Good morning, and welcome to the Life Time Group Holdings Conference Call to Discuss Financial Results for the Third 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 conference 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. 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, are included in earnings release issued this morning and the company's 8-K filed with the SEC and on the Investor Relations section of Life Time's Web site.

On the call from management today are Bahram Akradi, Founder, Chairman and Chief Executive Officer; Tom Bergmann, President; and Bob Houghton, Chief Financial Officer. I will now turn the call over to Mr. Akradi. Please go ahead, sir..

Good morning and thank you for joining us. With me this morning is Tom Bergmann and Bob Houghton. After my opening remarks, I will turn the call over to Bob to run through the numbers. And then Tom, Bob and myself will be available for questions and answers portion of the call.

So to start, we are right on track with our strategic progress on recovery from pandemic and poised to go beyond. As we have discussed in the past, our first priority coming out of the pandemic was to strictly play offense and focus on rebuilding our membership dues revenue.

Now that we are on a path to exceeding pre-pandemic membership dues revenue on a same-store basis in the first quarter of 2023, we have swiftly turned our focus to margin expansion.

We see significant opportunities to expand margins over the next year as we expect to capture the benefit of the higher dues revenue, fine-tune and optimize the rollout of our strategic initiatives and improve the efficiency of our club operations and corporate office.

We believe that even with inflation and macroeconomic headwinds, we are well positioned in 2023 to slightly exceed our 2019 adjusted EBITDA margin percentage, excluding the impact of rent expense.

With regards to liquidity and our balance sheet, we are working with a number of our great partners in the sale leaseback market and are planning to close on additional sale leaseback transactions during the first quarter of 2023.

We have taken extra time to look at alternative sale leaseback structures to optimize our financing costs and the utilization of our net operating losses reserved for the growing cash flow from our operations in 2023 and beyond.

For 2023, we plan our cash flow from operations and sale leaseback proceeds to equal or exceed our 2023 capital expenditure.

This will allow us to maintain a strong balance sheet during 2023 with very high levels of liquidity by maintaining cash on the balance sheet or utilizing only a small amount, about $475 million revolving credit facility during 2023.

Before turning it over to Bob to run through the numbers, I want to first thank Tom for his partnership and contribution to Life Time and wish him much happiness and success as he moves on to the next chapter of his life. And secondly, reiterate my confidence in our business as we finish 2022 and look forward to 2023.

It is a challenging macroeconomic environment, but I'm really excited about the progress we have made on executing our strategic priorities during 2022 and how we are positioned to drive substantial profitability improvement in 2023.

Our business model is highly resilient, and we are in a great position to continue to deliver healthy way of life to more members for years to come.

Bob?.

Thank you, Bahram, and good morning, everyone. It is a pleasure to speak with you on my first earnings call at Life Time, and I look forward to spending more time with members of our analysts and investment community in the weeks and quarters ahead.

I joined Life Time because I believe there is no other company better positioned to lead in the healthy way of life space, particularly with our incredible beloved lifestyle brand, our unmatched ecosystem of athletic country clubs and omni-channel programming, and our amazing team of professionals who deliver the incredible experiences we provide each and every day to our nearly 1.4 million members across North America.

As Bahram highlighted, we are happy with our progress to date, including continued momentum in revenue and improving profitability in the third quarter. Starting with our top line performance, third quarter total revenue increased 29% to $496 million.

Total center revenue of $480 million also increased 29% and was driven by a 29% increase in membership dues and enrollment fees and a 30% increase in incentive revenue. Total comparable center sales increased 26% in the quarter. Third quarter center memberships increased 9% to nearly 729,000 memberships.

Sequentially, we grew our membership base by nearly 4,000 over the second quarter. By comparison, our membership count declined approximately 3,100 from the second to third quarters of 2019.

We typically see a seasonally driven reduction in memberships between the second and third quarters, so we are pleased with the sequential increase in our membership count this quarter.

The strategic programming investments we are making in small group classes, dynamic personal training, active aging through our ARORA community and pickleball have all supported our continued membership recovery and driven an expanded membership base and higher usage levels.

