Life Time Group Holdings, Inc. (LTH) Q2 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to the Life Time Group Holdings Conference Call to Discuss Financial Results for the Second Fiscal Quarter of 2022. 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 call 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 the 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 management today are Bahram Akradi, Founder, Chairman and Chief Elective Officer; and Tom Bergmann, President and Chief Financial Officer. I will now turn the call over to Mr. Akradi. Please go ahead, sir.

Good morning. It is great to be on this call with you today. We're happy to report that Life Time is growing back steadily. In the second quarter, revenue grew 42.7% to $461.3 million from $323.2 million year-over-year and from $392.3 million in the first quarter. Adjusted EBITDA in the second quarter grew to $63.1 million from $4.2 million year-over-year and from $40.6 million in the first quarter. Clubs in states that emerge from pandemic early and where we rolled out our strategic initiatives such as Texas, Colorado, North Carolina and several others have recovered nicely and already surpassing 2019 monthly dues revenue levels. We expect to see many more of our clubs surpass 2019 monthly dues revenue levels as we complete the nationwide rollout of our strategic initiatives and continue our relentless focus on executing these programs. To refresh your memory, our first strategic pillar is investing in our athletic country clubs, programs and performers to drive revenue and profitability. To do that, we're driving 4 major initiatives: small group training, ARORA community, dynamic personal training transformation and pickleball rollout. First, small group training. We have increased from an average of 15 small group classes per club per week to approximately 40 currently. Over the next six months, we're driving participation and performer certification with the ultimate goal to get to around 100 classes per club per week in 2023. So there is still tremendous opportunity for growth in membership and revenue here. Second, ARORA. Our ARORA community did not exist a year ago. Since then, we have created the brand around dedicated active aging programs and a growing community. Since creating these systematic branded programs, at the beginning of the year, our membership in the 55-plus age group have increased by approximately 12,000, and we expect to add an additional 13,000 by the end of the year. Third, dynamic personal training. Dynamically-engaged personal training is a transformation in physical in-person training and is designed to be an experience that cannot be replicated digitally or remotely. Since our last call, the concept, brand development and certification of our team has been largely completed, and we have just reached DPT on August 1. We see a tremendous opportunity to grow our personal training revenue with this transformation. We will report on our progress on DPT in the quarters to come. Finally, last but not least, pickleball. Life Time is uniquely in a position to be the national pickleball brand leader in this incredibly fast-growing sport. We have the real estate and the space to accomplish this because of the very large footprint of our athletic clubs across the country. We have already established more than 235 dedicated courts and expect to have nearly 450 by the end of the year and more than 600 by the end of 2023 with complete local, regional and national programming. Using our Life Time app, participant can easily find and book courts and get involved in mixers, leagues and tournaments. And we have seen monthly participation grow from approximately 10,000 to more than 40,000 in just the last six months. Of these numbers, 12,000 are unique participants and growing. As we invest in our business to drive revenue and profitability, we're also actively monitoring the macroeconomic environment and managing our business to minimize the impact of the recession and high inflation environment. Inflation has had and we expect it to continue to have a short-term impact on our margins and construction costs until prices have settled. Tom will discuss this further. The great news is that we believe we have so much headroom and additional opportunities to gain membership and revenue as we accelerate the rollout of the four programs I just mentioned. I believe our future performance is in our control, and we can continue our growth and overcome the negative impact of macroeconomic environment, albeit not as fast as we would like. On our last call, we also discussed our continued transformation to a more asset-light business. Our first priority, as I mentioned, was maximizing the revenue and return opportunities in our existing clubs by investing in the programs I highlighted. This is the most asset-light investment we can make, and we have been busy at work on implementation. We're accelerating our effort now that we have proved these initiatives are working. Second, we mentioned sale-leaseback to make the entire enterprise more asset-light. We have entered into a definitive agreement for the sale leaseback of five properties for the gross proceeds of approximately $200 million, with cap rates similar to what we have achieved over the last several years. And we have some more discussions underway to complete another $300 million of sale-leaseback back by the end of the year. Third, our brand equity and reputation with developers are bringing us more asset-light growth opportunities than ever before. Finally, I'm looking forward to the Q&A and the future opportunities to demonstrate what Life Time can accomplish as a healthy way of life company. Now I will turn it over to Tom.

