Good morning, and welcome to the Lifetime Group Holdings 2022 Fourth Quarter and Full Year Earnings Conference Call. 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 conference is being recorded. I will now turn the call over to Ken Cooper with Investor Relations for Lifetime Group Holdings. Please go ahead.

Good morning, and thank you for joining us for the Lifetime 2022 fourth quarter and full year earnings conference call. With me today are Bahram Akradi, Founder, Chairman and CEO; and Bob Houghton, CFO. 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 made today. There 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 GAAP measures where possible without unreasonable efforts are included in the earnings release issued this morning and in the company's 8-K filed with the SEC and on the Investor Relations section of Lifetime's website. I'm now pleased to turn the call over to Bob Houghton, Bob?

Thank you, Ken, and good morning, everyone. We appreciate you taking the time to join us today. I will briefly cover our fourth quarter and full year results. The full details can be found in the earnings release we issued this morning. Bahram will then outline our strategies and key initiatives followed by updated guidance for 2023. Starting with our 2022 results, fourth quarter total revenue increased 31% to $473 million, driven by a 32% increase in membership dues and enrollment fees and a 28% increase in in-center revenue. For the full year, total revenue increased 38% to $1.8 billion. Center memberships increased 12% to end the year at more than 725,000 memberships. Fourth quarter average monthly dues were $162, up 20% from $135 in the fourth quarter last year. Fourth quarter revenue per center membership increased to $640, up 19% from $536 in the prior year period as we continue to benefit from higher dues and increased in-center activity. We generated net income for the fourth quarter of $14 million compared with a net loss of $305 million in the fourth quarter of 2021. Excluding the onetime expenses detailed in our earnings release in both periods, net income improved by $51 million. Adjusted EBITDA increased 123% to $107 million and adjusted EBITDA margin of 22.6% increased 9.3 percentage points versus 13.3% in the fourth quarter of 2021. For the full year, our net loss improved to $2 million, and our adjusted EBITDA was $282 million. We delivered another quarter of improving cash flow with net cash provided by operating activities of $76 million versus a $5 million net use of cash in the prior year period. We reduced our net debt to adjusted EBITDA leverage in the quarter and our year-end liquidity position remains strong with cash and cash equivalents of $26 million and $423 million in total available borrowings on our revolving credit facility. As we turn to 2023, our business is in great shape, and our strategies are working. We believe we are successfully using price to optimize our club performance and enhance our member experience, driving increased club usage across our strategic investments, opening new clubs and expanding margins, helping to drive increased cash flow and reduce leverage on our balance sheet. I will now turn it over to Bahram to outline our 2023 strategic initiatives and financial guidance.

Thanks, Bob. I am very proud of our more than 34,000 team members and our accomplishments in 2022. Our main priority in 2022 was to grow back our revenue and adjusted EBITDA margins and prove that our business model is intact and healthy. In 2022, we successfully made adjustments to our pricing strategy and executed our strategic initiatives of ARORA , which is our active aging program, DPT, our Dynamic Personal Training model, SGT, execution of our Small Group Training and, of course, the rollout of pickleball. These initiatives were critical to increasing our traffic and revenue. Additionally, we rewired our decision-making process to have significantly less layers to get things done, which helped our margin expansion effort. We took the past three years as a great challenge and made necessary adaptations to keep Life Time in a leading position. As I have visited more than third of our clubs over the last few months, I'm happy to report that our clubs are both busy and vibrant. For our clubs that were open at the end of 2019, January of 2023, membership dues in aggregate were 103% of membership dues in January of 2020 and are still reramping. As we have explained over the past several months, it takes three to four years to ramp or re-ramp one of our large athletic clubs. While we have already surpassed January 2020 membership dues across these clubs in aggregate, we're still in recovery period and expect to continue to improve results. In addition to the tailwinds for our reramping clubs, we feel we have significant pricing power and opportunity driven by a strong value proposition. The average dues of our memberships sold this year through February is $208. This compares to the total average dues of all memberships of 164. Not only…

Thank you. Ladies and gentlemen, at this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Chris Carril from RBC Capital Markets. Please go ahead.