This demonstrates that our strategy of elevating and broadening our unique healthy way of life offerings to attract additional members is working.

Average monthly dues per center membership increased 17% to $157 from $134 in the third quarter last year, driven by both the continued successful execution of our pricing strategy and the opening of higher priced new clubs.

Third quarter average center revenue per center membership increased to $660 from $555 in the prior year period, led by the increase in average dues and increased member spending within our in-center businesses.

Third quarter center operations expense of $295 million increased 27% versus the prior year, primarily driven by added staffing to support increased center usage and expanded programming, the opening of new centers and labor and utility cost inflation.

Third quarter rent expense increased 20% to $63 million, driven primarily by non-cash rent expense where we've taken possession of a site and started construction but have not yet opened for operation and rent expense from the sale leaseback of nine properties in 2022.

General, administrative and marketing expenses were $57 million and included $5 million of non-cash share-based compensation expense.

Excluding non-operating items in both periods, general, administrative and marketing expenses increased 25% in the quarter, primarily driven by increased labor to enhance and broaden our member services, increased technology and marketing investments and additional public company expenses.

Our GAAP net income for the third quarter was $25 million compared with a net loss of $45 million in the third quarter last year.

Excluding a one-time gain of $43 million related to the sale leaseback of five properties, share-based compensation expense and other non-recurring items, our adjusted net loss was $12 million in the third quarter compared to a $40 million adjusted net loss in the prior year.

Adjusted EBITDA increased 51% to $71 million and grew 12% on a sequential basis, demonstrating another quarter of strong year-over-year and sequential improvement. Adjusted EBITDA margin of 14.3% increased 210 basis points from the third quarter last year and 60 basis points sequentially from the second quarter of 2022.

We delivered another quarter of improving cash flow with net cash provided by operating activities of $45 million versus a $2.3 million net use of cash in the prior year period.

In the third quarter, we sold and leased back five properties for aggregate proceeds of $200 million, bringing our aggregate sale leaseback proceeds through the first nine months of the year to approximately $375 million.

Our liquidity position at the end of the third quarter remains strong with cash and cash equivalents of $107 million and no borrowings on our $475 million revolving credit facility. Turning to guidance. For our fourth quarter and full year outlook, we are tightening our guidance range but leaving the guidance midpoint unchanged.

For the fourth quarter, we are projecting total revenue of $460 million to $490 million and adjusted EBITDA of $80 million to $90 million. For full year 2022, this equates to total revenue of $1.81 billion to $1.84 billion and adjusted EBITDA of $255 million to $265 million.

This outlook includes the following assumptions; the opening of seven new centers in the fourth quarter and 12 for the full year, average fourth quarter monthly dues per center membership between $155 and $160, a 2,000 to 5,000 net center membership decline in the fourth quarter.

Please keep in mind that we do typically lose memberships in the fourth quarter. So this would be a nice improvement compared to 2019 when we lost just over 13,000 fourth quarter net memberships and last year when we lost nearly 19,000 fourth quarter net memberships. For the full year, we expect to add approximately 75,000 net center memberships.

Preopening expenses of approximately $5 million in the fourth quarter and $14 million for the full year, GAAP rent expense of $65 million to $70 million in the fourth quarter and $245 million to $250 million for the full year.

This includes approximately $40 million of annual non-cash rent expense, of which approximately $10 million will be incurred in the fourth quarter. We remain committed to making our enterprise more asset-light.

As Bahram mentioned, we are exploring alternative sale leaseback structures to optimize our financing costs and preserve the utilization of our net operating losses to offset our growing future taxable income. We plan to close on our next round of sale leaseback activity in the first quarter of 2023.

We are pleased with our progress on executing our strategic priorities this year. We've added programming. We're increasing membership and usage levels. We're opening new athletic country clubs and we're optimizing our pricing, and our efforts to make our corporate and field operations more efficient are just getting started.

We believe these initiatives leave us well positioned to deliver continued revenue growth and a substantial improvement in profitability in 2023, creating additional value for our shareholders while continuing to ensure we provide the best possible experiences to our members. With that, we will turn the call back over to the operator for Q&A.

Operator?.

