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 and cash flow, 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. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements. 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, 2023 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 Business and Strategy Life Time, the “Healthy Way of Life Co mpany,” is a leading lifestyle and leisure brand offering premium health, fitness and wellness experiences to a communit y of more than 1.5 million individua l members, who together compr ise more than 853,000 memberships, as of March 31, 2024. 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 170 centers—distinctive, resort-like athletic country club destinations—across 31 states in the United States and one province in Canada. Our brand loyalty and track record of providing differentiated experiences to our members has fueled our strong, long-term financial performance. Our luxurious athletic country clubs total approximately 17 million square feet in the aggregate. Our centers are located in affluent suburban and urban locations. Depending on the size and location of a center, we offer expansive fitness floors with top-of-the-line equipment, spacious locker rooms, group fitness studios and spaces, 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 39,000 Life Time team members, including over 10,200 certified fitness professionals, ranging from personal trainers to studio performers. 15 Table of Contents 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, center usage and the visits to our athletic country clubs. Our average revenue per center membership increased to $745 for the three months ended March 31, 2024 as compared to $667 for the three months ended March 31, 2023. Total visits to our clubs were 28 million for the three months ended March 31, 2024 as compared to 26 million for the three months ended March 31, 2023, and average visits per membership remained strong at 36 average visits per membership to our centers for the three months ended March 31, 2024. 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 $580.5 million for the three months ended March 31, 2024 as compared to $497.8 million for the three months ended March 31, 2023. We believe it will continue to grow as we open new centers in desirable locations across the country, our new centers ramp to expected performance 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 March 31, 2024, we had 27 centers open for less than three years and seven new centers under construction, with $204 million of growth capital expenditures already invested into these new centers that have yet to open. We are 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, our average revenue per center membership should naturally increase. We believe we have significant opportunities to continue expanding our portfolio of premium centers in an asset-light manner with plans for nine to 10 new centers in 2024. We believe the combined dynamic of our ramping new centers that are open and operating 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 an even healthier and stronger business. Our initial focus on center recovery produced strong results in member engagement and increasing memberships, visits and Center revenue. We were then able to focus on expanding margins by optimizing our average revenue per center membership and significantly improving the efficiency of our club operations and corporate office. We have also benefited 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. We have also launched a pilot for our MIORA health optimization and longevity services and believe we also have opportunities to enhance our offerings within our LifeCafe and LifeSpa during 2024. Additionally, our enhanced digital platform is delivering a true omni-channel experience, 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 digital health store offers a wide variety of equipment, wearables, apparel, beauty products and nutritional supplements. We are continuing to invest in our digital capabilities, including our integrated digital app and artificial intelligence, in order to strengthen our relationships with our members, reach more people looking for a Healthy Way of Life 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 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 March 31, 2024, we had 15 Life Time Work and four 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. Our omni-channel platform continues to grow as we expand our footprint with new centers and nearby work and living spaces, as well as strengthen our digital capabilities. 16 Table of Contents Macroeconomy We continue to monitor the macroeconomic environment and its impact on our business, including with respect to inflation, interest rates and labor, as well as a potential economic recession . Inflation continues to remain elevated, which 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, we have experienced growth in our revenue and margins. The rising interest rate environment has also increased the cost of our Term Loan Facility and Revolving Credit Facility and may result in increased capitalization rat es and delays on future sale-leaseback transactions. 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, Adjusted net income 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. Adjusted Net Income We define Adjusted net income as net income 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 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 and Adjusted EBITDA to evaluate the Company’s performance. We believe that Adjusted net income 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 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. Adjusted net income 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 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 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 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. 17 Table of Contents Set forth below are certain GAAP and non-GAAP measurements and key performance indicators for the three months ended March 31, 2024 and 2023. The following information has been presented consistently for all periods presented. Three Months Ended March 31, 2024 2023 ($ in thousands, except for Average Center revenue per center membership data) Membership Data Center memberships 802,010 764,173 Digital On-hold memberships 51,062 49,333 Total memberships 853,072 813,506 Revenue Data Membership dues and enrollment fees 73.3% 71.8% In-center revenue 26.7% 28.2% Total Center revenue 100.0% 100.0% Membership dues and enrollment fees $ 425,411 $ 357,488 In-center revenue 155,074 140,264 Total Center revenue $ 580,485 $ 497,752 Average Center revenue per center membership (1) $ 745 $ 667 Comparable center revenue (2) 11.1% 24.6% Center Data Net new center openings (3) 1 3 Total centers (end of period) (3) 172 164 Total center square footage (end of period) (4) 16,900,000 16,100,000 GAAP and Non-GAAP Financial Measures Net income $ 24,917 $ 27,460 Net income margin (5) 4.2 % 5.4 % Adjusted net income (6) $ 30,525 $ 23,211 Adjusted net income margin (6) 5.1 % 4.5 % Adjusted EBITDA (7) $ 145,977 $ 120,102 Adjusted EBITDA margin (7) 24.5 % 23.5 % Center operations expense $ 321,900 $ 274,109 Pre-opening expenses (8) $ 2,452 $ 1,685 Rent $ 72,282 $ 66,537 Non-cash rent expense (open properties) (9) $ 4,184 $ 6,378 Non-cash rent expense (properties under development) (9) $ 1,774 $ 2,650 (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 13 th full calendar month of the center’s operation, in order to assess the center’s growth rate after one year of operation. 