Hi, good morning. So you previously disclosed that you expect 35% to 40% of your close will reach profitability maturity this year and that's up from about 15% in '22. Can you update us on whether you still think that's the case here? I presume it's still just based on the EBITDA guidance that you provided this morning. It's largely unchanged from what you gave us in early January, but also how you expect that may hurt to ramp over the course of the year?

Yeah. Great question, Chris. We are seeing the clubs continuing to pick up under swipe. And that's catching up to the swipes of the past. Obviously, they are doing that at much higher average dues. The in-center is catching up and improving in some cases, moving ahead of the past performance as well. So I don't -- I think that we still have more runway for the clubs gaining to the 2019-2020 -- early 2020 prior to closure -- our revenues and margins and then get beyond that as they are still, as I've mentioned, they're still ramping. While our dollars have recovered, I think in terms of the opportunity to get more revenue and more memberships, more traffic and majority of the clubs is still plenty abundant. So each month, as we mentioned to you guys, you see more and more clubs, more states are getting passed their past performance and then easily go beyond. And I don't know how to really reconcile your question mathematically right now, but I think it's just -- there's quite a bit -- when we said these clubs -- I don't think the clubs when you call it mature, you're talking about like they have ramped up to a level that they can't keep going. And we have room in most of the clubs that have recovered the dollar revenue dollar margin, they still have room to gain more memberships and fill a lot more, if that helps you.

Got it. Yeah. Thank you. And then just as a follow-up on pricing. Can you talk about maybe recent reception to the pricing actions you've taken? Thanks, again.

Yeah. We've sold tens of thousands of memberships in the first couple of months of the year and not any resistance. It's interesting, our rejoins are still at a higher rate today than they were pre-pandemic. And there is zero resistance to the price front. The customer is finding the value proposition at Lifetime. It's not the gym. It's not a -- it's really the variety of athletic -- things they do for their family, sports. So it's a social community. So actually, we're getting zero price resistance. And we're continuing to adjust the prices, and we will see if they work, they don't. If they don't, we can easily just go back and change the price in the club for the next week. But so far, we haven't had to take any club backwards.

Hey, Chris, it's Bob. Just to add a little more color to that. Not only are memberships up, membership churn or membership departures are actually down the first two months of '23 relative to '22, and that's despite the fact that our average dues are up roughly $20 versus last year.

Okay. Thanks so much for the detail.

Thank you. Our next question comes from the line of Brian Nagel from Oppenheimer. Please go ahead.

Hi, good morning, guys.

Hi, Brian.

Nice quarter.

Thank you.

So the first question I have, just with respect to your cost control and some of the repositioning of costs within the model, you clearly done a nice job over the last couple of quarters -- controlling costs. I mean as we look at the business and especially in light of our improving top line, from dues perspective of membership, how should we think about the sustainability of these cost controls or another way the leverageability of them?

Yeah. That's a great question. I don't expect us to continue to create more, more, more margin. I want to be clear. Now as the club's revenue continues to go up in aggregate, many of the clubs are still going to grow those revenue, which is substantially, that's going to add to our margins by the fact that the revenue percentage is going to grow. On the cost side, we completely rewired the company, as I mentioned, the decision-making process of lifetime instead of going through five, six, seven different people to get an approval and something, it's now down to three. So we are basically making decisions much faster. We've eliminated layers those are being eliminated. So that the cost isn't going to -- and then we also have transitioned the corporate office to a structure that as we grow additional clubs, the corporate office -- majority of the office does not need to grow. So it's -- that actually allows us to benefit from the scale of the company. So it should move. We're not intending to go back and cut more cost, I want to be clear. But what we have put in place should be here permanently.

