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's 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 gross 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 website. On the call from the management today are Bahram Akradi, Founder, Chairman, and Chief Executive Officer, Tom Bergman, 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 Thomas Bergmann and Robert 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. 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 cost 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 of our $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.
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're in a great position to continue to deliver healthy way of life to more members for years to come. Rob?
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 analyst 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 Bram 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 in-center 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-$490 million and Adjusted EBITDA of $80 million-$90 million. For full year 2022, this equates to total revenue of $1.81 billion-$1.84 billion and Adjusted EBITDA of $255 million-$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 2,000-5,000 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. Pre-opening expenses of approximately $5 million in the fourth quarter and $14 million for the full year. GAAP rent expense of $65 million-$70 million in the fourth quarter and $245 million-$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 cost 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. 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. If you'd like to ask a question, please press star one on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star two if you'd like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment please while we poll for questions. We have a first question from the line of Brian Nagel with Oppenheimer & Co. Please go ahead.
Hey, good morning.
Good morning, Brian.
Good morning.
Nice quarter. Rob, welcome. Look forward to working with you.
Thank you.
The first question I have, just with regard to expense leverage. Now, Bahram, you talked about, you know, this in your opening comments, but you're clearly hearing membership's tracking well. It's recovering nicely. You've got new centers now coming online here over, you know, through the balance of this year and next year. You talked about kind of the target operating margin or, I'm sorry, EBITDA margin, you know, for 2023. How should we think about maybe the cadence of that improvement, then more of the components? Where should we, as we work through the balance of 2022 and into 2023, really see the, you know, the majority, if you will, the most of that expense leverage through the P&L?
Thanks, Brian. I think 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. We basically normally pre-pandemic, we had 140 clubs. Of those 140 clubs, 122 of them, 124 of them were 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 their revenue and maybe 50% of their EBITDA. A handful of them are in year one, where they basically are doing 60%-65% of their revenue, the potential of that club, and they're doing basically only flat EBITDA.
You know, they lose money in the first six months, five months, four months, and then they make some at the last four or five months of the year, but it's pretty much flat. When we came out of pandemic, what's really not understood in this business, the subscription business, we pretty much started every club in year one. All of our portfolio was in year one. Depending on the rate of opening, some markets which were much more robust, they opened sooner, like Texas, and they didn't really bring any additional restrictions in as time went on. Those clubs are all operating beyond year three. They are ahead of what we were ever doing in the past in revenue and in margins. We have
Today, we have a much larger number of clubs who have now reached that same store similar to this year three, the mature numbers. We still have probably 50, 60 clubs that they're acting more like 2, year 2 rather than year 1 because they were held back by the particular states much longer into the closure and then with a lot more restrictions even when they opened. They're just tracking behind.
We got to August. We could take a look ahead and our analytics basically mapped out that by beginning of the 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 of, or on a run rate basis, the first couple of months of 2020 before we shut down. We have, of course, the additional clubs. We've quickly switched our focus on phase two of our kind of a post-pandemic recovery, which is now not just playing offense. We've decided to start looking at we're gonna still grow the memberships, but we can now look truly at what the cost efficiencies are.
It's important for all of you guys to understand that typically, we do this every year. Every year, you know, when we do the budget for the next year, we look for efficiencies, we look for how we can improve. 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 gonna win on the revenue side first. Once we had that, we started digging in, and we have tremendous opportunities across the board. We have eliminated number of positions that they were sort of 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.
We are very, very comfortable guiding you guys to the numbers that Tom and I shared with you during the IPO. 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. I am confident that we can be slightly better than 2019 margins on the same front. 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. The follow-up question I have. I've spent a lot of time lately at the new clubs on One Wall Street in Dumbo. They look great, phenom. Very. Congratulations. How should we think about the economic model for Life Time of clubs like those 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 you know, return on invested capital. We have a clear advantage in our real estate on the sale-leaseback world for the ground-ups. We have partners who, you know, 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 stand-up company that pays every penny of the rent. They want. If they wanna add anything in the healthy way of life category, they want a Life Time asset. They don't want anything else. We have that, and then we have all other developers who are building big buildings. They're building apartment buildings, mall owners.
