Description
We believe Life Time Group Holdings (LTH) represents a solid recurring-revenue post-Covid recovery play that has the potential to double over the next 18 months.
Caveat-This idea is not for everyone
This idea is predicated on the belief that most people will go back to working out in gyms to pre-pandemic levels. While some people may never set foot in a gym again due to Peloton and other purchased home gym equipment, others may never get comfortable walking into an enclosed building where people are breathing heavily and touching shared equipment. This is certainly an understandable risk, and investors who cannot get past this risk should just pass.
Background and Current Set up
Many VIC members may remember back in 2015 when the company was exploring a Propco/Opco structure to enhance shareholder value. The result of this was the company being acquired in its entirety by Leonard Green and TPG. From 2016 to 2021, LTH operated as a private company while continuing to grow its footprint in the US. The company still owns about $2.4 billion in book value of real estate.
The company went public again in October of 2021 at $18/share from an initial range of $19-21. The company raised $700 million in the IPO.
Company Description
Life Time Group Holdings operates 150 fitness centers across North America. The fitness centers are large high end facilities that include indoor and outdoor pools, tennis courts, fitness, weights, classes, basketball, volleyball, steam room, saunas, physical therapy, room rental, kid camps, weight loss classes etc.
They are located throughout the US, with Texas having the highest number of facilities at 25.
The company charges monthly membership fees as well as add-on fees for optional classes and programs etc.
The company seeks to grow revenue by:
-
Annual Dues Increase
-
Add On Services and programs
-
Increased membership per location
-
Additional Facilities.
LTH currently owns 64 of its 150 facilities, representing approximately $2.3 billion of book value. It leases its other facilities from a related party, and plans to continue to enter into sale-leaseback transactions to raise money for further expansion.
Covid Devastation on the Gym Industry (Silver Lining for LTH)
According to the National Health and Fitness Alliance (NHFA) it is estimated that 22% of gyms in the US have closed PERMANENTLY. The industry lost about 50% of its revenue during Covid. This erased a steady string of revenue growth of 10 years prior to Covid. Taking care of one’s health utilizing gyms has been on a very positive trajectory prior to Covid.
The silver lining to LTH however, of course is that there is now significantly less competition in the industry.
Will Americans go back to the Gym?
There are a few data points that show that people will start using their gym memberships again. Prior to Covid, LTH had approximately 847k active center memberships, with 103k digital on-hold memberships. During the trough of Covid, active memberships dropped to 501k memberships with 226 digital on-hold memberships. Today, the LTH has 649k active memberships with just 75k memberships on hold. So far the snap back in active center memberships has largely come back from memberships that have been on the sideline. The pickup from members who permanently quit during Covid has not materially picked up yet.
The NHFA polled gym members during Covid and 96% percent of them said they planned to return to the gym at some point in the future if they hadn’t already.
Is it understandable that gym memberships haven’t rebounded more during 2021 and early 2022? That is open to debate, but the Summer of 2021 was Delta, and the late Fall and Winter was Omicron. If you were thinking about rejoining a gym, would you start paying dues while this was still going on?
The main thesis for this investment idea is that virus fears will die down, and the secular trend of gym memberships will continue.
Financial Model and Metrics
| |
2019
|
2020
|
2021
|
2022 (Est)
|
2023 (Est)
|
|
Total Revenue
|
1,900
|
948
|
1,318
|
1,900
|
2,300
|
|
Operating Expenses:
|
|
|
|
|
|
|
Center Operations
|
1,041
|
660
|
844
|
1,026
|
1,265
|
|
Rent
|
166
|
186
|
210
|
240
|
243
|
|
SG&A
|
228
|
150
|
481
|
228
|
255
|
|
D&A
|
220
|
248
|
235
|
250
|
284
|
|
Other
|
77
|
64
|
43
|
48
|
55
|
|
Total Opex
|
1,732
|
1,308
|
1,813
|
1,792
|
2,102
|
|
Operating Income/(Loss)
|
168
|
-360
|
-495
|
108
|
198
|
|
Interest
|
129
|
128
|
224
|
155
|
125
|
|
Pre-Tax
|
39
|
-488
|
-719
|
-47
|
73
|
|
Tax
|
10
|
-128
|
-140
|
-8
|
18
|
|
Net Income
|
29
|
-360
|
-579
|
-39
|
55
|
| |
|
|
|
|
|
|
EBITDA
|
438
|
-63
|
80
|
398
|
522
|
|
EBITDA Margin
|
23.05%
|
-6.65%
|
6.07%
|
20.95%
|
22.70%
|
|
Maintenance Capex
|
182
|
99
|
89
|
110
|
135
|
|
FCF
|
256
|
-162
|
-9
|
288
|
387
|
*EBITDA adds back stock comp, non-cash rent expense, debt amortization
Membership and Store Metrics
|
Metrics
|
2019
|
2020
|
2021
|
2022
|
2023
|
|
Beginnning Store Count
|
141
|
146
|
149
|
151
|
164
|
|
Year End Store Count
|
146
|
149
|
151
|
164
|
174
|
|
Year End Center Membership
|
854,000
|
501,000
|
645,000
|
850,000
|
950,000
|
|
Members/Store
|
5,849
|
3,362
|
4,272
|
5,183
|
5,460
|
|
Rev/Member
|
2,225
|
1,892
|
2,043
|
2,235
|
2,421
|
Valuation
|
Cash
|
32
|
|
Total Debt
|
1,800
|
|
Net Debt
|
1,768
|
|
Market Cap
|
2,961
|
|
Enterprise Value
|
4,729
|
| |
|
|
EV/2022 EBITDA
|
11.9
|
|
EV/2023 EBITDA
|
9.1
|
|
Price/2022 FCF
|
10.3
|
|
Price/2023 FCF
|
7.7
|
Target Price
We view the target price at 15x 2023 EBITDA or approximately $30/share.
Risks
-More Covid outbreaks causing shutdowns of gyms
-Reluctance and change in behavior of people not wanting to go back to a busy gym
-Recession. Gym memberships are discretionary.
-Private Equity Overhang
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise do not hold a material investment in the issuer's securities.
Catalyst
-Continued rebound in memberships and new facility openings