Yeah, Brian, just to emphasize 1 point that Bahram made, most of the cost efficiency actions were taken in the fourth quarter of last year. So we'll see the full annual benefit in 2023. There aren't a lot of additional cost saving steps we need to take to see that full year benefit this year.

But they're rolling through right now every month.

That's great. Very helpful. And then my second -- my follow-up question, obviously, we're seeing the results track well here. But how would you -- if you look at these -- the new center openings, how are those -- generally, how are you feeling about this? How are those tracking versus your expectations versus historic levels, that sort of thing?

They're fantastic. I mean our new model, again, both in the way we're modeling the operations of the clubs, the programing and the -- and the pricing of this system. We're generally opening up the clubs right now above the business plan in our dues revenue and they're ramping beautifully. So we have no issue. Generally, we take a substantial loss the few months before the club opens and about three to four months, maybe after the club is open, that so we've been -- as you know, we have opened significant number of clubs in December and on opening just this week, a big one in California. But -- and we are covering that sort of a negative EBITDA from those. But within about four-five months from the time they open, they flip over and they start kind of giving back EBITDA. So we're pretty excited about where everything is going. And again, as I mentioned on my remarks earlier, the business has never looked healthier, stronger than it is today.

Helpful. Congrats, again. Thank you.

Thank you.

Thank you. Our next question comes from the line of Robby Ohmes from Bank of America. Please go ahead.

Hey, Bahram. Hey, Bob. Two questions. Just the center memberships fell less than we were expecting in the fourth quarter. Is that the departure rates just being a lot less as Bob said, and based on that, like was it -- can you kind of talk about the initiatives and if that played a role in that? Was it pickleball versus personal group training in ARORA? And maybe more color we would want to know, like can you give us any examples like clubs that don't have pickleball versus clubs that do? Is there a significant difference in performance of memberships and departures and things like that?

Yeah. It's not just pickleball, though. So I think to be clear, we -- all the programs I mentioned, area, small group training, personal training is having an amazing come back and recovery for us under new programming DPT, and that obviously generates more customers the sort of revenue margins are up and the number of people doing personal training has increased. Small group training is more than tripled since the beginning of last year. So basically, it's simple. Our business in our company, in our particular business, on average, about 10 swipes generates on memberships. So we focused on what we called SSR, which is basically creating swipes doing people reasons to have to be in our large athletic facilities, and then that swipe would generate subscription and the subscription generates the revenue. So that was the full strategy last year. And that's what we're continuing to execute. We expect to grow ARORA, our active aging program significantly this year. We expect to -- it grew massively in the first quarter. So far, we are growing small group training significantly. We have, again steady growth in pickleball. We're continuing to convert opportunities to pickleball and running the programs. So and VPC [ph] as I mentioned, is working. So all the programs are working. And then we usually gain membership, substantial membership in the first quarter there, seasonally, and we're doing better than our own expectation this quarter. It's going fantastic. And so we're very, very optimistic about the year as we're seeing the programs that we have initiated, they really are catching momentum and getting into that leap stage that I really like to see with the programs.

That's helpful. And just a follow-up. The in-center revenue growth? What is the sort of expectation on in-center growth in the guidance for 2023? And is there -- do you guys disclose sort of the frequency driver to in-center revenue growth versus spend per visit?

Yeah. So let's go through this. The in-center is broken into a number of things. The personal training, which is the biggest factor. And we reinvented our approach to training and wiring from the corporate office on the clubs up and down, back and forth. And it's just -- it's really working. It's working significantly better than it ever has and I expect that to continue to grow. The second one is kids and aquatics. Our programming is very strong right now. We are getting more sign-ups for like summer camps, selling them much earlier. So we have full capability of seeing where we have the opportunity to expand the capacity because we're going to get sold out in many clubs on that to the capacity we have. So we're just sort of laying that out. The Cafe, we're making improvements and that on aggregate, we're way ahead of the past revenue for our cafe business in the same store, I think we're close, but we're making progress on that, and I expect that to get past -- so all of our in centers are growing. In the past, it used to be one third in-center, two thirds revenue, once we got into the pandemic period, that number shrank some and it was more like 70% dues. But now we gradually as we go back and we kind of readjust the programing that we need. I expect that number to come back up as well. So -- and we're seeing it that is happening.

