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 “believes,” “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. 16 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 approximately 1.5 million individua l members, who together compris e more than 830,000 memberships, as of September 30, 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 170 centers—distinctive, resort-like athletic country club destinations—across 31 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 17 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 37,000 Life Time team members, including over 9,700 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 nine months ended September 30, 2023 were $2,095 and 78 million, respectively, as compared to $1,885 and 65 million, respectively, for the nine months ended September 30, 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 has enabled us to consistently grow our annual membership dues and in-center revenue. Our total Center revenue increased to $1,608.3 million for the nine months ended September 30, 2023 as compared to $1,307.5 million for the nine months ended September 30, 2022. We believe it will continue to grow as 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. Our new centers on average have taken three to four years to ramp to expected performance. As of September 30, 2023, we had 27 centers open for less than three years. We are also expanding the number of our centers using an asset-light model that targets increasingly affluent markets with higher income members, higher average annual revenue per center membership and higher returns on invested capital. As we open these new centers in more affluent markets, we believe our average revenue per center membership will naturally increase. We believe we have significant opportunities to continue expanding our portfolio of premium centers in an asset-light manner with plans for 22 to 24 new centers over 2023 and 2024. While we have shifted our new center growth strategy to pursue more asset-light opportunities that include leases with tenant improvement allowances and existing center takeovers with lower capital required, as of September 30, 2023, we had eight new centers under construction, with $285 million of growth capital expenditures already invested into these new centers that have yet to open. We believe the combined dynamic of our ramping new centers and the future growth that we have not yet realized from the quicker turnaround center takeovers plus the capital expenditures already invested in our centers under construction creates a strong tailwind for the continued growth of our total Center revenue. Coming out of the COVID-19 pandemic, we believe that we have built a healthier and stronger business model. Our initial focus on center recovery has produced strong results in member engagement and increasing memberships, visits and Center revenue. We have also been able to expand margins by significantly improving the efficiency of our club operations and corporate office. We also expect to benefit from the greater flow through of our increased revenue and from new members joining at higher membership dues rates. We have also implemented several strategic initiatives that are driving revenue, engagement and memberships as we continue to elevate and broaden our member experiences and allow our members to integrate health, fitness and wellness into their lives with greater ease and frequency. These strategic initiatives include pickleball, Dynamic Personal Training, Dynamic Stretch, 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. Additionally, our enhanced digital platform is delivering a true omni-channel experience for our members, including 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, including our integrated digital app, 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. 17 Table of Contents 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 have the ability to receive access to all of our resort-like athletic country club destinations across the United States and Canada. Additionally, our Life Time Living locations offer luxury wellness-oriented residences, also in close proximity to one of our athletic country clubs. As of September 30, 2023, we had 13 Life Time Work and three 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 were not previously available to us. 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. Macroeconomy We continue to 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 . More than two years of elevated inflation has impacted our expenses and capital expenditures in several areas, including wages, construction costs and other operating expenses, and thus pressured our margin performance. Despite this headwind that has shown signs of easing, we have experienced growth in our revenue and margins as discussed above. 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 rat es and delays on future sale-leaseback transactions. We continue to explore sale-leaseback transactions but are being selective on whether to execute any additional sale-leasebacks in the current macroeconomic environment given our ability to add new centers through asset-light opportunities and our improved cash flow. We will continue to monitor the macroeconomic environment, but we believe that our business is resilient and has performed well historically during different economic cycles including during a recession. 