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions]. We have a first question from the line of Brian Nagel with Oppenheimer & Co. Please go ahead..

Hi. Good morning..

Good morning, Brian..

Good morning..

Nice quarter. Bob, welcome. Look forward to working with you. .

Thank you..

So the first question I have, just with regard to expense leverage. Bahram, you talked about this in your opening comments, but clearly your membership is tracking well. It's recovering nicely. You've got new centers now coming online here through the balance of this year and into next year.

And you talked about the kind of the target operating margin -- I'm sorry, EBITDA margin for '23.

But how should we think about maybe the cadence of that improvement and then more of the components? And where should we -- as we work through the balance of '22 and into '23, where should we really see the majority, if you will, most of that expense leverage through the P&L?.

Thanks, Brian. I think the -- really it's important for me to reiterate that when we came out of pandemic, we were in a situation that's hard to sometimes explain, but we basically normally pre-pandemic, we had 140 clubs. Of those 140 clubs, 122 of them, 124 number in year three. So they're pretty much at maturity.

They're doing full revenue, full EBITDA. Maybe a handful of the clubs are in year two, they're doing 85% of the revenue and maybe 50% of their EBITDA. And a handful of them are in year one, where they basically are doing 60%, 65% of the revenue, the potential of that club, and they're doing basically flat EBITDA.

They lose money in the first six months, five months, four months, and then they make some in the last four, five months of the year, but it's pretty much flat. So when we came out of pandemic, what's really not understood in this business as a subscription business, we pretty much started every club in year one.

So all of our portfolio was in year one. Depending on the rate of opening some markets which is much more robust, they open sooner like Texas and they didn't really bring any additional restrictions in as time went on. Those clubs are all acting beyond year three. They are ahead of what we were ever doing in the past, in revenue and in margins.

Today, we have a much larger number of clubs who have now reached that same-store similar to this year to the mature numbers.

We still have probably 50, 60 clubs that they are acting more like year two rather than year one because they were held back by the particular states much longer into the closure and then with a lot more restrictions even when they open. So they're just tracking behind.

But we got to August, we could take a look ahead, and our analytics basically mapped out. By beginning of 2023, it looks like we should be able to have the same-store clubs for sure on the dues revenue caught up with 2019 and the first couple of months on a run rate basis, the first couple of months of 2020 before we shutdown.

And then we have, of course, the additional costs. So we quickly switched our focus on phase 2 of our kind of a post-pandemic recovery, which is now not just playing offense, we decided to start looking at, okay, we're going to still grow the memberships, but we can now look truly at what the cost efficiencies are.

Now it's important for all of you guys to understand that typically, we do this every year. Every year, when we do the budget for the next year, we look for efficiencies. We look for how we can improve. But we didn't do that for three full years.

We were just strictly trying to get these clubs on a trajectory so we could see that we're going to win on the revenue side first. Once we had that, we started digging and we have tremendous opportunities across the board. So we have eliminated a number of positions that they reserve between the clubs and the corporate.

We have fine tuned many efficiencies in the corporate office and additionally rewiring some of our structures even in the clubs. So we are very, very comfortable guiding you guys to the numbers that Tom and I shared with you during the IPO. So we sort of gave you guys some margin range for EBITDA plus adding the rent back.

You guys can take those, and we're committed to deliver those percentages. But I am confident that we can be slightly better than 2019 margins on the same front. So it is coming across all aspects of our business and there's plenty of opportunities. We have implemented more than 50%, 60% of those things already.

We're taking necessary expenses that we have to take to make those adjustments, and then we should have a clean slate for the first quarter going forward..

Got it. Very helpful, Bahram. Thank you. And then a follow-up question I have, so I've spent a lot of time lately to the new clubs on One Wall Street and Dumbo. They look great, Bahram. Congratulations.

How should we think about the economic model for Life Time of clubs -- there's urban-type clubs like that versus the more traditional centers that you've opened historically?.

Look, when we run any business plan, doesn't matter if it's urban or not, we're looking for exactly similar rate of return on invested capital. So we have a clear advantage in our real estate on the sale leaseback world for the ground ups. We have partners who I was on the phone with, two of them just as early as late last week. They're always ready.