That sounds great. Thanks so much.

Yeah.

Thank you. Our next question comes from the line of John Baumgartner from Mizu Securities. Please go ahead.

Good morning, thanks for the question. I guess first off, I want to come back to pricing. And I think conceptually, Bahram, you've been clear about the lack of resistance to price increases on the part of your members thus far. But from your perspective, for the memberships that have seen pricing already increased, how consistent are these new prices with your objective relative to what you perceive the lifetime experience to be worth? I'm sort of more curious about how you think about price versus value from an operator's perspective.

Yeah. So the reality is that I have repeatedly admitted my mistake when we started the business, is that building these massive big athletic clubs and just pricing them extremely low. And that really was a challenge. We saw the problems with that was, a, we couldn't run the clubs with a level of excellence that I want to support season Ritz-Carlton level of quality, a real athletic country club quality. We just couldn't do it. There was too many people beating down on the club, number one. And number two, we just were stuck there because of the system we have with the salespeople in the company, they just could not -- they could not react to price changes. And it was just really, really clunky. So the most critical piece we did was eliminate the middleman, the sales person in here and go to a system where the customer just goes online looks at the product or goes to the club look of the product, we have member concierge, both in the corporate office that they do this via chat room, calls, et cetera, or in the clubs that they can show people what the facilities and people would just choose to buy or not buy. Nobody will call you back and harass you to buy a membership. I mean, is this really a different approach than I took the first 30-some years that was in this business. And we really love what's happening because there's no fear that you're making a mistake on the price. Let's say, we took a club from 179 to 199 and then the management says, that's not enough, we want to take it to 229. This has just happened. We take the price of 229 assume it didn't work. If it doesn't…

Okay. Thanks for that. And then just as a follow-up, I wanted to dig in a little bit around the phasing for 2023. The outlook for EBITDA in Q1 was stronger than expected, but it also implies sort of a sequential step down in EBITDA margin for the duration of the year. Are there any timing considerations, whether it's new opening expenses, rent or anything else that would drive that margin moderation fall in Q1? Or I guess is there anything that elevates margin temporarily in Q1. Thank you.

We just want to be -- no, I don't think anything elevates the first quarter margins are right exactly what they should be right now. As we grow the revenues in the summer, the next two quarters, their revenue grows substantially. Obviously, we all expect to have a bigger EBITDA come in the next two quarters. And then obviously, we also have incremental cost with like the summer camp. So we have big revenue. Also, we have big payroll with that. So furthermore, the reason we haven't taken the numbers up more than we have for this -- for the guidance increase is obviously we are trying to be conservative in the sense that we still have pokes in the world, and we just want to make sure we have the ability to deliver on what we say we will do quarter after quarter. But we don't expect the margins to go down as the rest of the revenue goes up. The only place that we have real pinch on our margin is when we open new clubs, but that's already baked in. So no, we don't have any event to think that the margin should decrease throughout the year.

Okay. Thank you very much.

Thank you. Our next question comes from the line of Simeon Siegel from BMO Capital Markets. Please go ahead.

Thanks, good morning Bahram. Hope you're doing well. Could you guys break out the revenue lift you're expecting from pricing versus new units -- new members for 1Q and full year embedded within the revenue -- and then sorry if I missed it, it might just be sale-leaseback timing. Did you say why rent came in $10 million less than the expected number from January? And just is there any offset we need to keep in mind on expected cash balance or anything. Thanks, guys.