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 net income (loss), Adjusted net income (loss) per common share, Adjusted EBITDA 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 net income (loss) and Adjusted EBITDA as important performance metrics for the Company. Adjusted Net Income (Loss) We define Adjusted net income (loss) as net income (loss) 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, less the tax effect of these adjustments. 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 net income (loss) and Adjusted EBITDA to evaluate the Company’s performance. We believe that Adjusted net income (loss) and Adjusted EBITDA are important metrics for management, investors and analysts as they remove 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 net income (loss) and 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. 18 Table of Contents Adjusted net income (loss) and Adjusted EBITDA 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 and may not be comparable to other similarly titled measures of other businesses. Adjusted net income (loss) and Adjusted EBITDA have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our operating results as reported under GAAP. Furthermore, we compensate for the limitations described above by relying primarily on our GAAP results and using Adjusted net income (loss) and Adjusted EBITDA only for supplemental purposes. See our condensed consolidated financial statements included elsewhere in this report for our GAAP results. 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 and nine months ended September 30, 2023 and 2022. The following information has been presented consistently for all periods presented. 19 Table of Contents Three Months Ended Nine Months Ended September 30, September 30, 2023 2022 2023 2022 ($ in thousands, except for Average Center revenue per center membership data) Membership Data Center memberships 784,331 728,729 784,331 728,729 Digital On-hold memberships 45,708 47,273 45,708 47,273 Total memberships 830,039 776,002 830,039 776,002 Revenue Data Membership dues and enrollment fees 71.8% 69.9% 71.7% 70.1% In-center revenue 28.2% 30.1% 28.3% 29.9% Total Center revenue 100.0% 100.0% 100.0% 100.0% Membership dues and enrollment fees $ 407,903 $ 335,717 $ 1,152,506 $ 916,895 In-center revenue 160,499 144,278 455,773 390,603 Total Center revenue $ 568,402 $ 479,995 $ 1,608,279 $ 1,307,498 Average Center revenue per center membership (1) $ 722 $ 660 $ 2,095 $ 1,885 Comparable center revenue (2) 11.4% 25.6% 16.6% 35.7% Center Data Net new center openings (3) 6 3 9 5 Total centers (end of period) (3) 170 156 170 156 Total center square footage (end of period) (4) 16,700,000 15,600,000 16,700,000 15,600,000 GAAP and Non-GAAP Financial Measures Net income (loss) $ 7,915 $ 24,732 $ 52,379 $ (15,519) Net income (loss) margin (5) 1.4 % 5.0 % 3.2 % (1.1) % Adjusted net income (loss) (6) $ 26,684 $ (11,535) $ 91,139 $ (66,832) Adjusted net income (loss) margin (6) 4.6 % (2.3) % 5.5 % (5.0) % Adjusted EBITDA (7) $ 142,981 $ 70,975 $ 399,123 $ 174,697 Adjusted EBITDA margin (7) 24.4 % 14.3 % 24.1 % 12.9 % Center operations expense $ 319,401 $ 295,253 $ 896,113 $ 814,383 Pre-opening expenses (8) $ 1,477 $ 5,350 $ 6,146 $ 9,296 Rent $ 69,225 $ 63,213 $ 203,196 $ 179,166 Non-cash rent expense (open properties) (9) $ 8,409 $ 6,762 $ 25,662 $ 14,850 Non-cash rent expense (properties under development) (9) $ 861 $ 4,907 $ 1,238 $ 12,454 (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. (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. 20 Table of Contents (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. During the third quarter of 2023, we opened six centers. During the nine months ended September 30, 2023, we opened 10 centers and closed one center. (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 net income (loss) as a supplemental measure of our performance. We define Adjusted net income (loss) as net income (loss) 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, less the tax effect of these adjustments. Adjusted net income (loss) margin is calculated as Adjusted net income (loss) divided by total revenue. The following table provides a reconciliation of net income (loss) and income (loss) per common share, the most directly comparable GAAP measures, to Adjusted net income (loss) and Adjusted net income (loss) per common share: Three Months Ended Nine Months Ended September 30, September 30, ($ in thousands) 2023 2022 2023 2022 Net income (loss) $ 7,915 $ 24,732 $ 52,379 $ (15,519) Share-based compensation expense (a) 14,858 5,803 37,029 33,214 COVID-19 related expenses (b) 93 354 339 937 Loss (gain) on sale-leaseback transactions (c) 12,672 (48,583) 13,431 (98,167) Capital transaction costs (d) — — — 255 Asset impairments (e) 5,340 — 6,620 — Other (f) (405) 1,172 (5,191) 1,021 Taxes (g) (13,789) 4,987 (13,468) 11,427 Adjusted net income (loss) $ 26,684 $ (11,535) $ 91,139 $ (66,832) Income (loss) per common share: Basic $ 0.04 $ 0.13 $ 0.27 $ (0.08) Diluted $ 0.04 $ 0.12 $ 0.26 $ (0.08) Adjusted income (loss) per common share: Basic $ 0.14 $ (0.06) $ 0.47 $ (0.35) Diluted $ 0.13 $ (0.06) $ 0.45 $ (0.35) Weighted-average common shares outstanding: Basic 196,146 