18 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 three months ended March 31, 2024, we opened one center, which excludes two acquired centers that are not currently considered new center openings as they are under major remodel. (4) Total center square footage (end of period) reflects the aggregate square footage, excluding areas used for tennis courts, outdoor swimming pools, outdoor play areas and stand-alone Work, Sport and Swim locations. We use this metric for evaluating the efficiencies of a center as of the end of the period. These figures are approximations. (5) Net income margin is calculated as net income divided by total revenue. (6) We present Adjusted net income as a supplemental measure of our performance. We define Adjusted net income as net income 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 margin is calculated as Adjusted net income divided by total revenue. The following table provides a reconciliation of net income and income per common share, the most directly comparable GAAP measures, to Adjusted net income and Adjusted net income per common share: Three Months Ended March 31, ($ in thousands) 2024 2023 Net income $ 24,917 $ 27,460 Share-based compensation expense (a) 7,626 5,622 Gain on sale-leaseback transactions (b) — (6,732) Other (c) 214 (4,512) Taxes (d) (2,232) 1,373 Adjusted net income $ 30,525 $ 23,211 Income per common share: Basic $ 0.13 $ 0.14 Diluted $ 0.12 $ 0.14 Adjusted income per common share: Basic $ 0.15 $ 0.12 Diluted $ 0.15 $ 0.11 Weighted-average common shares outstanding: Basic 197,498 194,572 Diluted 202,756 202,855 (a) Shar e-based compensation expense recognized during the three months ended March 31, 2024 was associated with stock options, restricted stock units, performance stock units and our employee stock purchase plan (“ESPP”) that launched on December 1, 2022. Shar e-based compensation expense recognized during the three months ended March 31, 2023 was associated with stock options, restricted stock units, our ESPP and liability classified awards related to our short-term incentive plan in 2023. (b) 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. (c) Includes benefits and costs associated with transactions that are unusual and non-recurring in nature. (d) Represents the estimated tax effect of the total adjustments made to arrive at Adjusted net income 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 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. 19 Table of Contents The following table provides a reconciliation of net income, the most directly comparable GAAP measure, to Adjusted EBITDA: Three Months Ended March 31, ($ in thousands) 2024 2023 Net income $ 24,917 $ 27,460 Interest expense, net of interest income 37,403 31,195 Provision for income taxes 9,914 8,872 Depreciation and amortization 65,903 58,197 Share-based compensation expense (a) 7,626 5,622 Gain on sale-leaseback transactions (b) — (6,732) Other (c) 214 (4,512) Adjusted EBITDA $ 145,977 $ 120,102 (a) - (c) See the corresponding footnotes to the table in footnote 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. 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. 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 and believe that we can continue to improve our leverage ratio as our profitability improves and we continue to strengthen our balance sheet. 20 Table of Contents Investment in Business We have continued to invest in our business to elevate and broaden our member experiences and drive member engagement and 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. 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 87% 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 and labor, as well as a potential economic recession . See “—Overview—Macroeconomy” for additional information. Share-Based Compensation During the three months ended March 31, 2024, we recognized share-based compensation expense associated with stock options, restricted stock units, performance stock units and our ESPP, totaling approximately $7.6 million. During the three months ended March 31, 2023, we recognized share-based compensation expense associated with stock options, restricted stock units, our ESPP and liability classified awards related to our short-term incentive plan in 2023, totaling approximately $5.6 million. 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. 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, 2023 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. 21 Table of Contents Results of Operations Three Months Ended March 31, 2024 Compared to Three Months Ended March 31, 2023 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, 2024 and 2023: Three Months Ended March 31, As a Percentage of Total Revenue 2024 2023 2024 2023 Revenue: Center revenue $ 580,485 $ 497,752 97.3 % 97.4 % Other revenue 16,232 13,099 2.7 % 2.6 % Total revenue 596,717 510,851 100.0 % 100.0 % Operating expenses: Center operations 321,900 274,109 53.9 % 53.7 % Rent 72,282 66,537 12.1 % 13.0 % General, administrative and marketing 48,853 42,497 8.2 % 8.3 % Depreciation and amortization 65,903 58,197 11.0 % 11.4 % Other operating expense 15,722 2,127 2.6 % 0.4 % Total operating expenses 524,660 443,467 87.8 % 86.8 % Income from operations 72,057 67,384 12.2 % 13.2 % Other (expense) income: Interest expense, net of interest income (37,403) (31,195) (6.3) % (6.1) % Equity in earnings of affiliates 177 143 — % — % Total other expense (37,226) (31,052) (6.3) % (6.1) % Income before income taxes 34,831 36,332 5.9 % 7.1 % Provision for income taxes 9,914 8,872 1.7 % 1.7 % Net income $ 24,917 $ 27,460 4.2 % 5.4 % Total revenue. The $85.8 million increase in Total revenue for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was due to continued strong growth in membership dues and in-center revenue, includi ng 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 $82.7 million increase in Center revenue for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023: • 82.1% was from membership dues and enrollment fees, which increased $67.9 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. This increase reflects the improvement in our Center memberships, which increased to 802,010 as of March 31, 2024 from 764,173 as of March 31, 2023, as well as higher average monthly dues per Center membership during the three months ended March 31, 2024 as compared to the three months ended March 31, 2023; and • 17.9% was from in-center revenue, which increased $14.8 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. 