Yeah. Hey, Simeon, it's Bob. Let me tackle the rent piece first. That's just a function of -- relative to our initial guidance, some of the sale-leaseback proceeds received and completion will be a little bit later in the year versus evenly distributed, but we're still very much on track to deliver the $300 million. In terms of Q1 revenue contribution from pricing versus memberships, yeah, they're both going to be meaningful contributors. As Bahram mentioned, we're seeing stronger-than-expected membership growth in the quarter. And as you know, historically, we add memberships in the first quarter. So there will both be meaningful contributors to that revenue growth in the quarter.

Great. And then if I can quick follow-up on. In terms of the seasonality comment, out of the members that tend to fall off in 4Q, what percent tends to come back? So just maybe talk about the reactivations within the churn.

Yeah. Simeon, this is a good question, and you are really great about kind of looking through the good stuff and the bad stuff. I think in some ways, and I've always gone back and questioned our reporting of membership count. Look, sometimes, we are -- we basically do not count a customer, right, if they haven't -- as soon as they drop out, they come off. Now in many times, these people are back within the 12 months and resigning back up, right? So a customer has a choice of going on hold for $15 a month, right, or just dropping out and coming back four months later. Now what they have is possibly they pay a little more in in monthly news, but that doesn't really stop in them from giving up their membership and coming back. They're not reacting to that. Where we see the opportunity is for that is to actually gradually start introducing enrollment fees as we have the strength. We wanted to wait to get to where we are today, which basically, in aggregate fully recovered and gone beyond. And once we have that strength coming through, we are now at least about 10-12 clubs across the system. We're charging initiation fees from a couple of hundred dollars all the way to $750. And I expect that by the summer season, we will have some enrollment fees in probably 100 of our locations across the system. And that is the real -- if there is a speed break for people just dropping out and coming back in is that enrollment fee that will help that process. But just really -- I mean, we're seeing no pattern that given us a real concern. The customers generally loves what they get at Life Time. If they can afford it, they go to Life Time if they can't they go elsewhere.

Great. Thanks a lot guys. Best of luck for the year.

Thank you so much. Yeah.

Thank you. Our next question comes from the line of Dan Politzer from Wells Fargo. Please go ahead.

Hey, good morning everyone. Thanks for taking my question.

Hello, Dan. How are you?

I'm well. Hope everybody's well over there too. I wanted to follow up on the enrollment fees. I know you just mentioned that that could be something you're facing over the course of the year at 100-plus locations. Is that included in the guide at all? Because I would think that, that could be material.

Yeah, it's not material because the numbers are we charge more of a pool pass in the summer months because part of what we're trying to manage is people just joining for the pool season overcrowding the customer who has been paying all year long. So we charge a pool pass and that pool pass basically goes into, I guess, averaged out over the several months of the pool open on the dose line. The memberships that we're selling now in the clubs that they have enrollment that enrollment fee is basically gapped over the length of the membership. So if we charge, call it $660 and seeing that for a number and the customer was -- member for average which i 33 months, we're only taking $20 of that in revenue per month over the first -- for that 33 months. As you know how that works. So it's really like a 1%, 2% number for right now. Again, it's my desire as the company gets really, really where I like it to do in terms of revenue and EBITDA generation. I would really like to have actual enrollment fee be the next phase of introduction for our -- that just makes the experience of a lifetime customer once again closer to a country club rather than a health club.

Interesting. That makes sense. On -- I think earlier on the call, you mentioned that memberships, the 2019 center commentary, I think you said 3% is where they're above at this point---

Let me take that really accurate. So it's actually a little bit higher relative to the same clubs are like 104% over the 2019 January dues. And then the clubs that open all the way through 2020 or 103% of the January of 2020. Now if you remember, January of 2020, we had a robust January and February and then the shutdown came in March. So we had a very strong January, very, very strong. The best January we've ever had was January of 2020, and we were able to beat the similar clubs that were open, be able to hit that number at 103%. That's what that number is.