They have full trust in Life Time. They know we are the legitimate standup company that pays every penny of the rent. So if they want to add anything in the healthy way of life category, they want a Life Time asset, they don't want anything else, so we have that.

And then we have all other developers who are building big buildings, building apartment buildings, mall owners that we have worked constantly. The one part of our company everybody is busy is in sort of looking at a variety of different options.

We also have been able to take over some other assets where they were meant to go somewhere else, but they didn't perform -- folks didn't perform. So the landlords called us and we were able to negotiate amazing deal structures for us. So our expectation is the return on invested capital will be no different than our prototype models..

Got it. Thank you very much. Appreciate it..

Thank you. We have next question from the line of Robby Ohmes with Bank of America. Please go ahead..

Hi. Good morning. Thanks for taking my questions. Bahram, can you talk about -- by the way, great job getting the membership dues per store back to those pre-pandemic levels.

Can you talk about what you've done in pricing with the legacy side as well as the new members? And where are you in bringing the legacy members pricing up to where the new members are? And do you see more opportunity to raise prices heading into 2023?.

That's a brilliant question. So let me take the time to explain. So when we went to pandemic, our average price was around for membership was about $120-ish, $120, $121, right before we went into it. And I think for the full year, 2019 might have been just a couple of bucks less than that.

We're going to finish the year right around $160 per membership across the board. This is really important. While a lot of attention has been put on the membership count, a membership count isn't what pays the bills. It's the dollars. And I've gone through this for I think 10 to 12 years, even before I was public.

For our business, when we started this company, we built the most amazing product services and we sold them incredibly too cheap and it created issues. And then we started kind of trying to correct that, correct that, correct that. But during the shutdown and reopening, we basically took an approach.

And as of right now, over the next 45 days, myself and my team, Bob, Tom and JZ and the rest of the group, we're working on club-by-club basis to sort of point out what should be the optimal membership in that club. And those optimal memberships are going to be less than what we had put in as membership counts in the past.

Our average dues of what we're selling today is roughly about $190 a month, so it's about a $30 difference between the memberships we are selling and the memberships that they're dropping off. So we have put in quite a few legacy price increases. We are in a really, really good place right now. We don't expect that we do a lot of those going forward.

Very small amounts on a monthly basis will hit as people come off of hold after a month or so. We give them the price increase if they need to, but it's not going to be a large -- but the churn as the people drop out and those clubs get a new customer, every churn is $30 additional revenue.

So we've done a great job of achieving our target of $160 per membership by end of the year.

And from here going forward, it's going to creep up and we probably won't put another major price increase passed on to legacy members, maybe a small group on pool season, the rest of them in September, October, November of next year, just like we did this year..

Got you. That's very helpful. And just a quick follow up. You guys called out the initiative small format group training in ARORA and pickleball, et cetera.

What is standing out on those initiatives? And how is it impacting sort of the demographics of the membership, or is it impacting the demographics of the membership?.

So we are selling all of those programs. ARORA is a different group. This is basically older people, 55 and above. And 65 and above has got the qualified memberships that come through the insurance companies.

A lot of them upgrade with -- pay an upgrade fee to a signature fee to make sure they can get the full use of the club at all hours as well as be able to get pickleball and other sports they want to get into. So ARORA is on fire. Pickleball is growing like 50% quarter-over-quarter. Utilization is up. I told you guys we want to dominate this category.

We have over 350 dedicated courts online right now. We are gaining about five to six additional courts a week, and I expect us to have 600, 700 courts by end of next year. We just signed an agreement partnership with MLP and we have ongoing relationship with PPA.

I expect us to have 60,000 to 70,000 memberships by end of next year that they are unique members playing pickleball in Life Time clubs. And I would say half of those are members of our Life Time. We're doing other things than not. They're doing more pickleball than anything else like myself and half would be all brand new customers to Life Time.

Then the other two programs are DPT, our dynamically engaged personal training, which is a completely new innovation in personal training. The way it's executed, it's impossible to get that service, that quality, that type of a workout online or with an app or with a phone or your iPad.

