Science Officer, is the authority in this space have been doing it with metabolic code for years. So we're going to fine-tune that model that you experienced in the target center in Minneapolis. And we have demand right now, multiple facilities around the country where their doctors knocking on our door, they're wanting to join us and deliver the same sort of plan. We also have the spaces. We have a lot of spots that they have the ability to embed the MIORA into that spa space. So it's an opportunity, but I wouldn't -- we don't need the dollars of revenue to EBITDA for '24. We don't really think we need it for '25, but I think by '25, it can be a nice substantial business for the company.

Okay. Awesome. Maybe in the last 30 seconds, what do you think is the most underappreciated part about the Life Time story today?

It's the brand. I think people just don't appreciate how much -- we've got $140 billion -- $130 billion, $140 billion impressions per year. And that NPS is extremely high. People want the product, they want the name, and I think that gives us opportunity to expand brand extension across the system.

Great way to end it, right on time. Thanks Bahram and thanks, everyone, for joining.

Thank you, Megan.