Okay. Got it. And I guess my question around that was, as we sit here today and your pricing is over $160 system-wide and getting those centers fully back. I mean is that membership? Is that pricing? Is it a combination of both? And what's the receptivity to those prior customers to come back at higher prices and possibly enrollment fees.

Well, that's really we -- it's a business is about supply and demand, right? And we have so many spots that we can deliver in anything in pickleball, in a small group in assuming deck, we basically have to manage that supply and demand so that the experience becomes -- this -- Life Time is a highly experiential company. And so we want to make sure the experience is what we wanted, and we have to adjust the pricing. As I mentioned, again, we are now -- if I go back, the aggregate clubs in that early part of 2020 before the shutdown would have been maybe 122-124-125 is for the new membership sold at that time. All memberships sold at that price. Now its 208 for the period we told you, we've made some additional price increases. Now it's actually above 210 this month so far for the membership sold. And we are just -- again, we can -- if the fear is, what if it doesn't work, we can adjust them. I mean it's not an issue. It is working. And we are seeing, as I mentioned to you, highest -- first, I mean we are getting 30%-some of our memberships are rejoins. Prior to pandemic, was 26% of membership being rejoined. So the answer is the customer is not even making a comment. They just go online and they sign up, they come to club, happy as they can be, and they go about doing their business. So we are very comfortable with the strategy, the way it's working. And so it goes to the -- you keep asking what portion is pricing. So some clubs they had me give you individual clubs as social had north of 9,000 memberships prior to pandemic. It's too many. It…

Thanks. I appreciate all the color. And if I could just sneak in one last housekeeping one for Bob. Just as we think about the rent and progressing throughout the year, is there a 4Q exit rate for the rent expense? And then on the leverage, I know you guys said 4 times at year-end. Is there a long-term target on a traditional or lease-adjusted basis we should think about? And that's all for me. Thanks.

The long-term leverage, I want to have it below -- so we're going to continue working on per se on improving the balance sheet until the leverage gets under three. Since everybody is on the call, that is not a leverage I would like 3 times debt-to-EBITDA for a company that would not have all the real estate assets we still own. The change in that I think under three is a very healthy number is that at all times, we are carrying roughly about $3 billion worth of owned real estate even with the sale leasebacks that we continually do that just doesn't allow that $3 billion to grow, right? But we recycled stuff coming in. So my target is to keep the debt to EBITDA under three, we're happy with the progress we're making. Obviously, the most improvement in that just keep growing the revenue and EBITDA to grow the margins, and that will help that number rapidly come down. And then I think Bob will get you that by the time you just -- you can run the math, go ahead.

Yeah. So Dan, on the rent piece, we've guided to $270 million to $280 million for the full year. Obviously, we'd exit the fourth quarter at slightly higher than that run-rate since that's the guide for the full year. So something just north of that $70 million --

You just take a rent because we only did $33 million that we just closed in end of February. One more is scheduled to close here in the next couple of months, another one in June, July, and then we are working on the other deals that we would announce in the future. But if you assume $300 million of sale leaseback in the mid-6s range for the cap rate for the year and add that to where we exited. So that will give you the exit coming out of -- the timing of these will be -- depends on Life Time's the ability to deliver the product and/or the landlord's ability with the time they want that to go on their deals. So that's going to take sort of little moving target. But you're looking at about $20 million some of, call it, $20 million of incremental rent annually added to our exiting rents on the fourth quarter 2022.

Thanks so much. Really helpful.

You're welcome.

Thank you. Our next question comes from the line of Brian Harbour from Morgan Stanley. Please go ahead.