You need to be [indiscernible], imagine your chiropractor, your physical therapist, your massage therapist and trainer, it's all in one completely interactive. That business is growing very nice right now quarter-over-quarter. I expect to beat the 2019 personal training numbers in 2023. We have everything lined up. We have the pricing.

We have the strategy, the structure of the workers, how they do it. Everything has been reprogrammed 100%, feel totally excited about DPT. Last but not least, small group training.

We have invested significant amounts of dollars in energy and time on Ultra Fit, which is sort of a sprint workout combined with the functional training intermittently changing back and forth. Hugely popular, it's growing rapidly. GTX and our Alpha, which is our version -- high end version of Cross-Fit workout. So they're all growing.

They're part of the signature membership, so it's much easier for customers. They don't have to buy a membership and then pay differently. They just buy the signature price point monthly dues, and they can take as many classes as they want.

So when I look ahead, our expectation is that all of these programs I just mentioned to you, they're all working and we are not doing anything other than doubling down with each and every one of them.

And these are the reasons this transformation, the pricing strategy, the rewiring of our structure for efficiency, all these things, this company, everybody on my side, all the leadership, everybody is working seven days a week. We have the best alignment we have ever had. Everybody is fired up for a record year for 2023..

That sounds great. Thanks so much..

Thank you. We have next question from the line of John Heinbockel with Guggenheim Securities. Please go ahead..

Hi, John. Hello, John..

John, your line has been unmuted. If you have muted yourself, please unmute yourself and ask your question..

Okay. Why don't we go to another question and come back to John later..

Thank you. We move to the next question from the line of Chris Carril with RBC Capital Markets. Please go ahead..

Hi, guys. Good morning. So as you noted in the prepared remarks, you saw center membership growth in 3Q versus that kind of expected typical seasonal decline. And that was with one less opening I think than you were anticipating for the 3Q.

So can you talk about what you saw that was different from your expectations last quarter with respect to membership growth? And what drove that modest increase versus the expected decline? And to what degree did the on-hold memberships contribute to that growth?.

The on-hold memberships really have not much of an impact on it at all. We are right in that 40,000, 45,000, 50,000 memberships on hold, I think is going to hold steady.

Our major decision was how to run these programs that I just mentioned, so that the pool season would be less factor of the people who come in, if they're not going to come in for pool season, they come for pickleball, they come for ARORA, they come for -- because of those is the change in the slight loss of membership to a slight gain of memberships.

And yes, we expect to outperform those metrics versus 2019 historically until the clubs have well surpassed their potential. And there's still quite a bit of potential.

I still believe the other markets that they were behind, again, because of what I explained earlier, I expect by mid-summer next year pretty much all of our clubs surpassed the 2019 performance in traffic, not in membership but in swipes and in revenues, of course, both dues and in center..

Got it. And then, Bahram, just curious -- at a high level, curious to hear your latest thoughts on just kind of competition in the health and wellness space. I know you offer a very unique product and experience, and that's been a big focus for the company historically here.

But curious to hear your thoughts on just kind of the rebuilding of industry supply post pandemic and just generally how the competitive environment is just evolving here?.

Yes. I think there is -- as you can see, there is a bit of pressure on the mid level -- as always, the mid level price point has always been under attack. I think there's no real sign that in the mid level, people can really do anything. So it's really just also that high end.

And on the low end, you basically have everybody from Planet Fitness to Crunch to dozens of brands. And I think they will have a bit of a challenge with the supply chain cost increases in construction. So that's why I think some of you see in all of the franchise model runs, they have a harder time to make the math work.

So my perspective is in our space, in the healthy way of life, these elaborate athletic country club style we are sort of a league of our own. I don't see anybody being able to emerge.

Our business model needed 100% reengineering and retooling over the last 12 months to deliver the results that we are delivering you, and it needed the exact strategy that we deployed. We needed to play strictly offense for last 18 to 24 months since they kind of let us reopen slowly.

And then once we had the clarity of revenue recovery, then switch to the margin expansion, if you have done it any other way, I don't see how there is a path that you could be growing next several years. So we have a pipeline and we have additional opportunities coming in.