We're constantly. The one part of our company that everybody is busy is in our sort of looking at 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. The folks didn't perform, so the landlords called us, and we were able to negotiate amazing deal structures for us. Our expectation is the return on these, on invested capital, will be no different than our prototype models.
Got it. Well, thank you very much. Appreciate it.
Thank you. Yep.
Thank you. We have next question from the line of Robert Ohmes with Bank of America. Please go ahead.
Hey, good morning. Thanks for taking my question. Bahram, can you talk about you know, by the way, great job getting the membership dues per store back to those pre-pandemic levels. Can you talk about you know, what you've done in pricing, you know, with the legacy side as well as the new members? Where are you in you know, bringing the legacy members' pricing, you know, up to where the new members are? Do you see you know, more opportunity to raise you know, prices heading into 2023?
That's a brilliant question, so let me take the time to explain. When we went into the pandemic, our average price was around, for membership, was about $120-ish, $120, $121, right before we went into it. I think for the full year of 2019, might have been just a couple bucks less than that. We're gonna finish the year right around $160 per membership across the board.
This is really important. While you know 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.
Then we started kind of trying to correct that. During the shutdown and reopening, we basically took an approach. As of right now, over the next 45 days, myself and my team, Bob, Tom, and Z, 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. Those optimal memberships are gonna 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. It's about a $30 difference between the memberships we're selling and the memberships that they're dropping off. 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 gonna 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 dollars per membership by end of the year. From here going forward, it's gonna creep up, and we probably won't put another major price increase, you know, passed on to legacy members.
You know, maybe a small group around, you know, pool season, the rest of them in September, October, November of next year, just like we did this year.
Gotcha. That's very helpful. Just a quick follow-up. You know, you guys called out the initiative, small format group training in ARORA and Pickleball, et cetera. What, you know, 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?
We're selling all of those programs. ARORA is a different group. You know, this is, you know, basically older people, 55 and above. 65 and above has got the qualified memberships that come through the insurance companies. A lot of them upgrade and 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 wanna get into. ARORA is on fire. Pickleball is growing, like 50% quarter-over-quarter
quarter over quarter. Utilization is up. We are, you know, I told you guys, we wanna dominate this category. We have over 350 dedicated courts online right now. We are gaining about 5-6 additional courts a week, and I expect us to have 600-700 courts by end of next year. We just signed a partnership agreement with MLP, and we have ongoing relationship with PPA. I expect us to have 60,000-70,000 memberships by end of next year, that they are unique members playing Pickleball in Life Time clubs.
I would say half of those are members of our Life Time who are doing other things and now they're doing more Pickleball than anything else, like myself, and half would be all brand new customers to Life Time. 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, you know, with a, with an app or with a phone or your iPad. You need to be. Imagine your chiropractor, your physical therapist, your massage therapist and trainer is all in one and 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 workouts, 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 amount of dollars and energy and time on Ultra Fit, which is sort of a sprint workout combined with functional training, intermittently changing back and forth. Hugely popular, it's growing rapidly. GTX and our Alpha, which is our version, a high-end version of a CrossFit workout. They're all growing. They're part of a signature membership, so it's much easier. For a customer, they don't have to buy a membership, and they pay differently.
They just buy the signature price point, monthly dues, and they can take as many classes as they want. 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. These are the reasons, these transformations, the pricing strategy, the rewiring of our structure for efficiency, all these things. You know, 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. 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 next question from the line of Chris Carroll with RBC Capital Markets. Please go ahead.
Hi. Good morning. As you noted in the prepared remarks, you saw center membership growth in 3Q versus that kind of expected typical seasonal decline. That was with one less opening, I think, than you were anticipating for the 3Q. 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? 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. You know, we are right in that 40, 45, 50 thousand memberships on hold. I think it's gonna hold steady. Our major decision was how to run these programs I just mentioned so that the pool season would be less factor of the people coming in. If they're not gonna come in for pool season, they come for Pickleball, they come for ARORA, they come for. Because of those is the change in the, you know, slight loss of membership to slight gain of memberships. Yes, we expect to outperform those metrics versus 2019 historically until the clubs have well surpassed their inner potential. The, you know, 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 midsummer 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, Bram, just curious at a high level, you know, curious to hear your latest thoughts on just kind of competition in the health and wellness space. I mean, 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's just evolving here.