Hey, guys. This is Matt Morris on for Brian. Just a follow-up on that conversation around membership dues versus 2019 levels. A couple of months back, you gave it broken down by state. You're obviously performing very well in quite a few of those states, but a couple of other core markets in the Midwest, like Minnesota, Illinois are still running kind of those levels or at least were when you last disclosed. Has that app kind of closed? And is that mostly just due to kind of the timing of restrictions rolling off a bit later in those states? Or is there anything else to call out there? Thanks.

Yeah, majority of -- they're like the anomalies, but majority of those the ones that can be mapped out, like in Orange, that hasn't fully recovered, was really timing. But if you go back right now, and we will -- as we meet with investors. We filed those before we go through an investor conference. And then you look at every single month, more states are turning green from orange and the other ones are keep coming up. Our expectation is every single state will recover to full numbers and go beyond. So it's just timing. And really, there hasn't been a situation saying, the world is going to be different in Michigan or Minnesota, it is not. So the only other thing in Minnesota has always been a little bit off is that we have one large, large, super, mega club that opened in town and that depending on where you draw the line, that club takes a lot of members from the other ones, so dilutes the message. It's very close. And I think by this summer, I think we will hardly have any state that is left behind.

Yeah. So Matt, just to give context of what happened in the fourth quarter from November to December, two states, two additional states coverage and 6 additional clubs. We're seeing similar, if not accelerated progress as we've rolled into 2023.

Yeah, every month, you'll see that progress happening.

Okay. Thanks. And then just 1 more. Curious on how Net Promoter Scores have evolved recently? Have you seen any noticeable shift given gyms are likely less crowded versus pre-COVID, but you also have some additional programming around whatever may be pickleball, small group chaining or revamped personal training, et cetera? Thanks.

Yeah. No significant change to our NPS. What's happening is we're getting a little better, obviously, results because of expanded programing and then the two things will reduce NPS. The most potent one is when the members get a letter saying their use is going to go up $10 or $15. So the legacy those increases usually is an impact. It's just a one-month impact. And finally, yes, the January traffic in the clubs basically can make the experience a little pinched and so those are just seasonal, but apples and apples, our NPS is as good as it's ever been.

Thank you.

Thank you.

Thank you. Our next question comes from the line of Chris Woronka from Deutsche Bank. Please go ahead.

Yeah. Hey, good morning, guys. Thanks for all the color so far. Just a follow-up on the kind of the leasebacks. The big question we get a lot from investors is how do we get comfortable that the given the interest rate environment and such that the buyers, which I know includes some REITs that the economics still don't change materially. Any thoughts you can provide around that?

So -- go ahead.

Yeaj. So on sale leaseback, so yes, we -- from a cap rate perspective, Chris, we're seeing cap rates consistent a little mid-6s -- Yeah, consistent with what we've done historically, we still see strong demand from the REITs to participate in our properties. As you know, we paid every nickel of rent during the pandemic. Our clubs are cash flow positive. So we're a really attractive tenant for landlords. So we're seeing continued strong demand at rates consistent with what we had there.

One thing I would mention to you guys is that our leases are 20-plus year leases initially and then they have -- we have multiple options, five-year options after that. There's a very, very long term. And if you think of it, it should be more like the 30-year mortgage rather than the -- so our partners who are doing these deals with us, obviously, they're under pressure for their investors tying it into current rates. But we all know the current rates will change if they don't change this year or they'll change soon enough relative to a 2030 year. So while the rates are volatile a two-year or five-year, even 10 years, they don't really have as big of a pull. It's not percent for percent on a 20-plus 25-year lease. So there is virtually no concern that we can't get them done. The difference is just a quarter percentage point one way or the other on the cap rate.

Okay. Very helpful. Appreciate that. And then, Bahram, you've talked in the past about the potential M&A in the space and being an active participant in that. Has anything changed versus a year ago, six months ago in terms of what you're seeing relative to, again, debt markets being tough for some of the maybe weaker capitalized players. Is there anything that changes your view on what might happen over the next year or so?