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, 2024 as compared to the three months ended March 31, 2023. Th e $3.1 million increase in Other revenue for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was primarily driven by the improved performance of our Life Time Work and Life Time Living locations. Center operations expenses . The $47.8 million increase in Center operations expenses for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 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. 22 Table of Contents Rent expense . The $5.7 million increase in Rent expense for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was primarily driven by the timing of sale-leaseback transactions during the prior year as well as our taking possession of four properties since May 31, 2023 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 increased $6.4 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily due to higher share-based compensation expense, timing of marketing expenses primarily related to our new club openings and increased information technology costs. Depreciation and amortization . Depreciation and amortization increased $7.7 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily due to new center openings. Other operating expense . Other operating expense increased $13.6 million for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023, primarily due to the recognition of a $6.7 million gain on sale-leaseback transactions and a $4.8 million gain on the sale of two triathlon events during the three months ended March 31, 2023, as well as increased costs to support other revenue growth. Interest expense, net of interest income . T he $6.2 million increase in Interest expense, net of interest income for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was driven by a higher average level of outstanding borrowings during the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 . Provision for income taxes . The $1.0 million increase in provision for income taxes for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was primarily driven by a change in the valuation allowance associated with certain of our deferred tax assets and tax deficiencies associated with share-based payment awards, offset by a decrease in earnings before income taxes. The effective tax rate was 28.5% and 24.4% for those same periods, respectively. The effective tax rate applied to our pre-tax income for the three months ended March 31, 2024 is higher than our statutory rate of 21% and reflects an increase due to deductibility limitations associated with executive compensation and state income tax provisions. Net income . As a result of the factors described above, net income was $24.9 million and $27.5 million for the three months ended March 31, 2024 and 2023, respectively. 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 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 continue to include improving our balance sheet, reducing leverage and generating positive free cash flow. 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. In December 2023, we amended our Term Loan Facility to reduce the interest rate by 0.50%. During 2023, we completed sale-leaseback transactions associated with three properties. We are optimistic that we will execute sale-leaseback transactions for multiple properties in 2024. 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. 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 higher 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. 23 Table of Contents As of March 31, 2024, there were $220.0 million of outstanding borrowings under our Revolving Credit Facility and there were $30.9 million of outstanding letters of credit, resulting in total availability under our $475.0 million Revolving Credit Facility of $224.1 million. Total cash and cash equivalents at March 31, 2024 was $18.6 million , resulting in total cash and availability under our Revolving Credit Facility of $242.7 million. The following table sets forth our condensed consolidated statements of cash flows data (amounts in thousands): Three Months Ended March 31, 2024 2023 Net cash provided by operating activities $ 90,407 $ 74,348 Net cash used in investing activities (158,588) (136,851) Net cash provided by financing activities 74,975 72,325 Effect of exchange rates on cash and cash equivalents and restricted cash and cash equivalents (36) 6 Increase in cash and cash equivalents and restricted cash and cash equivalents $ 6,758 $ 9,828 Operating Activities The $16.1 million increase in net cash provided by operating activities for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was primarily the result of increased business performance and 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 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 $21.7 million increase in net cash used in investing activities for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was primarily driven by a $32.7 million decrease in the amount of proceeds that we received from sale-leaseback transactions, offset by a $14.0 million decrease in capital expenditures during the three months ended March 31, 2024 as compared to the three months ended March 31, 2023. The following table reflects capital expenditures by type of expenditure (in thousands): Three Months Ended March 31, 2024 2023 Growth capital expenditures (1) $ 105,225 $ 123,049 Maintenance capital expenditures (2) 51,576 47,765 Total capital expenditures $ 156,801 $ 170,814 (1) Includes new center land and construction, asset acquisitions and initial major remodels of acquired centers. (2) Includes general maintenance and modernization of existing centers and technology. The decrease in total capital expenditures for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was primarily driven by less new center construction activity. Financing Activities The $2.7 million increase in net cash provided by financing activities for the three months ended March 31, 2024 as compared to the three months ended March 31, 2023 was primarily driven by net incremental proceeds we received from borrowings under our Revolving Credit Facility, largely offset by our payment of a mortgage note and less proceeds from stock option exercises, during the three months ended March 31, 2024. 24 Table of Contents We believe we have adequate amounts of cash to meet our requirements and plans for cash in the short-term and long-term and expect to satisfy our short-term and long-term obligations through a combination of cash on hand, funds generated from operations, sale-leaseback transactions, the borrowing capacity available under our Revolving Credit Facility and additional debt and equity financing as needed.