Yeah. 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 us at its high end. On the low end, you basically have everybody from Planet Fitness to Crunch Fitness to dozens of brands. 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 ones, they have a harder time to make the math work.
My perspective is, in our space, in the healthy way of life, these elaborate, athletic, country club style, you know, we are sort of league of our own. I don't see anybody being able to emerge. Our business model needed 100% re-engineering and retooling over the last 12 months to deliver the results that we're delivering you. It needed the exact strategy that we deployed. We needed to play strictly offense for, you know, last 18-24 months since they kind of let us reopen slowly. 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's a path that you could be growing next several years.
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 pre-tax income we're gonna generate the next three years. I expect it to be substantial. As a result of that, when we took a second look after mid-August, as I mentioned, we looked at our trajectory. About the $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. 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 gonna 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 wanna 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. That will allow us to kinda get the new club openings pre-funded for the ground up. A lot of our real estate, a lot of our growth now was already funded by our partners. You know, 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. You know, we're in a really, really great position competitively. I don't see anybody who can.
This year we're on track to do about 100 billion impressions naturally. I mean, you know, it allows us to do well in excess of $2 billion of revenue with less than, you know, $12 million of money spent on direct marketing. I mean, 0.5%, unlike some other so-called fitness companies, they spend 30% of their 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. 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.
Hey, 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? If that happens to be in the clubs, how are you safeguarding the experience for your members? Thank you.
Yeah. You know, over the years, our business model, you know, sort of had slowly creeped into more of a management style. 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. When we look back, we can snap it back into more of a ownership mindset. It's like a leader structure rather than a manager structure in all of our departments. 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. We have created all brand-new dashboards for them, and they can see and operate their business with more autonomy.
We have eliminated a 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 them more power to the clubs. In the clubs we have new wiring. It's actually across all fronts. I think our personal training will deliver better margins in 2023 than historically it has. 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. We've taken 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 1-1.5 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 on for Simeon. Thanks for taking our question. I'm just curious, you know, just given the macro backdrop, you're seeing anything within your customer base outside of normal seasonality along the lines of, you know, increased churn or, you know, resiliency among your member base and anything interesting there maybe you can note?
Yeah. I think for the most part, we are not seeing. We focused strictly on our strategy. It's been over the last half a dozen years, but then much more swift swing to sort of top 20% of the market. As you guys all well aware of, the top 10% is spending more money still than anybody any other category. The next 10% is still not affected. That top 20% is the least.
We're not hearing anybody coming in and saying, "Oh, God, I'm gonna cancel my membership because price of gas is, you know, $2 a gallon more." We are completely in a right environment. However, I just wanna be clear, we plan for the worst and we expect the best, of course.
We're 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 an impact to our customer right now. We still expect to have substantial growth in our revenues, you know, through 2023. Substantial.
Okay. That's great to hear. I guess just as a follow-up, and Bahram, you kinda touched on this a little bit, but I'm, you know, any further detail would be great. You know, just understanding the real estate market and how that's evolving and kinda what you mentioned on cost and availability of products for new builds. Are you seeing any changes there that are, you know, worth calling out across the sale-leaseback and just kind of the new build CapEx that's worth noting?
Yeah. You basically have the market broken down to those who do sale-leaseback and they finance each unit by putting up to get the right returns, to get a 10% cash-on-cash return. They need to get a 65% loan-to-value, give or take 5%, 10%, financing specific to that asset. Those types of investments are punitive unless we wanna pay a huge cap rate, which we won't. It basically doesn't allow the investor with the current interest environment. That will not come back. If a year from now, a year and a half from now, the interest rate starts coming back down, two years from now, that portion of the market will reopen.