193,918 195,404 193,364 Diluted 204,298 198,381 203,954 193,364 (a) Shar e-based compensation expense recognized during the three and nine months ended September 30, 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 in 2023. Shar e-based compensation expense recognized during the three and nine months ended September 30, 2022 was associated with stock options, restricted stock and restricted stock units. The majority of this expense in 2022 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 September 30, 2023 and the three and nine months ended September 30, 2022 , COVID-19 related expenses primarily consisted of legal-related costs in pursuit of our claim against Zurich. For the nine months ended September 30, 2023, COVID-19 related expenses primarily consisted of legal-related costs in pursuit of our claim against Zurich, partially offset by a subsidy for our Canadian operations. 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 losses and gains on the sale-leaseback of our properties as they do not reflect costs associated with our ongoing operations. For details on the loss on sale-leaseback transactions that we recognized during the nine months ended September 30, 2023, see “Sale-Leaseback Transactions” within Note 7, Leases, to our condensed consolidated financial statements in this report. 21 Table of Contents (d) Represents 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) Represents non-cash asset impairments of our long-lived assets. (f) Includes benefits and costs associated with transactions that are unusual and non-recurring in nature. (g) Represents the estimated tax effect of the total adjustments made to arrive at Adjusted net income (loss) using the effective income tax rates for the respective periods. (7) 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, loss (gain) 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 Nine Months Ended September 30, September 30, ($ in thousands) 2023 2022 2023 2022 Net income (loss) $ 7,915 $ 24,732 $ 52,379 $ (15,519) Interest expense, net of interest income 33,075 27,696 96,249 84,732 Provision for (benefit from) income taxes 5,815 3,401 18,200 (3,456) Depreciation and amortization 63,618 56,400 180,067 171,680 Share-based compensation expense (a) 14,858 5,803 37,029 33,214 COVID-19 related expenses (a) 93 354 339 937 Loss (gain) on sale-leaseback transactions (a) 12,672 (48,583) 13,431 (98,167) Capital transaction costs (a) — — — 255 Asset impairments (a) 5,340 — 6,620 — Other (a) (405) 1,172 (5,191) 1,021 Adjusted EBITDA $ 142,981 $ 70,975 $ 399,123 $ 174,697 (a) See the corresponding footnotes to the table in note 6 immediately above. (8) Represents non-capital expenditures associated with opening new centers that 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. (9) 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. 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. 22 Table of Contents 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. 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 for at least the near term. 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 was 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 have significantly improved our leverage ratio in the first nine months of 2023 and believe that we can continue to improve our leverage ratio as our profitability improves and we continue to strengthen our balance sheet. 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, Dynamic Stretch, 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 and overhead support efficiencies 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, among other asset-light opportunities. Approximately 66% of our centers are now leased, including approximately 89% of our new centers opened since 2015, 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, the timing of sale-leaseback transactions and terms of the leases for the new centers or sale-leaseback transactions. Macroeconomic Trends We have been 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—Macroeconomy” for additional information. Share-Based Compensation During the nine months ended September 30, 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 in 2023, totaling approximately $37.0 million . During the nine months ended September 30, 2022, we recognized share-based compensation expense associated with stock options, restricted stock and restricted stock units totaling approximately $33.2 million. The majority of this expense in 2022 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 23 Table of Contents 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. 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. 