And this takes me to the next part, we're really looking forward to the net income, the pre-tax income we're going to generate in the next three years, I expect it to be substantial.

And as a result of that, when we took a second look after mid-August, as I mentioned, we looked at our trajectory about $500 million of loss carryover that we have is significantly valuable to us. We can chew that up in the next three years with pre-tax income that we can be offset.

So then we changed our strategy rather than selling old building and taking the gain and washing out our net loss carryover, which I think is incredibly valuable when we know we're going to be so profitable, we basically started talking to our partners, landlords and say, hey, why don't we just take the new clubs that we want to launch and structure a deal that they fund those new constructions, rates will be similar.

They have corporate guarantees, so it doesn't change for them and they trust us.

And that will allow us to kind of get the new club openings prefunded for the ground up, a lot of our real estate, a lot of our growth now was already funded by our partners, whether it's the mall deals or the apartment buildings, locations we're going to or office buildings that they need us to come in.

And so we are in a really, really great position competitively. I don't see anybody can. And then this year, we are on track to do about 100 billion impressions naturally.

It allows us to do well in excess of $2 billion of revenue with less than $12 million of money spent on direct marketing, 0.5% unlike some other so-called fitness companies, they spend 30% of the revenue on marketing.

We are in an amazing position to make sure that the economics of this business model shows up side by side to the quality of our brand that is loved by the country. So that's where we're at. I don't see anybody being able to emerge to give any impact to Life Time..

Great. Thanks so much..

Thank you. We have next question from the line of John Heinbockel with Guggenheim. Please go ahead..

Hi, guys. Sorry about the technical difficulties earlier..

That's okay. We forgive you, John..

This is Julio Marquez on actually for John Heinbockel. Just a quick question for you all. You mentioned broad based efficiency opportunities, but I guess what are the one or two biggest buckets that you guys have identified? And if that happens to be in the clubs, how are you safeguarding the experience for your members? Thank you..

Yes. So over the years, our business model sort of had slowly creep into more of a management style, and of course there is benefits to that, but we basically went sort of deeper into that management style during the last three years because we were focused on all other priorities.

And then when we look back, we can snap it back into more of an ownership mindset, it's like a leader structure rather than a manager structure in all of our departments. And it's been adopted lovingly by our general managers. They are super excited about the ability for them to be the lead general of their clubs.

And then we have created all brand new dashboards for them, and they can see and operate their business for more autonomy.

We have eliminated significant layer -- a huge layer of cost structure in the corporate office that was basically between the executive team and all the department heads in the clubs, the regional area leads, regional leads, all that sort of stuff, and basically given more power to the clubs and in the clubs we have new wiring.

So it's actually across all fronts. I think our personal training will deliver better margins in 2023 than historically it has.

And I really would love to see our corporate overhead be substantially less of a burden to the clubs than they have been in the past, and we've taken an aggressive approach to actually make sure the corporate office expense will shrink versus grow while our revenues will grow substantially in the next year.

Therefore, the cost that is passed on as a percentage for G&A to the clubs should reduce by at least 1 percentage point to 1.5 percentage points..

Great. Thank you..

Thank you. We have next question from the line of Simeon Siegel with BMO Capital Markets. Please go ahead..

Hi. Good morning. This is Garrett [ph] on for Simeon. Thanks for taking our question. I'm just curious, just given the macro backdrop, you're seeing anything within your customer base outside of normal seasonality along the lines of increased churn or resiliency among your member base? And anything interesting there maybe you can note..

Yes. I think for the most part, we are not seeing our -- we focused strictly on our strategy. It's been about the last half a dozen years, but then much more swift swing to sort of the top 20% of the market. As you guys all well aware of, the top 10% is spending more money still than any other category, the next 10% is still not affected.

So the top 20% is the least. We're not hearing anybody coming in and saying, oh, God, I'm going to cancel my membership because price of gas is $2 a gallon more. So we are completely in a right environment. However, I just want to be clear. We plan for the worst and we expect the best, of course.