Yeah. I think strategically, at some point, those opportunities will become very attractive for Life Time. For the last 12 months, the current six months, the first six months of the year, our heads down focusing on fundamentals. We needed to make the adaptations that I have talked about to make sure our business model has overcome all the inflationary issues that everybody has dealt with and recovered from the pandemic -- ups and downs and overcome all the inflationary stuff is construction, supplies, payroll. And I am so excited because we have accomplished that, I think as we look into the breakdown of the business unit, I tried to do it and give you guys some examples on this call, unfortunately, it gets convoluted, because we have to -- we can talk about the EBITDA when you exclude the impact of rents. So I just took it out so I can do it in a much more detailed approach. But we have the healthiest business model since the in such a company today. And I'm proud of our company. I'm proud of our team, I'm proud of my partners for digging deep and making all the necessary adaptations to end up with a business that is better. Now once we get that done and then we are kind of building our normal course of clubs, and we can also look at opportunities hopefully, by the next call or two or three, we can start sharing with you guys the opportunities are popping up and how we're dealing with them.

Okay, very good. Thanks, guys.

Thanks.

And we have time for one. Go ahead guys.

Thank you. Our next question comes from the line of John Heinbockel from Guggenheim Partners. Please go ahead.

Hey, Barham.

Hey, John. How are you?

Good. So a quick one -- well, 1 will be quick. Can you talk about your philosophy, right, on -- there's a virtual flywheel here, right? You take in more dues, you invest in the business, the experience gets better and you can further raise pricing. Talking about that philosophically, right? And what would you like to -- when you think about raising the experience further, what would you like to invest in whether it's new services or upgrades that you're not doing today, right, that would elevate the experience.

Yeah. So we are doing them we're not doing them across the system, John, it's a great question. So let me -- certain things you just can't do overnight. Like what I'd like to do is in terms of our ultra-fit class, which is really amazing small group training kind of a sprint training, coupled with functional training for perception. It has completed a workout somebody would want to have. Okay, we have to build this pop-up studios for people to be able to do those, and we've been busy working our tails of nonstop to converting the floor plans to get this done, we are now done with maybe more than two thirds of the clubs, and we're still kind of doing that remodeling the others going forward. That takes time to implement that idea. And then once you have that, now you have to get the talent that can actually coach that class that has the people wanting to follow. So just these things that we want to do is not like writing a new software for something and then rolling it out and everybody can -- it's just the speed of implementation is really one of those things that you have to take into consideration. So what I'd like to answer your question, what I'd love to see is more consistently across all the clubs in the country executing the locker room that smells like the best spa in the world, the cafe that gives you the best food, all the programs taught by the best coaches, best instructors. So it's just really continuing to work when we -- and any of the -- any CEO of a multiunit. You can get excited about the few stores that is closer to you that you see everything running…

And then just real quick, the quick one was going to be, if you look at the underpriced memberships, right, that you talked about before. So that's about $200 million of annual revenue. I mean how do you think about -- maybe not all of that is available, but you think about staging that over one-year, two-year, three-year period?

Yeah. That's too aggressive. You really have to run your business from the customer point of view. You don't want to make the customer who's been with you for six-seven-eight years, feel like 10 years, 15 years, feel like you have no appreciation for that. So we are -- we have been doing this steadily. We didn't do it as as smoothly as we're doing it now, we used to do a price increase every November for everybody at one time, too harsh. Now we go through a use of AI utilization studies, everything -- and we may take $0.5 million worth of dues increase this month. We may take another $0.5 million next month. So it's a small number of people. And then that allows -- it's a small number of people per club that allows an individual conversation between that particular member and the lead general of the club. So we're going to lead that in methodically slowly but we have lots of dry powder, just that, that's really an opportunity for the company to kind of improve the dues revenue steadily throughout the year.

Okay. Thank you.

Thank you.

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And the conference of Life Time Group Holdings Inc., has now concluded. Thank you for your participation. You may now disconnect your lines.