Thank you, Bahram, and good morning, everyone. I'm pleased to share a few highlights from our second quarter results and then discuss our outlook for the remainder of the year before turning the call over for questions. For the quarter, total revenue increased 43% to $461 million driven by strong increases in both center revenue and other revenue. Total center revenue increased 41% to $446 million and was driven by a 42% increase in membership dues and a 38% increase in in-center revenue. Average revenue per center membership for the quarter increased to $639 from $525 in the prior year period and $580 in the first quarter. And average monthly dues per center membership increased to approximately $157 in the second quarter compared to $132 in the same period last year and $145 in the first quarter of 2022. As we discussed on last quarter's earnings call, we expected to see average monthly dues per center membership increase to the $150 to $160 range by the end of the second quarter, and we were right in the middle to upper end of that range for the quarter. The year-over-year and sequential increase in these metrics reflect increased member spending with our in-center businesses and the continued execution of our pricing strategy. On a same-store basis, comparable center sales increased 36%. Center memberships increased approximately 10% to just under $725,000 as of June 30 compared to just under $658,000 at the end of June last year and approximately $674,000 as of March 31, 2022. We expected to add around 50,000 net center memberships in the second quarter and slightly beat that with close to 51,000 net center memberships. Total operating expenses during the second quarter were $440 million. This included noncash share-based compensation expense of $6 million and a onetime gain of $21 million related to the sale leaseback of two properties in the quarter. Excluding these items, total operating expenses increased 20.9% to $455 million. Center operations expense was $280 million and included just over $600,000 of noncash share-based compensation expense. Excluding share-based compensation expense, center operations expense increased 27.3% due to increased staffing required by our strategic program investments and increased usage of our centers by members during the quarter as compared to the prior year period. Our GAAP net loss for the second quarter was $2.3 million compared with a net loss of $76.4 million in the prior year period. Excluding share-based compensation expense and other nonrecurring items, our adjusted net loss improved to $7.7 million from $73.5 million last year. Adjusted EBITDA increased to $63.1 million for the second quarter from $4.2 million in the prior year period and approximately $41 million in the first quarter of this year, showing strong year-over-year and sequential improvement. Our liquidity position at the end of the second quarter remained strong with cash and cash equivalents of $61.3 million and only $30 million in borrowings on our $475 million revolving credit facility. With the additional $500 million of sale-leaseback gross proceeds that we are targeting for 2022, including $200 million in October and an additional $300 million planned before the end of the year, we expect our liquidity and financial flexibility to continue to strengthen throughout the remainder of 2022. We also showed nice improvement in cash flow during the second quarter with net cash provided by operating activities of $71.3 million compared to $25.1 million during the same period last year. Now turning to our outlook. As we highlighted last quarter and Bahram mentioned again today in his remarks, we've made a number of investments in the first half of the year to drive membership and revenue growth. We remain focused on executing those investments across all our clubs while also driving center efficiencies and expense control. While the macroeconomic headwinds around inflation and consumer spending caused us to be a little more cautious in our outlook for the second half of this year, we feel very good about the overall momentum we're seeing with our business and our positioning as the definitive leader in healthy living and healthy aging. Our outlook includes the following assumptions and components. The opening of four new centers during the third quarter and six new centers during the fourth quarter, bringing our 2022 new club opening total to 12. Given the timing of these openings and normal seasonality, we now expect center memberships to decline by a few thousand units during the third quarter and increase by a few thousand units during the fourth quarter, resulting in flattish center memberships in the second half of 2022. Please keep in mind that we normally lose memberships in the back half of the year, so this will be a significant improvement compared to the second half of 2019 when center memberships declined by more than 16,000 units. We expect average monthly dues per center membership to remain in the $150 to $160 range for the remainder of 2022. We anticipate preopening expenses of approximately $12 million for the full year, of which approximately $8 million will be incurred during the second half of the year compared to just $4 million of preopening expenses during the first half of 2022. The additional $500 million of sale-leaseback transactions we expect to close on during the fourth quarter will result in total 2022 GAAP rent expense of $245 million to $255 million. This includes approximately $40 million of noncash rent expense for the full year, of which approximately $23 million will be incurred during the third and fourth quarters. Assuming the completion of $675 million of sale leasebacks in 2022, we will exit 2022 with an annual run rate for rent of approximately $290 million. Given these assumptions, the continued investments and the key initiatives we discussed and expected macroeconomic headwinds, we expect total revenue to be in the range of $490 million to $510 million for the third quarter, and $1.8 billion to $1.85 billion for the full year 2022; adjusted EBITDA to be in the range of $65 million to $75 million for the third quarter and continued sequential improvement in the fourth quarter resulting in $250 million to $270 million for the full year of 2022. As Bahram and I have said since the start of the year, our objective has been to continue to build momentum throughout 2022 in order to exit the year on a run rate that supports a strong 2023. As with the last couple of years, 2022 has continued to throw us curve balls, but we have stayed the course in building elevated experience and executing our strategic priorities, and we are confident in the continued growth of our business. With that, we will turn the call back over to the operator for Q&A. Operator?