So we are having a very, very cautious approach in terms of our cash flow and maintaining our liquidity. And again, as I mentioned, keeping our revolver as dry powder for the most part, all through the next year. But we're not seeing any impact to our customer right now.

We still expect to have substantial growth in our revenues through 2023, substantial..

Okay. That's great to hear. And I guess just as a follow up, and Bahram you kind of touched on this a little bit, but any further detail would be great. Just understanding the real estate market and how that's evolving and kind of what you mentioned on cost and availability of our products for new builds.

Are you seeing any changes there that are worth calling out across the sale leaseback and just kind of the new build CapEx that's worth noting?.

Yes. So you basically have the market broken down to those who do sale leaseback and they finance each unit by putting -- to get the right returns, to get a 10% cash-on-cash return. They need to get a 65% rough and tough, give or take 5%, 10% financing specific to that asset.

Those types of the investments are punitive, unless we want to pay a huge cap rate, which we won't.

It basically doesn't allow the investor with the current interest environment to -- that will not come back if a year from now, year and a half from now, the interest rate starts coming back down, two years from now, that portion of the market we reopen.

Then there are large REITs, again, our partners who have massive FFO, funds from operation, and they have -- their capital is lined up completely with a big, huge revolver. They have kind of a fixed -- they'll pay a dividend on their deals. So those guys also need -- they still need to grow.

They still need to put some of that capital to work and grow their -- and while the rates may move like 25 or 50 basis points, they're not going to move substantially. They can do selective deals. Again, our deals are 20-year leases with 25 years of options. So these are long, long-term investments for these companies.

So they're not going to shy away from great assets from great companies. So I have never had any doubt ever really and it's the last thing I ever worry about is not being able to sell leasebacks based on the credential of Life Time, our status and our relationships that we have.

But as far as the construction costs, I think you can expect in a transition basis, some commodities like steel or concrete or whatever, they go up, they come down, they go up. Labor has gone up. Labor isn't going to come back down, which is probably a third to half of the construction costs.

So we're not going to see construction costs go back to what they used to be pre-COVID. That's not going to happen. The question is, are they going to be up in general and are they going to settle at 10% or 15% higher, they're going to settle at 25% or 30% higher.

And so as you guys know, we have our own internal construction GC [ph] at Life Time, which has kept our costs down. So we're well aware of it. We have a lot of latitude with the timing of our starts. So we own right now five large club parcels. We have the entitlements.

And while we could have started some of those right now, we deliberately have those on pause until we have some of these forward sale leasebacks done until we see the macroeconomic get more clear. And again, I want to demonstrate to the Street our increased cash flow starting from next quarter moving forward.

And then we have a lot of opportunities if we start two or three or four of those clubs six months later, nine months later, we have a lot of other opportunities that could allow us to still have that 10-ish plus new club growth from '24, '25 and beyond.

So we are just totally not comfortable with our growth prospects and our ability to handle any sort of obstacle that gets our way. We've done it for 30 years. We find a way to overcome any sort of obstacle. And we're expecting to see some more challenges with the macroeconomic and we're completely prepared for it..

Great. Thank you. Appreciate the color..

Thank you. We have next question from the line of Dan Politzer with Wells Fargo. Please go ahead..

Hi. Good morning, everyone, and thank you for taking my questions. So membership growth definitely came in better in the third quarter, and I appreciate that there's typically negative seasonality. But fourth quarter, you're guiding to down again. You have one center shipping out of the 3Q into the fourth quarter.

So just what are the kind of the moving pieces there to think about why fourth quarter memberships would be down? And is there some conservatism built into that? Thanks..

Yes. Well, we would be foolish if we don't have conservatism built into what we tell you. So I don't know what else to tell you on that. So yes, they are conservative. We don't want to tell you something and miss. The second thing is seasonally, we have lost a lot more memberships in the fourth quarter, significantly more than what we're guiding you to.

It's just seasonal. It's basically we go through this shift. We lose memberships in September, October, November. We sort of flatten out in December and then we grow massively in January and February, March all the way through the June, July period, which is our really robust season.

So not giving up as many points as we have given up in the past years, we are absolutely a great position. We lose 3,000 memberships. That's nothing. That's a weak additional membership gain in just January. It's nothing.

