S&P Global Ratings revised its outlook on Minnesota-based athletic center operator Life Time, Inc. to positive from stable because of more certainty around the recovery of the company’s center memberships, increased prices, revenue, and EBITDA.
At the same time, S&P affirmed its ‘CCC+’ issuer credit rating on Life Time and all of its issue-level ratings.
S&P said its positive outlook reflects its expectation that the company will start generating enough EBITDA to cover its fixed charges in the second half of 2022 or early 2023 and bring leverage below S&P’s 7.5x upgrade threshold.
S&P said in its analysis, “We believe Life Time’s center memberships will increase considerably through at least the end of 2022, and that it will cover its fixed charges with EBITDA in the second half of 2022. Under our base-case forecast, we expect the company to end 2022 with dues-paying center memberships up in the mid-teens percent area compared to 2021, or down in the low-teens area compared to 2019. We expect solid membership growth in second-quarter 2022, in line with the company’s guidance for 50,000 center memberships or more, and low-single-digit percent membership growth in the third and fourth quarters. We also expect the company could end 2023 with about the same number of center memberships as 2019, or up around 10 percent compared to our base-case forecast for 2022. We also expect the average dues per center membership to increase sequentially from first-quarter average dues of around $145 to above $150 per member in the second quarter and to remain at that level through at least 2023 as the company raises prices for both new and renewing members. We forecast that the combination of increased center memberships and higher average center membership dues will result in 2022 membership dues revenue up approximately 40 percent compared to 2021, which was up in the high-single-digit percent area compared to 2019. We expect the company’s ancillary revenue categories, including personal training to remain relatively flat compared to first-quarter 2022 in the low-hundred-million area. As a result, we expect 2022 revenue to be in the low end of the company’s guidance at around $1.8 billion.
“We also expect relatively good flow-through of incremental revenue through the remainder of 2022 despite inflationary pressure and increased occupancy costs following sale-leasebacks because we expect revenue to grow faster than inflation. This could result in a sequential quarter-over-quarter improvement for quarterly reported EBITDA margin to approximately 18% by the fourth quarter, which is lower than the company’s 2018 and 2019 margin but stronger than first-quarter 2022. We expect that the company could end 2022 with full-year margin in the mid-single-digit percent area, and that 2023 margin could be in the high-teens to low 20 percent area. This level of revenue and margin, combined with our expectation for operating lease growth, would result in lease-adjusted leverage in the mid-to-low-7x area.
“Life Time plans to develop new clubs and intends to fund a large portion of the costs with the proceeds from sale-leaseback transactions. We expect the company to use these proceeds to partially finance its growth capital spending over the next several years. We assume Life Time will spend approximately $600 million annually on capital expenditure (Capex) in 2022 and 2023, developing 12 new clubs in 2022 and 11 in 2023. We also expect the company will close on $750 million-$760 million in sale-leasebacks in 2022, including more mature clubs and a smaller amount of leasebacks in 2023. Our estimate of 2022 sale-leasebacks includes those the company completed in first-quarter 2022, sale-leasebacks currently under contract and $500 million of sale-leasebacks the company announced it is contemplating but does not yet have under contract. While we believe Life Time has adequate liquidity to fund its capital spending needs over the next several years, the timing of its club development spending typically precedes the closing of its sale-leaseback transactions, which creates incremental financing risk.
“We believe that price increases could partially offset fewer memberships compared to historical levels and significant inflationary pressure. Life Time announced it intends to raise its membership prices for new and renewing members and has begun to execute that strategy successfully. The company announced that its new joins in the first quarter came in at an average dues rate of approximately $166 per month, which compares favorably to its new join rate in the first-quarter of 2021 of $135 per month. As a result, we believe that the company could return to pre-pandemic EBITDA with a lower per-club membership base than it previously had before the price changes. However, given significant macroeconomic risk, this strategy could leave the company vulnerable to a recessionary environment and drops in consumer spending.
“Our positive outlook reflects our expectation that the company could start to generate enough EBITDA in the second half of 2022 to comfortably cover its fixed charges and bring leverage below our 7.5x.”
Photo courtesy Life Time