First question is from Brian Nagel of Oppenheimer & Co.

Nice results. So I have a couple of questions. I mean first off, look, a lot of consumer companies now are talking about macro pressure, so it's not surprised me here. You mentioned as well. But the question I have is, as you look at the business, particularly the recent trends or maybe even what's happening to Q3, where are the macro -- where are these macro pressures really emerging? Where are they identifying themselves? Are you seeing something more anything geographically or more segment within your business? And then the second question I have, Bahram, you laid out a number of -- you talked more about a number of the center initiatives. Could you talk more -- if you -- I know it's early in these programs, what you're seeing as these are rolling out in terms of membership growth or maybe reduced churn and that you tie directly to these programs you're implementing?

Absolutely. I'm going to let Tom take the first question, Brian, and I'll take the second one.

Yes, Brian, just quickly on the macro environment and the inflation that the country is seeing, that we're seeing in our business, that's the biggest headwind we've seen as we still continue to experience labor inflation in our business like everybody else. But it was 8% to 9% last year, and year-to-date, I'm running 4% to 5% labor inflation. So it's in the summertime. We hire a lot of seasonal employees, and we saw some inflation in wages here throughout the summer season. And then we continue to see inflation in other parts of our business as well, in our cost of goods sold, if you look at our food supply with chicken and avocado as good examples. So we just continue to see that inflationary pressure on our business. At the same time, we've talked about on past calls, we've taken a number of good cost reduction actions to offset that to the greatest extent we can. So by combining our sales role into our member concierge roles as well as passing on credit card surcharge fees, we're taking a lot of proactive actions as well to offset a bunch of those costs. So we still continue to see it almost like every other business out there, but I think we're doing a lot of good things to try to offset it.

And to add to that, Brian, as Tom and I have mentioned, we literally had not focused on cost measures that much. During 2022, first half, our focus was really to get the memberships to this critical point that we've gotten to at this point in the first half of the year. There are tremendous amount of opportunities in thinking about how we run the business sort of between the clubs and the corporate office, there's still some opportunity to pick up to offset additional pressures that may come from inflation, et cetera. So again, we don't ever think the world will be always great. So we're always ahead of it and thinking about how we can mitigate these challenges. As far as the programs you asked, frankly, there's been a lot. We have rolled out these programs. We had to concept them. We have to brand them. We have to create the expectation and then go out and try to roll them out. And a couple of things, some clubs just more eagerly jumped forward and tried to perform very well and some clubs, a little slower, and some of it has to do, as I mentioned on the call, very much to do with the depth of the closures and restrictions is taking those clubs a little longer time to just wake up back to normal before they can roll things out. So the great news is, though, is where we have these clubs executing these initiatives, even like at 50%, 60%, not even 100% yet, the membership numbers, those revenue numbers in all of those clubs are beyond 2019 numbers. We are very, very confident that pressing on right now and rolling out those programs very consistently across the country in the next 4 to 6 months is the most critical thing that we can do. We already have clear proof that they're all working. The increased memberships from pickleball or our revenue growth right now in PT is just starting to launch from a DPT program we have put in place. And of course, small group training has tremendous opportunity. We can have 2 to 3x the number of classes that we have right now per club per week by this time next year so -- and that is continued growth of subscription and revenue for the company. So we have a lot of cards in our hands to play yet, and I'm excited. Our team is focused. They're dedicated. And I know that everybody wants to win here. We don't want to let anybody down. So that's -- we feel really, really good about that.

The next question is from John Heinbockel of Guggenheim Securities.

I wanted to start with how you think in the -- with this backdrop, the progression of your pricing initiative, right? Do you go slower, take a little more time to look at the reaction? Have you seen any reaction? And I guess sort of tied in with that, I knew you guys were obsessive about your NPS scores. How have they looked? And does NPS ever get impacted by pricing? Or it never does, it's all about the experience?

Yes. No, the NPS is a completely depend on experience and ours has been consistent. We've got the improvements in it, and it's right around that mid -- right around 50 range point. It's very, very consistent. The -- look, at the end of the day, the customer that is coming to Life Time is not the customer that goes to the low-priced gyms. This customer is, if they wanted price, they would have gone there already. They would have never been in our doors. What we can do to maintain our customers is deliver that high level Four Seasons, Ritz-Carlton exquisite service. What we can do to chase them away is not do that. So the price really was very methodical. It's also not complicated. It's not like you are making a mistake that you can't correct. You can adjust the price, see if it works. If it doesn't work, you can take it back down $5 or $10. It hasn't been an issue at all. We have -- as we told you, we eliminated all promotions. If you guys noticed, there has been none all -- since we told you 1.5 years ago, we haven't ever done a promotion. We're not selling and we're just helping, assisting people buy memberships. And the membership units are literally as good as they've ever been. So with the higher prices and no sales or no promotion. So, so far, we're seeing no indication that our strategy is not working. We just need to implement the programs I mentioned to you more decisively across all the club consistently.

And then maybe number two, right, the revenue guidance change was not that substantial, right? The EBITDA was. So I guess you can put it in two buckets, right? Costs are inflating at a faster pace than you thought versus have you pulled forward any investments, right, that you were thinking about for '23 and let's just do them in '22? If you put it in those 2 buckets, how would it break out in terms of the EBITDA reduction?

Yes, John, the change in guidance in EBITDA for the year, I think you are setting it up or characterizing it well. As Bahram said, we're making heavy investments in the strategic investments this year, more than $25 million of additional operating expense from these strategic initiatives this year, which, again, we've been focused on driving memberships and revenue and making these investments to set us up to leave 2022 to deliver a very strong 2023. So we're going to continue to make these investments heavily into the third quarter. But at the same time, we're going to start really focusing more on expense control and center efficiency to drive some of these efficiencies to offset some of these investments. So this was a big investment year for us, but I think it positions us extremely well to come out of 2022 in a great spot to drive 2023 to good results.

And now that we have the -- as I mentioned to you, we have the clear indication programs are working as intended. Now we are -- we have to go from 35 classes a week on average in the club, 40 classes, all the way up to 80 to 100 classes a week. When you roll out all that payroll to get the classes going on, that, that comes first and then comes the membership behind it. The same thing with rolling out the programs for pickleball or all the other things we're doing, there is an investment upfront that you've got to get the program in place, you have to build the schedule, you have to cover all that cost and then you get the membership revenue coming in. But look, we are clear-headed. We want -- based on the number of clubs that we have opened by end of the year, I'd like to have the membership count up another 10% from where we are now. This is access membership. In order to get that happening, we have to execute all these programs in a very consistent and robust fashion. And so part of that conservative approach on the EBITDA is that we are allowing the room for the investment for those programs, so that we can jump off of the December run rate into the January in a position that gets us to the -- to where we want it to always be for 2023 in revenue and EBITDA.

Our next question is from Robby Ohmes of Bank of America.

I just had a few follow-ups on the first two questions. The first one is just given -- it sounds like these initiatives are working great. But how should we think about the long-term EBITDA margin, say, per center with all these programs -- these new programs and the higher incremental cost? It sounds like they would continue into next year and beyond. Do you need to -- to cover all these programs over time, do you have a longer-term expectation of either higher membership or higher prices to get back to the kind of EBITDA margin profit targets per center that you would have normally had? And then I have a follow-up question.

Great question. Let me -- I'm glad you asked. Let me explain. So when we add a -- we add a robust class, a class that is good enough, that adds -- just basically, has the full participation with the wait list. That class is significantly higher margin revenue at the end. It generates so many swipes. Those swipes generate subscription. It's all mathematically run. And some of -- these programs can have as much as a 60%, 70% sort of a margin once they are rolled out and completely working. So initially, they cost more. Ultimately, as I mentioned, Tom mentioned in the early part of our conversations, these investments are the lowest, is the most asset-light investment we can make because what they actually do is they create a much higher revenue per cost. Initially, it's just cost. I pay $75 or $100 for a class. But ultimately, it's -- when you run the math, it's about a 35%, 40% margin on that. So -- on cost on that and 65% margin. So -- but it's going to take time. This is all I'm saying to you. And we are in a great position financially, particularly with the sale leasebacks. We want to continue to manage our balance sheet so that we have our revolver more or less unused. So we have plenty of bullet to do the right things to continue to elevate and build the brand, so there's virtually no -- but I have full confidence that these programs will generate a better margin for 2023 than a lower margin. Tom?

Yes. Robby, I think I will reiterate a couple of comments. I think you have to think about the leg in membership growth. So this has been the year to make the investments. We know it was going to take time to market these investments and grow the membership base. But remember, next year, all of this will be a high, high leverage of my fixed cost model and my flow-through will be very strong on the incremental memberships that I pick up next year, which will help start driving that margin expansion later this year and into 2023. So we're just in that leg between building the programs, the schedules the social events and so forth. So we need to make all these investments and then the membership will continue to build. And that will get my flow through and my margin improvement. Specifically, as you think about long term, I still see this being around a 20% EBITDA margin business. And then you think about rent expense running in that 13% to 15% range. We still look at the business and we run the business on an EBITDA plus rent basis. So we want to look at how the operations are performing, absent of any financing decision of how we run the business. So when you think about around a 20% EBITDA margin, plus the incremental rent expense, we still see this EBITDA plus rent margin getting into that low to mid-30s longer term for this business, where we've been historically.

I'm going to add to that, too. We have a pretty extensive operation in our corporate office. And we're spending a tremendous amount of money and we have been on the technology this last several years, and we're continuing to spend there. However, as we scale the company up, there is absolutely no reason to have a proportional increase in our overhead. We have -- when we have 50, 60 more clubs, big clubs running, we can do it with the same technology we have today, we can do it with the same corporate office we have today. In fact, we have been mitigating the cost of the corporate office but most of it is going back in spending in the technology that we have been focused on. But all in all, I think our margins should improve. There's no reason for them to go backwards.

That's really helpful. And just a quick follow-up on the memberships. I think on-hold membership, I think, came down versus pre-COVID levels. Was that a benefit? And maybe any other color on what the -- with the kind of thought that the 3Q memberships, I know which normally wouldn't be up, but I think you guys at one point thought third quarter memberships could be up sequentially this year. Is the -- what's the dynamic of retention of members versus new members coming in on these programs you're doing? And also did on-hold membership kind of help or not help the membership numbers this quarter or for 3Q, do you think?

Yes. On-hold memberships weren't a big factor in the quarter. I would call it normal. In summer, we get many people coming off of hold for the summer season, so I wouldn't say that was a major factor during the quarter. In the third quarter, initially, we thought we'd be slightly positive, on last quarter's call. Now I'm telling you, we're -- I think we'll be down a few thousand units in the quarter, which typically in 2019, we lost 16,000 units in the back half of the year. So this year, I think we'll be down just a few thousand, and a lot of that is due to some of these investments in the programming, like if you think of ARORA or active aging, we're seeing much lower attrition and nice gains in our older members at the club. So I like what I'm seeing there. But we also had some club openings that I thought were going to happen earlier in the third quarter that got delayed for various supply chain reasons, a few weeks or a couple of months. So I actually, I'm opening clubs a little later in the third quarter and more in the fourth quarter than the third quarter. So that's what's also driving that a little different perspective on the third quarter. But again, the back half of the year with the 10 new club openings and the trends we're seeing in the business, I think we'll be flattish on memberships, which would be very successful for the back half of the year.

Our next question is from Brian Harbour of Morgan Stanley.

Just maybe a more basic question. Is some of the investment in programming that you're doing, is that to get you back to where you were kind of three years ago just on a number of class basis, on kind of a range of class basis? Or is this really kind of above and beyond where you've been historically? And how does that kind of drive your confidence that, that will bring all these new members in as you think about '23?

Yes. Let me explain. We have a completely different program than pre-COVID on our small group training, so what we call SGT. The SGT is different than our large group, group fitness classes like the yoga, strength, those were always part of the dues, et cetera. Then we used to sell small group packages where 8 to 12 people would be in an alpha class or some sort of a group training program together. It was part of our PT program and it was 2 separate fees. Basically, you buy a membership in the club and then you pay $150, $160 incremental per month, do like so many sessions of those. It was -- while it was cheaper than a personal training hour for a person, it was like 1/4 of that, it was really a cumbersome system. So this company's strategy basically was to develop an easy way for the customer to engage in a small group training so that we basically have an answer to any kind of boutique near the club. So we invented what we call the Signature Memberships. Some clubs are $249 or $200 a month, $219, whatever the clubs are in the more expensive locations. Their Signature Membership basically is automatically included and cheaper clubs or the membership is maybe $119. The Signature Membership was $169 or $179. Now with that Signature Membership, they get to go to the small group training, just like they would go into any boutique, they can participate to all the classes. They use the app. It's super easy. We -- while we may have had like 14, 15 small group classes in a week in a club, right now, we're between 35 to 40 and that's the number that I mentioned to you. We will be going all the way up. Some clubs are at 70, and the results are amazing. And we're going to get to about 70 to 100 -- 80 to 100 across all the clubs. This is incremental. Now in the past, an average club was doing about 100 classes, a large group per week. That also includes -- that's not -- that's unchanged and remains. So the memberships associated with the swipes that come from a small group training, all those memberships, I mean -- and ultimately, I think it's 400 to 500 minimum membership per club when the program is running. It could be as much as 800, 900 participants that are going to the club using the small group training. And it will be an incremental way of getting memberships that you wouldn't have gotten otherwise. So ultimately, we have rerigged the business to emerge out of the pandemic and basically have the membership. The other part of the business that we have made up for so far, and it's kind of hard for people to understand is prior to -- even though our business model, the use model, we basically most -- we want our customers to use the club and then use the club, they have lower attrition whereas you look at the HVLP model, that's a nonuse model. They sell memberships, 20%, 25% of the people use the club. The rest of them are not using the club. But it's $10 or $15, $20 a month, they keep paying their dues. Our focus is to get the people using. But despite that, prior to beginning of pandemic, almost 18%, 19%, 20% of our members who were paying dues did not use the club in the past 30 days. When pandemic came and it lasted as long as -- it wasn't 3 weeks, 4 weeks, it ended up for an eternity more or less. Most clubs like high-end clubs, lost that member who was paying and not using. When you're bringing the business back, you would have to invent everything you would do to make up for those members who would pay for the club and not use it. We've done that. And we have many, many clubs right now that the dues are actually significantly ahead of 2019 does because of these programs are in running robustly, the markets open sooner, a combination of those things. But we are confident right now with our strategy that we have rerigged the business for today's environment, not pre-COVID environment, and making up for all of those things, and we can see a clear path to getting majority of our clubs to above 2019 revenues and margins.

Okay. And if you think about the clubs that are not as far along on that path to recovery, is that largely driven by what you were just talking about? You're not as far along in that new programming and those investments. Do you think that there's just still more of kind of a geographical explanation for some of those things? I think we know that like work patterns, for example, are still quite disrupted and have kind of been slow to come back, which has impacted other companies that are operating in places like New York or Chicago or Boston, for example. What do you think are kind of the main drivers in those clubs that have been slower to recover?

Yes, great question. I think the markets where you have dependent on workforce for your membership, those are going to be unbearably difficult. And luckily, we only have like three or four clubs that are affected like out of 160. So we actually have no excuse. And again, it's just three or four of our clubs that you can see. It's near impossible to get them back to where they used to be, unless the workforce comes back and the workforce is just not there. But again, we have only three or four. No big deal. When I look at our company, and I just want to make sure we're not the kind of organization that uses every excuse, external excuse. As I mentioned repeatedly, we have had markets where the market basically, we stayed close too long, restrictions were too long. And the clubs were more asleep and the organization in that area is just literally like the limbs were asleep. It takes them longer to shake them awake and then roll out the programs. And part of it is our own execution. I mean literally, I can just tell you, we were not perfect. We are working our butts off, but the reality is in some of the markets, some of our areas are just behind what would have been possible. And right now, if you were in the four-walls of our company, you would see that we are driving consistency in execution across the board. This is the #1 topic every day, every week. And I believe the next three or four months is going to be an amazing opportunity for us to get everybody caught up to the same levels.

Our next question is from Simeon Siegel of BMO Capital.

Bahram, great to hear how well the pricing great is going. Can you just speak to how you're going to make sure you're watching or listening to the members' willingness to absorb the price hikes should the environment get worse? Just kind of help us understand what signals you'll be looking for in either direction. And then, Tom, just a quick one. Appreciate the full year rent guidance. What would that be on an annualized basis, so that $245 million to $255 million...

Why don't I let Tom -- Simeon, why don't I let Tom answer that question. It's an easy one. Tom, go ahead.

Yes. So Simeon, when I exit this year, assuming we get the other -- the additional -- another $300 million of sale leasebacks done to bring the year-to-date total to $675 million, I'll leave the year at an annual run rate of $290 million of rent expense. So that will be my run rate leaving the year. On the pricing, Bahram?

Yes. The pricing, Simeon, is -- actually has not been an issue. We have -- more largely, what we are doing today is we look at markets and then we have -- actually just like we can't keep people out of the club. So club is at $199 right now in Edina, and every time I go there, I'm like, this club needs to be more just because we -- it's just -- it's getting overrun by people even at that price. And it's the most expensive club in Minneapolis. So we are basically looking at the membership pattern, when people are coming in, how fast they're coming in. If the memberships are -- so if the memberships are not going as fast as we want them, we have to first examine, are we running the programs, the play correctly? And if we're running the play correctly, we're doing everything right and the membership is not coming in, then it's the price and then you bring the price down $10 or $15. But we're watching it every day. So it's not something that -- it's not an annual decision. It's not in-a-decade decision. This is day-by-day decision. What we've done over the last couple of years, we've made everything easy. So it's easy for you to sign up. You go online and you sign up. You show up the club, somebody assist you. And we made it easier as well for the customer to go on hold, come off hold. We made it easy for people to cancel. So basically, everything has been designed from a customer point of view. And really, I don't see any disturbing pattern in our execution. It's just we have clubs that are further ahead and there are clubs that -- and it's interesting. Like in Boston, this particular club is way ahead of 2019 and a few other ones are behind 2019. So you can't blame everything on the geographical market decisions in terms of the closures and stuff. It's really execution and the teams are doing a great job working on the overall, the organization is pushing on that execution. But I don't see the price affecting us, and we can make super rapid corrections if necessary.

Yes. And Simeon, just to wrap it up, we have a lot of great data. So as Bahram said, it's day-to-day looking at acquisition attrition trends, looking at NPS feedback, looking at exit interviews when members do leave, the reasons they're leaving, looking at our web traffic and our lead traffic and what's flowing in. So we look at all those different data points to also help us analyze what trends we're seeing in the overall business and how our pricing strategy and how our execution is working.

Our next question is from Chris Woronka of Deutsche Bank.

Had a question on kind of the rollout of some of these programs, especially the small group classes and some of the dynamic PT you talked about. I guess, as it pertains to the full year EBITDA guidance, you still have a lot of rollout of these to go. How confident are you that you're not going to have another step up in some of the labor costs beyond what you currently envision? I mean are most of these costs for the rest of the year locked and loaded even where you're still building the classes?

Yes, Chris, I'll start. I think I feel very good that I've taken a conservative approach here for the rest of the year to build in all the cost inflation and the investment that we're making in all these different programs for the third quarter and the fourth quarter. So I've taken a conservative view to make sure I've built the cost in. And then as Bahram said, as we really push hard on DPT, small group, ARORA, pickleball, we'll see the membership growth come through. So if we can get a faster membership growth, we'll see really nice flow-through and have the opportunity to beat in the back half of the year, given that I've already built all the expenses into it. So that's the story there.

Okay. Great. And then as a follow-up, given the cost of some of the rising costs to develop the new clubs that you've talked about, is there any thinking on changing the cadence or scope of stuff that's going to -- on the radar to open in 2023 or '24?

Yes -- go ahead. Go ahead.

Let me start. So short term, we're still committed and on schedule for the 12 clubs this year and the 11 clubs next year. A lot of the more recent inflation you've seen on the construction side really doesn't impact those projects as we had bought them out and we're already bid out on those. So really not an impact that we'll see in '22, '23. As we look at '24, '25 and beyond, we're being very smart about how we go about starting these projects, how we're bidding them out, slowing down projects. So at this point in time, it'd be too early to say what any potential impact would be on '24, '25 and beyond other than to say, we've done a lot of good things to really slow down. If we're seeing high inflation in certain construction markets around the year, we're probably going to delay a project in that market and look at other markets or other projects where we can do it more cost effectively where labor may be more available, et cetera.

Our next question is from Chris Carril of RBC Capital Markets.

Maybe as a follow-up to some -- a couple of prior questions. But I know the development pipeline and timing is planned well in advance here. But could you maybe talk about just kind of latest thoughts on long-term strategy around location types, maybe specifically around geography or urban versus suburban footprint? It's clearly still evolving environment in terms of costs, return to office, behaviors across different regions. But curious if your thinking has shifted at all around long-term development focus and opportunities.

Great question. Again, this is Bahram. We -- what is really not appreciated is the brand equity of lifetime and what we are able to do when we open one of our athletic resorts as part of the ecosystem of an apartment building or a residential area. And so there's a substantial amount of opportunity to mitigate increased costs by the fact that we have a unique advantage that we bring to the table for these developers where they can get more -- they can get significantly more rent and they can get a faster ramp into their buildings. So the -- lots and lots of work is being done on -- with the different developers and doing sort of a -- kind of an ecosystem with the potentially brand of Life Time Living, which just dramatically changes the ramp and the rate of the apartment business. So I think as time goes on, in the blended execution, which means there's some assets that look like typical development in a suburban area, and then you have these other ones. But there's not going to be as much focus. We never have been -- never been a fan of being in a strictly office market. So that's never been our strategy, so there's no change. But in the urban markets where you have lots of resis, then that is working to our advantage as well. So we expect to continue to be able to grow and have good margins from -- better situation from occupancy expense because of the brand equity and what Life Time brings to the table.

Got it. And then just for my follow-up, I wanted to ask about staff hiring and retention. I think recently, you've talked about rebuilding staff across training and spa services. How much progress did you see there in the 2Q? And any thoughts going forward here would be helpful?

It's working really, really well. We really had to take a look and see how we can create a culture where the best talent, whether it's a spa or personal training, they virtually would talk amongst themselves and want to be the #1 place -- choice for them would be Life Time. We have made significant adjustments to tiny little things that we've done in the past that may have been a pain point for these folks. We've eliminated everything. Typically, when we go to a market and people say, oh, how are you going to staff something? We open clubs and there's still tremendous number of people who want to work in Life Time. They wouldn't work anywhere else. They want to work at Life Time from young to old. So we virtually have no excuse for that. Talent has not been an issue for Life Time. And because of the quality of our brand and our culture, I don't see it being any issue or any excuse for the future.

Yes, Chris, I'll just add. We continue to make really nice progress on rebuilding in some of these key areas. So personal training now, year-to-date, we've added over 400 personal trainers including over 220 here in the second quarter. And we'll continue to add -- need to add several hundred here in the back half of the year to continue to build that business back up. Same with spa. We still need to hire a few hundred more body and hair technicians to continue to build up that business as well. And even things like swim instructors. I have a waitlist of over 1,200 members right now waiting for swim lessons and so we're working extremely diligently to hire swim instructors as well. So I just point that out because it just shows we've got great demand from our members for all these services. And we're doing everything we can to cast as effectively and quickly as possible.

Our next question is from Dan Politzer of Wells Fargo.

I just wanted to confirm, you guys have given a lot of detail already, but as we think about 2023, it sounds like revenue margins, you guys think you should be able to exceed 2019 levels. But in terms of memberships, how should we think about the kind of ramp back up? Is that just you're losing that 18% to 20% of members that just didn't come within the last 30 days? Or how should we kind of think about that cadence over the next couple of years?

So that's a great question, Dan. Good to hear your voice. I think we just laid out the strategy. We're not -- our strategy is not dependent now for nonusers to come back. That business will take years and years to build 18% of people paying you and not using the club for a month. It will take five years, 10 years to do that. So we basically built the strategy to make sure we can achieve membership counts, dues revenues and margins without that and then gradually, that will come. So that will be just -- it becomes a very slow residual build-out but it's not part of our plan. The programs we have laid out clearly over and over, those programs executed at the levels that we've intended. I'm confident we're going to hit the membership counts that we need for 2023, the revenues and the margins. So I feel very, very bullish about 2023.

Okay. And then just for my follow-up, I guess it's probably for Tom. But in terms of -- do you have one -- it's a two-parter. One, do you have a target EBITDAR to rent coverage ratio or threshold that you wouldn't want to exceed? And the second part, I think we had penciled in maybe $300 million plus of sale leasebacks in 2023. So just given the macro and also your conversations with your real estate partners, how should we think about that number?

Yes, Dan, we can take off-line the discussion on the coverage ratios. And then as we talked about for the remainder of 2022, again, we're very pleased with having just completed the incremental $200 million and we have great discussions underway on the remaining $300 million that we're planning. We've got great relationships and great discussions with our partners. For 2023 sale leasebacks, I think it will be somewhere in that range of, I would say, $150 million to $300 million, depending on what we decide to do, what interest rates do and so forth. So a little early to give you any firm guidance on 2023 sale leasebacks. But we'll have several properties that will be opening next year that will have the opportunity to take to the sale-leaseback market. So we'll continue to see how that market develops and how our business develops over the next 18 months here.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would like to turn the call back to management for any closing remarks.

Well, great. Thank you, everybody, for joining, and thanks for your time, and we'll look forward to updating you next quarter on the continued progress that we're making in all these strategic initiatives as well as improving our balance sheet and keeping our liquidity strong over the near term here. So thanks again for joining us today, and we look forward to next quarter.

This concludes today's conference. Thank you for joining us. You may now disconnect your lines.