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 September 30, 2023 Compared to Three Months Ended September 30, 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 September 30, 2023 and 2022: Three Months Ended September 30, As a Percentage of Total Revenue 2023 2022 2023 2022 Revenue: Center revenue $ 568,402 $ 479,995 97.1 % 96.7 % Other revenue 16,775 16,386 2.9 % 3.3 % Total revenue 585,177 496,381 100.0 % 100.0 % Operating expenses: Center operations 319,401 295,253 54.6 % 59.5 % Rent 69,225 63,213 11.8 % 12.7 % General, administrative and marketing 51,668 57,139 8.8 % 11.5 % Depreciation and amortization 63,618 56,400 10.9 % 11.4 % Other operating expense (income) 34,516 (31,358) 5.9 % (6.3) % Total operating expenses 538,428 440,647 92.0 % 88.8 % Income from operations 46,749 55,734 8.0 % 11.2 % Other (expense) income: Interest expense, net of interest income (33,075) (27,696) (5.7) % (5.5) % Equity in earnings of affiliate 56 95 — % — % Total other expense (33,019) (27,601) (5.7) % (5.5) % Income before income taxes 13,730 28,133 2.3 % 5.7 % Provision for income taxes 5,815 3,401 1.0 % 0.7 % Net income $ 7,915 $ 24,732 1.3 % 5.0 % Total revenue. The $88.8 million increase in Total revenue for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was due to continued strong growth in membership dues and in-center revenue, including continuing to realize the benefits of pricing actions already completed, membership growth in our new and ramping centers and higher member utilization of our in-center offerings. 24 Table of Contents With respect to the $88.4 million increase in Center revenue for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022: • 81.7% was from membership dues and enrollment fees, which increased $72.2 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. This increase reflects the improvement in our Center memberships, which increased to 784,331 as of September 30, 2023 from 728,729 as of September 30, 2022, as well as higher average monthly dues per Center membership during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 ; and • 18.3% was from in-center revenue, which increased $16.2 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 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 September 30, 2023 as compared to the three months ended September 30, 2022 . T he $0.4 million increase in Other revenue for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily driven by the improved performance of our Life Time Work and Life Time Living locations. Center operations expenses . Th e $24.1 million increase in Center operations expenses for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily due to increased operating costs related to our new and ramping centers as well as growth in memberships and in-center business revenue. Rent expense . T he $6.0 million increase in Rent expense for the three months ended September 30, 2023 as compared to the three months ended September 30, 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 during the current year fo r future centers where we started incurring GAAP rent expense, most of which is non-cash . General, administrative and marketing expenses. General, administrative and marketing expenses decreased $5.5 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to reduced center support overhead, advertising and marketing and cash incentive compensation expenses, partially offset by higher share-based compensation expense. Depreciation and amortization . Depreciation and amortization increased $7.2 million for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022, primarily due to new center openings. Other operating expense (income) . Other operating expense for the three months ended September 30, 2023 was $34.5 million as compared to Other operating income of $31.4 million for the three months ended September 30, 2022. The $65.9 million change was primarily attributable to the recognition of a $13.2 million loss on a sale-leaseback transaction during the three months ended September 30, 2023 as compared to the recognition of a $47.9 million gain on sale-leaseback transactions during the three months ended September 30, 2022, and a $5.6 million loss associated with the sale of an outparcel of land during the three months ended September 30, 2023, of which $5.3 million was recognized as an impairment charge. Interest expense, net of interest income . The $5.4 million increase in Interest expense, net of interest income for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was driven by a higher average level of outstanding borrowings and higher interest rates during the three months ended September 30, 2023 as compared to the three months ended September 30, 2022. Provision for income taxes . The provision for income taxes was $5.8 million for the three months ended September 30, 2023 as compared to $3.4 million for the three months ended September 30, 2022. The effective tax rate was 42.4% and 12.1% for those same periods, respectively. The increase in provision for income taxes for the three months ended September 30, 2023 as compared to the three months ended September 30, 2022 was primarily driven by a change in the valuation allowance associated with certain of our deferred tax assets and the tax deficiencies associated with share-based payment awards, partially offset by a decrease in earnings before income taxes and research tax credits. The effective tax rate applied to our pre-tax income for the three months ended September 30, 2023 is higher than our statutory rate of 21.0% and reflects the tax deficiencies associated with share-based payment awards and state income tax provisions, partially offset by a decrease in the valuation allowance associated with certain of our deferred tax assets and research tax credits. Net income . As a result of the factors described above, net income was $7.9 million for the three months ended September 30, 2023 as compared to $24.7 million for the three months ended September 30, 2022. 