There are large REITs, some, again, are partners who have massive FFO, funds from operations, and they have their capital lined up completely, you know, with a big, huge revolver. They have kind of a fixed, you know, they're paid dividend on their deals. Those guys also need, you know, they still need to grow. They still need to put some of that capital to work and grow their. While their rates may move like 25 or 50 basis points, they're not gonna move substantially. They can do selective deals. Again, our deals are, you know, 20-year leases with 25 years of options. These are long-term investments for these companies. They're not gonna shy away from great assets, from great companies. I have never had any doubt, ever. I really have.
You know, it's the last thing I ever worry about is not being able to do sale-leasebacks based on the credential of Life Time, our status and our relationships that we have. But as far as the construction cost, I think you can expect, you know, 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 gonna come back down, which is probably, you know, a third to half of the construction cost. So we're not gonna see construction costs go back to what they used to be pre-COVID. That's not gonna happen. The question is, are they gonna be up in general, and are they gonna settle at 10% or 15% higher?
Are they gonna settle at 25% or 30% higher? As you know, you guys know, we have our own internal construction GC at Life Time, which has kept our costs down. We're well aware of it. We have a lot of latitude with the timing of our start. We own right now 5 large club parcels. We have the entitlement. 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. Again, I wanna demonstrate to the street our increased cash flow starting from next quarter moving forward. We are very...
We have a lot of opportunities if we start 2 or 3 or 4 of those clubs 6 months later, 9 months later. We have a lot of other opportunities that could allow us to still have that 10-ish plus new club growth from 2024, 2025 and beyond. We are just totally not comfortable with our growth prospect and our ability to handle any sort of a, you know, obstacle that gets our way. You know, we've done it for 30 years. We find a way to, you know, overcome any sort of obstacle. We're expecting to see some more challenges with the macroeconomic, and we're completely prepared for it.
Great. Thank you. Appreciate the call.
Thank you. We have next question from the line of Daniel Politzer with Wells Fargo. Please go ahead.
Hey, good morning, everyone, and thanks for taking my questions. Membership growth definitely came in better in the third quarter, and I appreciate that there's typically negative seasonality. Fourth quarter, you're guiding to down again. You have one center shifting out of the Q3 into the fourth quarter. Just, you know, what are the kind of moving pieces there to think about why, you know, fourth quarter memberships would be down and, you know, is there some conservatism built into that? Thanks.
Well, we would be foolish if we don't have conservatism built into what we tell you. I don't know what else to tell you on that. Yes, they are conservative. We don't wanna 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've sort of flatten out in December, and then we grow massively in January and February, March, and all the way through the, you know, June, July period, which is our really robust season. Not giving up as many points as we have given up in the past years, we are absolutely in a great position.
We lose 3,000 memberships, that's nothing. That's a week additional membership gain in just January. It's nothing. It's actually very robust, you know, number that we are showing you and, you know, we're not gonna. Look, I wanna 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 gonna 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. I don't wanna 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. It's working, and it's gonna 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. You know, Bahram, you talked a lot about the efficiencies at the centers and the focus there on margins. I guess where we sit at today, average members per center is probably, you know, 20%+ below 2019, and I think we've talked about that in the past. How are you thinking about, you know, staffing per center, you know, the number of FTEs per center? You know, 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?
Yeah. I have strict orders to our clubs, and I'll be incredibly disappointed if they are cutting frontline staff. If they're cutting, I mean, our expectation is clubs run like a Four Seasons, like The Ritz-Carlton. We're not cutting staff in the locker room, keeping the clubs immaculately clean for you people.
That's not where 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. 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. It's across the board. It's in PT, it's in the spa, it's in the cafes.
The biggest portion of it's been corporate office, biggest for corporate initiatives, corporate office. 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.
Our expectation is we have everything on a clean slate for January forward, so we can have a record year of revenue and margins, like I told you guys, we wanna 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 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, sir.
I'd like to take a couple minutes in here and welcome Bob. He's an amazing partner. He's always on and always available to help, truly a 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. I wanna just truly give him my biggest marks of appreciation here with all of you guys here, and I wanna 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 wanna thank you for that. I wanna thank all the other executives at Life Time for all the support and most importantly, thank the 30,000+ 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. Thank you, everybody. It's been great working with you.
I wanna just take one minute for Rob. Rob, would you say hello to everyone.
Yeah. 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.
2023
2023. If you have any questions, feel free to reach out 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.