So it's actually a very robust number that we are showing you, and we're not going to -- and look, I want to explain to you guys with a hint of desire to do some promotional marketing, some price points, some closeouts, we could change that outcome.

It's just been the company's strategy, and we're going to stick to it to have zero sales and zero promotions and let the customer come to us naturally because the product, the services, the experience is that great. And I don't want to dilute that strategy.

We haven't deviated from it from two years ago when I told you guys that we are doing all this with zero promotions, zero closeout, zero salespeople, and it's working. And it's going to allow us to deliver higher revenues and better margins to you guys and a higher NPS than we have ever had before in 2023..

Got it. Thanks for all the detail. And then Bahram, you talked a lot about the efficiencies at the centers and the focus there on margins. I guess where we sit here today where average members' percenters call it 20% plus below 2019. And I think we've talked about that in the past.

How are you thinking about staffing percent or the number of FTEs per center? Are you where you need to be? Is there room to cut there? Or are you still kind of ramping with some of the personal trainers that you said to hire through this year?.

Yes. So I have strict order to our clubs, while being incredibly disappointed if they are cutting frontline staff, if they're cutting -- I mean our expectation is these clubs run like a Four Season, like a Ritz-Carlton. So we're not cutting staff in the locker room, keeping the clubs immaculately clean for you people. That's where not the saving is.

We have had too many dollars go to middle level management all the way through from the corporate office, all the way to the club model. And that's the only place we're restructuring the business where we have more leaders leading the way, demonstrating the work rather than sitting in the offices and having meetings and conference calls.

So it's across the board. It's in PT. It's in the spa. It's in the cafes. It's in the -- and the biggest portion of it has been corporate office, biggest for corporate initiatives, corporate office and everybody who was in between the corporate office and the clubs, and that was substantial. It's been 100% eliminated.

Now this quarter, we're not coming out and saying we're taking one-time charges. We're just paying for it with over performance. But our expectation is we have everything on a clean slate for January forward. So we can have -- like I told you guys, we want to have a record year of revenue and margins.

And obviously, that will translate to EBITDA and such, and you guys can do your own work on that..

Understood. Thanks for all the color..

Thanks..

Thank you. Ladies and gentlemen, we have reached the end of the question-and-answer session. And I'd like to turn the call back over to Mr. Akradi for closing remarks. Over to you, Bahram..

Yes. I'd like to take a couple of minutes in here and welcome Bob. He is an amazing partner. He is always on and always available to help truly seven days a week, CFO partner here. Tom has been an absolute gift for me for the last six, seven years. He's been an amazing partner.

He has built an incredible finance team here that they can support Bob in everything he needs. As you guys know, I'm five years older, but Tom and I share the same exact birthday. We both are jet pilots and we both do these crazy 100 mile mountain bike races. I fully expect to be doing a lot with Tom on a personal level as time goes on.

He and I talk regularly. He's always available to me if I need something. I'm always available to him if he needs something. So I want to just truly give him my biggest marks of appreciation here with all of you guys here, and I want to have Tom say a few things before we hang up..

Great. Thank you, Bahram. I really appreciate it. It's a great friendship and partnership we've had for almost seven years now, and I want to thank you for that. I want to thank all of our other executives at Life Time for all the support. And most importantly, thank the 30,000-plus team members out there. You guys are incredible.

The energy you bring and the happiness you bring to our members every day is so impressive and I've been grateful to serve this company for seven years and super happy with how it's positioned going forward. It's in really good hands and really well positioned to drive profitability and growth for years to come. So thank you, everybody.

It's been great working with you..

And I want to just take one minute for Bob. Bob, won't you say hello to everyone and --.

Yes. Hello, everybody. It's great to be on the call with you this morning. Thrilled to be here at Life Time. A huge thank you to Tom for all his support during this transition that he and I have had, and thank you to Bahram for placing your trust and confidence in me as your next CFO..

All right, guys. Thank you so much. We look forward to be on the call with you guys again beginning of 2023. And if you have any questions, feel free to reach to any one of us three. Thank you so much..

Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation..