Life Time Group Holdings, Inc. 10-Q

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Forward-Looking Statements Certain statements in this discussion and analysis are forward-looking statements within the meaning of federal securities regulations. Forward-looking statements in this discussion and analysis include, but are not limited to, our plans, strategies and prospects, both business and financial, including our financial outlook, possible or assumed future actions, opportunities for growth and margin expansion, improvements to our balance sheet and leverage, capital expenditures, consumer demand, industry and economic trends, business strategies, events or results of operations. Generally, forward-looking statements are not based on historical facts but instead represent only our current beliefs and assumptions regarding future events. All forward-looking statements are, by nature, subject to risks, uncertainties and other factors. This discussion and analysis does not purport to identify factors that could cause actual results to differ materially from those expressed or implied in forward-looking statements. You should understand that forward-looking statements are not guarantees of performance or results and are preliminary in nature. Statements preceded by, followed by or that otherwise include the words “believe,” “assumes,” “expects,” “anticipates,” “intends,” “continues,” “projects,” “predicts,” “estimates,” “plans,” “potential,” “may increase,” “may result,” “will result,” “may fluctuate,” and similar expressions or future or conditional verbs such as “will,” “should,” “would,” “foreseeable,” “may,” and “could” as well as the negative version of these words or similar terms and phrases are generally forward-looking in nature and not historical facts. In addition, any statements or information that refer to expectations, beliefs, plans, projections, objectives, performance or other characterizations of future events or circumstances, including any underlying assumptions, are forward-looking. The forward-looking statements contained in this discussion and analysis are based on management’s current beliefs and assumptions and are not guarantees of future performance. The forward-looking statements are subject to various risks, uncertainties, assumptions or changes in circumstances that are difficult to predict or quantify. Actual results may differ materially from these expectations due to numerous factors, many of which are beyond our control, including risks relating to our business operations and competitive and economic environment, risks relating to our brand, risks relating to the growth of our business, risks relating to our technological operations, risks relating to our capital structure and lease obligations, risks relating to our human capital, risks relating to legal compliance and risk management and risks relating to ownership of our common stock and the other important factors discussed under the caption “Risk Factors” in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission (the “SEC”) and as such risk factors may be updated from time to time in our periodic filings with the SEC that are accessible on the SEC’s website at www.sec.gov . Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive. Consequently, we caution investors not to place undue reliance on any forward-looking statements, as no forward-looking statement can be guaranteed, and actual results may vary materially. Additionally, our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures, investments or other strategic transactions we may make. All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by the foregoing cautionary statements. Forward-looking statements speak only as of the date of this report. We do not undertake any obligation to update or revise, or to publicly announce any update or revision to, any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law. Overview Initial Public Offering On October 12, 2021, Life Time Group Holdings, Inc. consummated its initial public offering (“IPO”) of 39.0 million shares of its common stock for total gross proceeds of $702.0 million before deducting the underwriting discounts and other offering expenses. Additionally, on November 1, 2021, Life Time Group Holdings, Inc. consummated the sale of nearly 1.6 million additional shares of its common stock pursuant to the partial exercise by the underwriters of their over-allotment option, resulting in total gross proceeds of approximately $28.4 million before deducting the underwriting discounts and commissions. 21 Table of Contents Business and Strategy Life Time, the “Healthy Way of Life Co mpany,” is a leading lifestyle brand offering premium health, fitness and wellness experiences to a communit y of more than 1.4 million individua l members, who together compris e more than 813,000 memberships, as of March 31, 2023. Since our founding over 30 years ago, we have sought to continuously innovate ways for our members to lead healthy and happy lives by offering them the best places, programs and performers. We deliver high-quality experiences through our omni-channel physical and digital ecosystem that includes more than 160 centers—distinctive, resort-like athletic country club destinations—across 29 states in the United States and one province in Canada. Our track record of providing differentiated experiences to our members has fueled our strong, long-term financial performance. Our luxurious athletic country clubs, which are located in both affluent suburban and urban locations, total approximately 16 million square feet in the aggregate. We offer expansive fitness floors with top-of-the-line equipment, spacious locker rooms, group fitness studios, indoor and outdoor pools and bistros, indoor and outdoor tennis courts, pickleball courts, basketball courts, LifeSpa, LifeCafe and our childcare and Kids Academy learning spaces. Our premium service offerings are delivered by over 35,000 Life Time team members, including over 9,200 certified fitness professionals, ranging from personal trainers to studio performers. Our members are highly engaged and draw inspiration from the experiences and community we have created. The value our members place on our community is reflected in the continued strength and growth of our average revenue per center membership and the visits to our athletic country clubs. Our average revenue per center membership and the visits to our clubs for the three months ended March 31, 2023 were $667 and 26 million, respectively, as compared to $580 and 20 million, respectively, for the three months ended March 31, 2022. We believe that no other company in the United States delivers the same quality and breadth of health, fitness and wellness experiences that we deliver, which enabled us to consistently grow our annual membership dues and in-center revenue for 20 consecutive years, prior to the impact of the COVID-19 pandemic, and now again as we have emerged from the pandemic. We have been focused on returning to consistent annual growth in our membership dues and in-center revenue. Our total Center revenue has grown significantly since the adverse impacts of the pandemic. Our total Center revenue increased to $497.8 million for the three months ended March 31, 2023 as compared to $381.6 million for the three months ended March 31, 2022. We expect it to continue to grow as our existing centers re-ramp in their performance, our new centers ramp to expected performance, we open new centers in desirable locations across the country and we continue to execute on our strategic initiatives discussed below. As of March 31, 2023, we h ad 20 new centers open for less th an three years and 10 new centers under construction, with $401 million of growth capital expenditures already invested into these yet-to-open new centers. We believe the combined dynamic of our ramping new centers, which on average have taken three to four years to ramp to expected performance, plus the future growth that we have not yet realized from the capital expenditures already invested in our centers under construction creates a strong tailwind for the continued growth of our total Center revenue. We also have significant opportunities to continue expanding our portfolio of premium centers with 18 to 20 new centers planned over 2023 and 2024 in increasingly affluent markets. During the pandemic, we determined that we had been under-valuing the experiences delivered to our engaged members and that certain members would likely not return following the pandemic. We thus began to implement a new pricing strategy coming out of the pandemic. As we continued to enhance and broaden the premium experiences for our members, we strategically increased our membership pricing across most of our new and existing centers, particularly for our new member join rates. New members are thus joining at higher membership dues rates and we expect these members to be incrementally more profitable than the members we lose over the long-term. As expected, our total center memberships have not fully recovered to their 2019 pre-pandemic levels, b ut for the first time in the three months ended March 31, 2023, our membership dues revenue exceeded our pre-pandemic membership dues revenue for centers opened at the end of 2019. We believe we can continually refine our pricing, and transition existing memberships to higher membership prices or tiers, as we deliver exceptional experiences and find the optimal balance among memberships per center, the member experience and financial returns for each center. With the strong recovery of our membership dues revenue, we have also been able to focus on margin expansion. We experienced significant margin expansion in the three months ended March 31, 2023, and we believe we have opportunities to continue to expand margins as we benefit from higher dues revenue and as we continue to optimize the roll-out of our strategic initiatives and improve the efficiency of our club operations and corporate office. 22 Table of Contents We have implemented several strategic initiatives as we continue to evolve our premium lifestyle brand in ways that elevate and broaden our member experiences and allow our members to integrate health, fitness and wellness into their lives with greater ease and frequency. We believe these initiatives are driving significant increases in center usage and higher memberships. These strategic initiatives include pickleball, Dynamic Personal Training, small group training such as Alpha, GTX and Ultra Fit, and our ARORA community focused on members aged 55 years and older, where we have experienced a significant increase in our unique participants or total sessions. We also continue to enhance our digital platform to deliver a true omni-channel experience for our members. Our Life Time Digital offering delivers live streaming fitness classes, remote goal-based personal training, nutrition and weight loss support and curated award-winning health, fitness and wellness content. In addition, our members are able to purchase a wide variety of equipment, wearables, apparel, beauty products and nutritional supplements via our digital health store. We are continuing to invest in our digital capabilities in order to strengthen our relationships with our members and more comprehensively address their health, fitness and wellness needs so that they can remain engaged and connected with Life Time at any time or place. We also continue to expand our “Healthy Way of Life” ecosystem in response to the desire of our members to holistically integrate health and wellness into every aspect of their daily lives. In 2018, we launched Life Time Work, an asset-light branded co-working model that offers premium work spaces in close proximity to our centers and integrates ergonomic furnishings and promotes a healthy working environment. Life Time Work members also generally receive access to all of our resort-like athletic destinations across the United States and Canada. Life Time Living offers luxury wellness-oriented residences also in close proximity to one of our athletic country clubs. At March 31, 2023, we had 11 Life Time Work and two Life Time Living locations open and operating. Our Life Time Living offering is generating interest from new property developers and presenting opportunities for new center development that we had not previously had. As we expand our footprint with new centers and nearby work and living spaces, as well as strengthen our digital capabilities, we expect to continue to grow our omni-channel platform to support the “Healthy Way of Life” journey of our members. We have continued to actively monitor the macroeconomic environment and its impact on our business, including with respect to inflation, interest rates, labor and supply chain issues, as well as a potential economic recession . The inflation rate has been elevated for several quarters and continued to be elevated in the first quarter of 2023, which has had an impact on our expenses in several areas, including wages, construction costs and other operating expenses. These inflationary impacts have resulted in pressure on our margin performance and an increase in our capital expenditures. The rising interest rate environment has also increased the cost of our Term Loan Facility and Revolving Credit Facility and may result in increased cap rates on future sale-leaseback transactions. We anticipate the remainder of fiscal year 2023 will continue to be a dynamic macroeconomic environment. Non-GAAP Financial Measures This discussion and analysis includes certain financial measures that are not presented in accordance with generally accepted accounting principles in the United States (“GAAP”), including Adjusted EBITDA and free cash flow before growth capital expenditures and ratios related thereto. These non-GAAP financial measures are not based on any comprehensive set of accounting rules or principles and should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items. In addition, these non-GAAP financial measures should be read in conjunction with our financial statements prepared in accordance with GAAP. The reconciliations of the Company’s non-GAAP financial measures to the corresponding GAAP measures should be carefully eva luated. We use Adjusted EBITDA as an important performance metric for the Company. In addition, free cash flow before growth capital expenditures is an important liquidity metric we use to evaluate our ability to make principal payments on our indebtedness and to fund our capital expenditures and working capital requirements. 23 Table of Contents Adjusted EBITDA We define Adjusted EBITDA as net income (loss) before interest expense, net, provision for (benefit from) income taxes and depreciation and amortization, excluding the impact of share-based compensation expense, (gain) loss on sale-leaseback transactions, capital transaction costs, legal settlements, asset impairment, severance and other items that are not indicative of our ongoing operations, including incremental costs related to COVID-19. Management uses Adjusted EBITDA to evaluate the Company’s performance. We believe that Adjusted EBITDA is an important metric for management, investors and analysts as it removes the impact of items that we do not believe are indicative of our core operating performance and allows for consistent comparison of our operating results over time and relative to our peers. We use Adjusted EBITDA to supplement GAAP measures of performance in evaluating the effectiveness of our business strategies, and to establish annual budgets and forecasts. We also use Adjusted EBITDA or variations thereof to establish short-term incentive compensation for management. Free Cash Flow Before Growth Capital Expenditures We define free cash flow before growth capital expenditures as net cash provided by (used in) operating activities less center maintenance capital expenditures and corporate capital expenditures. We believe free cash flow before growth capital expenditures assists investors and analysts in evaluating our liquidity and cash flows, including our ability to make principal payments on our indebtedness and to fund our capital expenditures and working capital requirements. Our management considers free cash flow before growth capital expenditures to be a key indicator of our liquidity and we present this metric to our board of directors. Additionally, we believe free cash flow before growth capital expenditures is frequently used by analysts, investors and other interested parties in the evaluation of companies in our industry. We also believe that investors, analysts and rating agencies consider free cash flow before growth capital expenditures as a useful means of measuring our ability to make principal payments on our indebtedness and evaluating our liquidity, and management uses this measurement for one or more of these purposes. Adjusted EBITDA and free cash flow before growth capital expenditures should be considered in addition to, and not as a substitute for or superior to, financial measures calculated in accordance with GAAP. These are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income (loss) or any other performance measures derived in accordance with GAAP or as an alternative to net cash provided by (used in) operating activities as a measure of our liquidity and may not be comparable to other similarly titled measures of other businesses. Adjusted EBITDA and free cash flow before growth capital expenditures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our operating results or cash flows as reported under GAAP. Furthermore, we compensate for the limitations described above by relying primarily on our GAAP results and using Adjusted EBITDA and free cash flow before growth capital expenditures only for supplemental purposes. See our condensed consolidated financial statements included elsewhere in this report for our GAAP results. 24 Table of Contents Non-GAAP Measurements and Key Performance Indicators We prepare and analyze various non-GAAP performance metrics and key performance indicators to assess the performance of our business and allocate resources. For more information regarding our non-GAAP performance metrics, see “—Non-GAAP Financial Measures” above. These are not measurements of our financial performance under GAAP and should not be considered as alternatives to any other performance measures derived in accordance with GAAP. Set forth below are certain GAAP and non-GAAP measurements and key performance indicators for the three months ended March 31, 2023 and 2022. The following information has been presented consistently for all periods presented. Three Months Ended March 31, 2023 2022 ($ in thousands, except for Average Center revenue per center membership data) Membership Data Center memberships 764,173 673,983 Digital On-hold memberships 49,333 70,289 Total memberships 813,506 744,272 Revenue Data Membership dues and enrollment fees 71.8% 71.3% In-center revenue 28.2% 28.7% Total Center revenue 100.0% 100.0% Membership dues and enrollment fees $ 357,488 $ 271,915 In-center revenue 140,264 109,706 Total Center revenue $ 497,752 $ 381,621 Average Center revenue per center membership (1) $ 667 $ 580 Comparable center revenue (2) 24.6% 50.3% Center Data Net new center openings (3) 3 2 Total centers (end of period) (3) 164 153 Total center square footage (end of period) (4) 16,100,000 15,300,000 GAAP and Non-GAAP Financial Measures Net income (loss) $ 27,460 $ (37,966) Net income (loss) margin (5) 5.4 % (9.7) % Adjusted EBITDA (6) $ 120,102 $ 40,626 Adjusted EBITDA margin (6) 23.5 % 10.4 % Center operations expense $ 274,109 $ 239,573 Pre-opening expenses (7) $ 1,685 $ 1,387 Rent $ 66,537 $ 55,964 Non-cash rent expense (open properties) (8) $ 6,378 $ 1,068 Non-cash rent expense (properties under development) (8) $ 2,650 $ 4,941 Net cash provided by operating activities $ 74,348 $ 9,062 Free cash flow before growth capital expenditures (9) $ 26,583 $ (35,256) (1) We define Average Center revenue per center membership as Center revenue less Digital On-hold revenue, divided by the average number of Center memberships for the period, where the average number of Center memberships for the period is an average derived from dividing the sum of the total Center memberships outstanding at the beginning of the period and at the end of each month during the period by one plus the number of months in each period. 25 Table of Contents (2) We measure the results of our centers based on how long each center has been open as of the most recent measurement period. We include a center, for comparable center revenue purposes, beginning on the first day of the 13th full calendar month of the center’s operation, in order to assess the center’s growth rate after one year of operation. (3) Net new center openings is calculated as the number of centers that opened for the first time to members during the period, less any centers that closed during the period. Total centers (end of period) is the number of centers operational as of the last day of the period. (4) Total center square footage (end of period) reflects the aggregate fitness square footage, which we use as a metric for evaluating the efficiencies of a center as of the end of the period. The square footage figures exclude areas used for tennis courts, outdoor swimming pools, outdoor play areas and stand-alone Work, Sport and Swim locations. These figures are approximations. (5) Net income (loss) margin is calculated as net income (loss) divided by total revenue. (6) We present Adjusted EBITDA as a supplemental measure of our performance. We define Adjusted EBITDA as net income (loss) before interest expense, net, provision for (benefit from) income taxes and depreciation and amortization, excluding the impact of share-based compensation expense, (gain) loss on sale-leaseback transactions, capital transaction costs, legal settlements, asset impairment, severance and other items that are not indicative of our ongoing operations, including incremental costs related to COVID-19. Adjusted EBITDA margin is calculated as Adjusted EBITDA divided by total revenue. The following table provides a reconciliation of net income (loss), the most directly comparable GAAP measure, to Adjusted EBITDA: Three Months Ended March 31, ($ in thousands) 2023 2022 Net income (loss) $ 27,460 $ (37,966) Interest expense, net of interest income 31,195 29,943 Provision for (benefit from) income taxes 8,872 (2,867) Depreciation and amortization 58,197 58,107 Share-based compensation expense (a) 5,622 21,438 COVID-19 related expenses (b) 322 212 Gain on sale-leaseback transactions (c) (6,732) (28,372) Capital transaction costs (d) — 255 Other (e) (4,834) (124) Adjusted EBITDA $ 120,102 $ 40,626 (a) Shar e-based compensation expense recognized during the three months ended March 31, 2023 was associated with stock options, restricted stock units, our employee stock purchase plan (“ESPP”) that launched on December 1, 2022, and liability classified awards related to our short-term incentive plan for our executive officers in 2023. Shar e-based compensation expense recognized during the three months ended March 31, 2022 was associated with stock options, restricted stock and restricted stock units. The majority of this expense was associated with awards that were fully vested and became exercisable on April 4, 2022 in connection with the expiration of the lock-up period following our IPO. (b) Represents the incremental expenses we recognized related to the COVID-19 pandemic. We adjust for these expenses as they do not represent expenses associated with our normal ongoing operations. We believe that adjusting for these expenses provides a more accurate and consistent representation of our actual operating performance from period to period. For the three months ended March 31, 2023 and 2022 , COVID-19 related expenses primarily consisted of legal-related costs in pursuit of our claim against Zurich. For more information regarding this claim, see Note 10, Commitments and Contingencies, to our condensed consolidated financial statements in this report. (c) We adjust for the impact of gains on the sale-leaseback of our properties as they do not reflect costs associated with our ongoing operations. For details on the gain on sale-leaseback transactions that we recognized during the three months ended March 31, 2023, see “Sale-Leaseback Transactions” within Note 7, Leases, to our condensed consolidated financial statements in this report. (d) Represents one-time costs related to capital transactions, including debt and equity offerings that are non-recurring in nature, but excluding direct costs related to the IPO, which were netted against the proceeds of the IPO. (e) Includes costs associated with transactions that are unusual and non-recurring in nature. (7) Represents non-capital expenditures associated with opening new centers, which are incurred prior to the commencement of a new center opening. The number of centers under construction or development, the types of centers and our costs associated with any particular center opening can vary significantly from period to period. 26 Table of Contents (8) Reflects the non-cash portion of our annual GAAP operating lease expense that is greater or less than the cash operating lease payments. Non-cash rent expense for our open properties represents non-cash expense associated with properties that were operating at the end of each period presented. Non-cash rent expense for our properties under development represents non-cash expense associated with properties that are still under development at the end of each period presented. (9) Free cash flow before growth capital expenditures, a non-GAAP financial measure, is calculated as net cash provided by operating activities less center maintenance capital expenditures and corporate capital expenditures. The following table provides a reconciliation from net cash provided by operating activities to free cash flow before growth capital expenditures: Three Months Ended March 31, ($ in thousands) 2023 2022 Net cash provided by operating activities $ 74,348 $ 9,062 Center maintenance capital expenditures (32,899) (16,396) Corporate capital expenditures (14,866) (27,922) Free cash flow before growth capital expenditures $ 26,583 $ (35,256) Factors Affecting the Comparability of our Results of Operations Impact of COVID-19 on our Business Overview In March 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic, the United States declared a National Public Health Emergency and we closed all of our centers based on orders and advisories from federal, state and local governmental authorities regarding COVID-19. Throughout this report, including this “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” when we refer to “COVID-19” or “the pandemic,” such as when we describe the “impact of COVID-19” on our operations, we mean the coronavirus-related orders issued by governmental authorities affecting our operations and/or the presence of coronavirus in our centers, including COVID-19 positive members or team members. We re-opened our first center on May 8, 2020, and continued to re-open our centers as state and local governmental authorities permitted, subject to operating processes and protocols that we developed in consultation with an epidemiologist (MD/PhD) to provide a healthy and clean environment for our members and team members and to meet various governmental requirements and restrictions. Our centers were also impacted in 2021 as a result of the Delta variant and then again later in 2021 and into 2022 with the Omicron variant. The performance of our centers has improved significantly as our centers have ramped back from the adverse impacts of COVID-19, but our improvement has varied depending on various factors, including how early we were able to re-open them, whether we were required to close them again, their geographic location and applicable governmental restrictions. We have experienced a slightly faster recovery in our membership dues revenue compared to our in-center revenue. We expect membership dues revenue to remain a higher percentage of our total revenue in the near term and return to more historical levels over time. We continue to be encouraged by our improved business performance, the traction of our strategic initiatives and the diminishing negative impacts from COVID-19. Operations As of March 31, 2023, total memberships were 813,506, an increase of 9.3% compared to 744,272 at March 31, 2022. Center memberships were 764,173, an increase of 13.4% compared to 673,983 at March 31, 2022. Digital On-hold memberships were 49,333, a decrease of 29.8% compared to 70,289 at March 31, 2022. We have experienced a significant decrease in COVID-19 related restrictions on our operations. While we are still utilizing certain of the processes we implemented to provide a healthy and clean environment for our members and team members, we are no longer subject to the stricter requirements such as face coverings, vaccine mandates or negative test results. We will continue to monitor governmental orders regarding the operations of our centers, as well as our center operating processes and protocols. 27 Table of Contents Leverage We are focused on improving the ratio of our net debt to Adjusted EBITDA, or our leverage ratio. We define net debt as the current and long-term portion of our debt, excluding unamortized debt discounts and issuance costs and fair value adjustments, less cash and cash equivalents. Our leverage ratio has been elevated due in part to the adverse impacts o f COVID-19, which required us to incur additional debt and significantly reduced our Adjusted EBITDA. We believe that we can significantly improve our leverage ratio in 2023 as our profitability improves and we continue to strengthen our balance sheet, including through sale-leaseback transactions. During the three months ended March 31, 2023, we completed a sale-leaseback transaction of one property for aggregate gross proceeds of $33.0 million. For more information regarding the sale-leaseback transaction that was consummated during the three months ended March 31, 2023, see Note 7, Leases, to our condensed consolidated financial statements included elsewhere in this report. Investment in Business We have continued to invest in our business to elevate and broaden our member experiences and drive additional revenue per center membership, including improving our in-center services and products, such as pickleball, Dynamic Personal Training, small group training and our ARORA community, introducing new types of memberships, providing concierge-type member services and expanding our omni-channel offerings. Elevating our member experiences requires investment in our team members, programs, products, services and centers. These investments may impact our short-term results of operations and cash flows as our investments in our business may be made more quickly than we achieve additional revenue per center membership. While we remain focused on providing exceptional experiences to our members and growing our revenue, we are also focused on center efficiencies and expense control given our recovery of membership dues and a significant portion of our center memberships. Impact of Our Asset-light, Flexible Real Estate Strategy on Rent Expense Our asset-light, flexible real estate strategy has allowed us to expand our business by leveraging operating leases and sale-leaseback transactions. Approximately 66% of our centers are now leased, including approximately 93% of our new centers opened within the last five years, versus a predominantly owned real estate strategy prior to 2015. Rent expense, which includes both cash and non-cash rent expense, will continue to increase as we lease more centers and will therefore impact the comparability of our results of operations. The impact of these increases is dependent upon the timing of our centers under development and the center openings and terms of the leases for the new centers or sale-leaseback transactions. Macroeconomic Trends We have been actively monitoring the macroeconomic environment and its impact on our business, including with respect to inflation, interest rates, labor and supply chain issues, as well as a potential economic recession . See “—Overview—Business” for additional information. Share-Based Compensation During the three months ended March 31, 2023, we recognized share-based compensation expense associated with stock options, restricted stock units, our ESPP that launched on December 1, 2022 and liability classified awards related to our short-term incentive plan for our executive officers in 2023, totaling approximately $5.6 million. During the three months ended March 31, 2022, we recognized share-based compensation expense associated with stock options, restricted stock and restricted stock units totaling approximately $21.4 million. The majority of this expense was associated with awards that were fully vested and became exercisable on April 4, 2022 in connection with the expiration of the lock-up period following our IPO. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Ultimate results could differ from those estimates. In recording transactions and balances resulting from business operations, we use estimates based on the best information available. We revise the recorded estimates when better information is available, facts change or we can determine actual amounts. These revisions can affect operating results. Management has evaluated the development and selection of our critical accounting policies and estimates used in the preparation of the Company’s unaudited condensed consolidated financial statements and related notes and believes these policies to be reasonable and appropriate. Certain of these policies involve a higher degree of judgment or complexity and are most significant to reporting our results of operations and financial position, and are, therefore, discussed as critical. 28 Table of Contents Our most significant estimates and assumptions that materially affect the Company’s unaudited condensed consolidated financial statements involve difficult, subjective or complex judgments, which management used while performing goodwill, indefinite-lived intangible and long-lived asset impairment analyses and sale-leaseback arrangements. Given the additional effects from the COVID-19 pandemic, these estimates can be more challenging, and actual results could differ materially from our estimates. As it relates to the long-lived asset impairment analyses that we have performed d uring the three months ended March 31, 2023 and 2022, we determined during the three months ended March 31, 2022 that certain projects were no longer deemed viable for construction, and that the previously capitalized site development costs associated with these projects were impaired during the three months ended March 31, 2022. Accordingly, as it relates to these long-lived assets, we recognized impairment charges of $0.2 million during the three months ended March 31, 2022. There were no impairment charges recognized during the three months ended March 31, 2023. More information on all of our significant accounting policies can be found in Note 2, “Summary of Significant Accounting Policies” to our audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022 filed with the SEC. There have been no material changes to our critical accounting policies as compared to the critical accounting policies described in such Annual Report on Form 10-K. Results of Operations Three Months Ended March 31, 2023 Compared to Three Months Ended March 31, 2022 The following table sets forth our condensed consolidated statements of operations data (amounts in thousands) and data as a percentage of total revenue for the three months ended March 31, 2023 and 2022: Three Months Ended March 31, As a Percentage of Total Revenue 2023 2022 2023 2022 Revenue: Center revenue $ 497,752 $ 381,621 97.4 % 97.3 % Other revenue 13,099 10,633 2.6 % 2.7 % Total revenue 510,851 392,254 100.0 % 100.0 % Operating expenses: Center operations 274,109 239,573 53.7 % 61.1 % Rent 66,537 55,964 13.0 % 14.2 % General, administrative and marketing 42,497 66,561 8.3 % 17.0 % Depreciation and amortization 58,197 58,107 11.4 % 14.8 % Other operating expense (income) 2,127 (17,035) 0.4 % (4.3) % Total operating expenses 443,467 403,170 86.8 % 102.8 % Income (loss) from operations 67,384 (10,916) 13.2 % (2.8) % Other (expense) income: Interest expense, net of interest income (31,195) (29,943) (6.1) % (7.6) % Equity in earnings of affiliate 143 26 — % — % Total other expense (31,052) (29,917) (6.1) % (7.6) % Income (loss) before income taxes 36,332 (40,833) 7.1 % (10.4) % Provision for (benefit from) income taxes 8,872 (2,867) 1.7 % (0.7) % Net income (loss) $ 27,460 $ (37,966) 5.4 % (9.7) % Total revenue. The $118.6 million increase in Total revenue for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 primarily reflects strong growth in membership dues and in-center revenues, which included the continued ramp of our centers and higher utilization of our in-center offerings by our members. With respect to the $116.1 million increase in Center revenue for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022: • 73.7% was from membership dues and enrollment fees, which increased $85.6 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. This increase reflects the improvement in our Center memberships, which increased to 764,173 as of March 31, 2023 from 673,983 as of March 31, 2022, as well as higher average monthly dues per Center membership during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 ; and 29 Table of Contents • 26.3% was from in-center revenue, which increased $30.6 million for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 . This increase was recognized across all of our primary in-center businesses and reflects the higher utilization of our offerings by our members during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 . The $2.5 million increase in Other revenue for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by the improved performance of our Life Time Work and Life Time Living locations, as well as our race registration and timing businesses. Center operations expenses . The $34.5 million increase in Center operations expenses for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by additional staffing requirements to support increased usage in existing and new centers, expanded programming, increased labor costs and utility cost inflation during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Rent expense . The $10.6 million increase in Rent expense for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by the timing of sale-leaseback transactions during both the current and prior year as well as our taking possession of two properties since March 31, 2022 for future centers where we started incurring GAAP rent expense, most of which is non-cash . General, administrative and marketing expenses. The $24.1 million decrease in General, administrative and marketing expenses for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by a $15.2 million decrease in share-based compensation expense as well as the benefits that we experienced during the three months ended March 31, 2023 from operational efficiency efforts. Depreciation and amortization . Depreciation and amortization was $58.2 million for the three months ended March 31, 2023, a $0.1 million increase compared to $58.1 million for the three months ended March 31, 2022. Other operating expense (income) . Other operating expense for the three months ended March 31, 2023 was $2.1 million, as compared to Other operating income of $17.0 million for the three months ended March 31, 2022. The $19.1 million change was primarily attributable to the recognition of a $28.4 million gain on sale-leaseback transactions during the three months ended March 31, 2022, partially offset by the recognition of a $6.7 million gain on a sale-leaseback transaction and increased costs to support the revenue growth we experienced in our Life Time Work, Life Time Living and race registration and timing businesses during the t hree months ended March 31, 2023. Interest expense, net of interest income . The $1.3 million increase in Interest expense, net of interest income for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was driven by a higher average level of outstanding borrowings and higher interest rates during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. Provision for (benefit from) income taxes . The provision for income taxes was $8.9 million for the three months ended March 31, 2023 as compared to a $2.9 million benefit from income taxes for the three months ended March 31, 2022. The effective tax rate was 24.4% and 7.0% for those same periods, respectively. The increase in provision for income taxes for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by the increase in earnings before tax, offset by the decrease in valuation allowance associated with certain of our deferred tax assets. The effective tax rate applied to our pre-tax income for the three months ended March 31, 2023 is higher than our statutory rate of 21.0% and reflects an increase due to the deductibility limitations associated with executive compensation and state income tax provisions, partially offset by a decrease in the valuation allowance associated with certain of our deferred tax assets. Net income (loss) . As a result of the factors described above, net income was $27.5 million for the three months ended March 31, 2023 as compared to a net loss of $38.0 million for the three months ended March 31, 2022. Liquidity and Capital Resources Liquidity Our principal liquidity needs include the development of new centers, lease requirements and debt service, investments in our business and technology and expenditures necessary to maintain and update or enhance our centers and associated fitness equipment and member experiences. We have primarily satisfied our historical liquidity needs with cash flow from operations, drawing on the Revolving Credit Facility and through sale-leaseback transactions. One of our top priorities remains improving our balance sheet and reducing leverage. We have taken significant actions to improve our liquidity. During the three months ended March 31, 2023, we completed a sale-leaseback transaction 30 Table of Contents associated with one property. During 2022, we completed sale-leaseback transactions associated with nine properties and also rewired our Company to improve the efficiency of our club operations and corporate office. We continue to explore potential sale-leaseback opportunities for a number of our properties. For more information regarding the sale-leaseback transaction that was consummated during the three months ended March 31, 2023 , see Note 7, Leases, to our condensed consolidated financial statements included in this report . We believe the steps we have taken to strengthen our balance sheet and to reduce our cash outflows leave us well-positioned to manage our business. As the opportunity arises or as our business needs require, we may seek to raise capital through additional debt financing or through equity financing. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. To date, we have not experienced difficulty accessing the credit and capital markets; however, volatility in these markets, particularly in light of the rising interest rate environment and any continued impacts of COVID-19, may increase costs associated with issuing debt instruments or affect our ability to access those markets, which could have an adverse impact on our ability to raise additional capital, to refinance existing debt and/or to react to changing economic and business conditions. In addition, it is possible that our ability to access the credit and capital markets could be limited at a time when we would like or need to do so. As of March 31, 2023, there were $85.0 million of outstanding borrowings under our Revolving Credit Facility and there were $30.5 million of outstanding letters of credit, resulting in total availability under our Revolving Credit Facility of $359.5 million. Total cash and cash equivalents, exclusive of restricted cash, at March 31, 2023 was $23.2 million, resulting in total cash and availability under our Revolving Credit Facility of $382.7 million. The following table sets forth our condensed consolidated statements of cash flows data (in thousands): Three Months Ended March 31, 2023 2022 Net cash provided by operating activities $ 74,348 $ 9,062 Net cash used in investing activities (136,851) (26,283) Net cash provided by financing activities 72,325 26,619 Effect of exchange rates on cash and cash equivalents 6 61 Increase in cash and cash equivalents $ 9,828 $ 9,459 Operating Activities The $65.3 million increase in cash provided by operating activities for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily the result o f higher profitability. Investing Activities Investing activities consist primarily of purchasing real property, constructing new centers, acquisitions and purchasing new fitness equipment. In addition, we invest in capital expenditures to maintain and update our existing centers. We finance the purchase of our property and equipment through operating cash flows, proceeds from sale-leaseback transactions, construction reimbursements and draws on our Revolving Credit Facility. The $110.6 million increase in net cash used in investing activities for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by a higher level of new center construction activity, partially offset by a lower amount of proceeds that we received from sale-leaseback transactions during the three months ended March 31, 2023 as compared to the three months ended March 31, 2022. The following schedule reflects capital expenditures by type of expenditure (in thousands): Three Months Ended March 31, 2023 2022 Growth capital expenditures, net of construction reimbursements (1) $ 123,049 $ 66,436 Center maintenance capital expenditures 32,899 16,396 Corporate capital expenditures 14,866 27,922 Total capital expenditures $ 170,814 $ 110,754 31 Table of Contents (1) Growth capital expenditures include new center land and construction, growth initiatives, major remodels of acquired centers and the purchase of previously leased centers. The $60.1 million increase in total capital expenditures for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by higher growth capital expenditures for new centers. Financing Activities The $45.7 million increase in cash provided by financing activities for the three months ended March 31, 2023 as compared to the three months ended March 31, 2022 was primarily driven by net proceeds we received from borrowings under our Revolving Credit Facility and Construction Loan and proceeds from stock option exercises during the three months ended March 31, 2023. We expect to satisfy our short-term and long-term obligations through a combination of cash on hand, funds generated from operations, sale-leaseback transactions and the borrowing capacity available under our Revolving Credit Facility.