25 Table of Contents Nine Months Ended September 30, 2023 Compared to Nine Months Ended September 30, 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 nine months ended September 30, 2023 and 2022: Nine Months Ended September 30, As a Percentage of Total Revenue 2023 2022 2023 2022 Revenue: Center revenue $ 1,608,279 $ 1,307,498 97.0 % 96.9 % Other revenue 49,480 42,404 3.0 % 3.1 % Total revenue 1,657,759 1,349,902 100.0 % 100.0 % Operating expenses: Center operations 896,113 814,383 54.1 % 60.3 % Rent 203,196 179,166 12.3 % 13.3 % General, administrative and marketing 147,005 175,650 8.9 % 13.0 % Depreciation and amortization 180,067 171,680 10.8 % 12.7 % Other operating expense (income) 64,837 (56,605) 3.9 % (4.2) % Total operating expenses 1,491,218 1,284,274 90.0 % 95.1 % Income from operations 166,541 65,628 10.0 % 4.9 % Other (expense) income: Interest expense, net of interest income (96,249) (84,732) (5.8) % (6.3) % Equity in earnings of affiliate 287 129 — % — % Total other expense (95,962) (84,603) (5.8) % (6.3) % Income (loss) before income taxes 70,579 (18,975) 4.2 % (1.4) % Provision for (benefit from) income taxes 18,200 (3,456) 1.1 % (0.3) % Net income (loss) $ 52,379 $ (15,519) 3.1 % (1.1) % Total revenue. The $307.9 million increase in Total revenue for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was due to continued strong growth in membership dues and in-center revenue, including continuing to realize the benefits of pricing actions already completed, membership growth in our new and ramping centers, the continued re-ramp of our centers and higher member utilization of our in-center offerings. With respect to the $300.8 million increase in Center revenue for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022: • 78.3% was from membership dues and enrollment fees, which increased $235.6 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. This increase reflects the improvement in our Center memberships, which increased to 784,331 as of September 30, 2023 from 728,729 as of September 30, 2022, as well as higher average monthly dues per Center membership during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022; and • 21.7% was from in-center revenue, which increased $65.2 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 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 nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Th e $7.1 million increase in Other revenue for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily driven by the improved performance of our Life Time Work and Life Time Living locations. Center operations expenses . The $81.7 million increase in Center operations expenses for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily due to increased operating costs related to our new and ramping centers as well as growth in memberships and in-center business revenue. Rent expense . The $24.0 million increase in Rent expense for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily driven by the timing of sale-leaseback transactions during both 26 Table of Contents the current and prior year as well as our taking possession of three properties since May 31, 2022 f or future centers where we started incurring GAAP rent expense, most of which is non-cash . General, administrative and marketing expenses. General, administrative and marketing expenses decreased $28.6 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to lower cash incentive compensation expense and reduced center support overhead and advertising and marketing expenses. Depreciation and amortization . Depreciation and amortization increased $8.4 million for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022, primarily due to new center openings. Other operating expense (income) . Other operating expense for the nine months ended September 30, 2023 was $64.8 million as compared to Other operating income of $56.6 million for the nine months ended September 30, 2022. The $121.4 million change was primarily attributable to the recognition of a $13.4 million loss on sale-leaseback transactions during the nine months ended September 30, 2023 as compared to the recognition of a $98.0 million gain on sale-leaseback transactions during the nine months ended September 30, 2022, as well as increased costs to support other revenue growth. Interest expense, net of interest income . T he $11.5 million increase in Interest expense, net of interest income for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was driven by a higher average level of outstanding borrowings and higher interest rates during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 . Provision for (benefit from) income taxes . The provision for income taxes was $18.2 million for the nine months ended September 30, 2023 as compared to a $3.5 million benefit from income taxes for the nine months ended September 30, 2022 . The effective tax rate was 25.8% and 18.2% for those same periods, respectively. The increase in provision for income taxes for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily driven by the increase in earnings before income taxes and the tax deficiencies associated with share-based payment awards, offset by a change in the valuation allowance associated with certain of our deferred tax assets and research tax credits. The effective tax rate applied to our pre-tax income for the nine months ended September 30, 2023 is slightly higher than our statutory rate of 21% and reflects an increase due to deductibility limitations associated with executive compensation, the tax deficiencies associated with share-based payment awards and state income tax provisions, largely offset by a change in the valuation allowance associated with certain of our deferred tax assets and research tax credits. Net income (loss) . As a result of the factors described above, net income was $52.4 million for the nine months ended September 30, 2023 as compared to a net loss of $15.5 million for the nine months ended September 30, 2022 . Liquidity and Capital Resources Liquidity Our principal liquidity needs include the acquisition and 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, construction reimbursements and through sale-leaseback transactions. Our top priorities remain improving our balance sheet, reducing leverage and having positive cash flow from operations after all capital expenditures. Our cash flow from operations continues to improve and we have taken significant actions to improve our liquidity. In May 2023, we refinanced our $273.6 million Term Loan Facility that had a maturity date in December 2024 to our $310.0 million Term Loan Facility that has a maturity date of January 15, 2026. For more information regarding the debt refinancing transaction, see Note 6, Debt, to our condensed consolidated financial statements included in this report. In addition, during the nine months ended September 30, 2023, we completed sale-leaseback transactions associated with three properties. 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, but we are being selective on whether to execute any additional sale-leasebacks in the current macroeconomic environment given our ability to add new centers through asset-light opportunities and our improving cash flows from operations. For more information regarding the sale-leaseback transactions that were consummated during the nine months ended September 30, 2023 , see Note 7, Leases, to our condensed consolidated financial statements included in this report . Additionally, w e benefit from our in-house architecture, design and construction expertise that allows us to create operationally efficient centers and control the cost and pace of capital expenditures, including in determining when to begin or delay construction on a new athletic country club. 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. 27 Table of Contents As the opportunity arises or as our business needs require, we may seek to raise capital through additional debt or equity financing. There can be no assurance that any such financing would be available on commercially acceptable terms, or at all. Volatility in these markets, particularly in light of the rising interest rate environment, 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 September 30, 2023, there were $45.0 million of outstanding borrowings under our Revolving Credit Facility and there were $32.6 million of outstanding letters of credit, resulting in total availability under our Revolving Credit Facility of $397.4 million. Total cash and cash equivalents, exclusive of restricted cash, at September 30, 2023 was $9.2 million, resulting in total cash and availability under our Revolving Credit Facility of $406.6 million. The following table sets forth our condensed consolidated statements of cash flows data (in thousands): Nine Months Ended September 30, 2023 2022 Net cash provided by operating activities $ 330,946 $ 125,320 Net cash used in investing activities (403,549) (37,480) Net cash provided by (used in) financing activities 72,505 (11,708) Effect of exchange rates on cash and cash equivalents 30 (700) (Decrease) increase in cash and cash equivalents $ (68) $ 75,432 Operating Activities The $205.6 million increase in cash provided by operating activities for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily the result of higher profitability. Investing Activities Investing activities consist primarily of the acquisition and development of new centers, investments in our business and technology and expenditures necessary to maintain and update or enhance our centers and associated fitness equipment. We finance the purchase of our property, centers and equipment through operating cash flows, proceeds from sale-leaseback transactions, construction reimbursements and draws on our Revolving Credit Facility. The $366.1 million increase in net cash used in investing activities for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily driven by a higher level of new center construction activity and a lower amount of proceeds that we received from sale-leaseback transactions during the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022. Financing Activities The $84.2 million increase in cash provided by financing activities for the nine months ended September 30, 2023 as compared to the nine months ended September 30, 2022 was primarily driven by net incremental proceeds we received from borrowings under our Term Loan Facility, Revolving Credit Facility and Construction Loan and proceeds from stock option exercises during the nine months ended September 30, 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. 28 Table of Contents