Life Time Group Holdings, Inc. Q2 FY2022 Earnings Call

Good morning, and welcome to the Life Time Group Holdings Conference Call to Discuss Financial Results for the Second Fiscal Quarter of 2022. Please be advised that reproduction of this call in whole or in part is not permitted without written authorization from the company. As a reminder, this call is being recorded. During this call, the company will make forward-looking statements which involve a number of risks and uncertainties that may cause actual results to differ materially from our forward-looking statements. There is a comprehensive list of risk factors in the company's SEC filings, which you are encouraged to review. Also, the company will discuss certain non-GAAP financial measures, including adjusted EBITDA and free cash flow before growth capital expenditures. This information, along with reconciliations to the most directly comparable GAAP measures are included in the earnings release issued this morning and the company's 8-K filed with the SEC and on the Investor Relations section of Life Time's website. On the call from management today are Bahram Akradi, Founder, Chairman and Chief Executive Officer; and Tom Bergmann, President and Chief Financial Officer. I will now turn the call over to Mr. Akradi. Please go ahead, sir.

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

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

First question is from Brian Nagel of Oppenheimer & Co.

Nice results. I have a couple of questions. First, many consumer companies are discussing macro pressures, which isn't surprising. You mentioned this as well. My question is, as you evaluate the business, particularly the recent trends or what's happening in Q3, where are the macro pressures emerging? Are they more noticeable in certain geographic areas or within specific segments of your business? My second question is for Bahram. You outlined several initiatives. Could you elaborate on what you're observing regarding membership growth or reduced churn as these programs are rolled out?

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

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

And to add to that, Brian, as Tom and I have mentioned, we really had not focused on cost measures that much. During the first half of 2022, our focus was primarily on getting memberships to a critical point. There are numerous opportunities to improve how we operate between the clubs and the corporate office, and there are still ways to offset additional pressures from inflation and other factors. We don't believe that the world will always be favorable, so we are always planning ahead to mitigate these challenges. Regarding the programs you mentioned, we've rolled out several initiatives. We had to conceptualize them, brand them, set expectations, and then implement them. Some clubs have eagerly embraced these initiatives and performed very well, while others have been a bit slower, often due to the depth of closures and restrictions that have delayed their return to normal operations. The good news is that in the clubs where these initiatives are being executed— even at 50% or 60% capacity, not even at full strength— the membership and revenue numbers have exceeded 2019 figures. We are very confident that moving forward with the consistent rollout of these programs across the country in the next 4 to 6 months is crucial. We already have clear evidence that they are effective. The increase in memberships from pickleball and our current revenue growth in personal training is just beginning to take off due to our new DPT program. Additionally, small group training has significant potential; we can increase the number of classes per club each week by 2 to 3 times by this time next year, which will contribute to continued growth in subscriptions and revenue for the company. We still have many opportunities ahead, and I'm excited. Our team is focused and dedicated, and I know everyone is committed to success. We don’t want to let anyone down, so we feel very positive about the direction we’re headed.

The next question is from John Heinbockel of Guggenheim Securities.

I wanted to start by asking about your pricing initiative. Are you considering taking a slower approach to assess the market's reaction? Have you noticed any feedback so far? Additionally, I'm aware that your team closely monitors NPS scores. How have those scores been trending, and does pricing affect NPS, or is it entirely focused on the customer experience?

Yes, the NPS is entirely based on experience, which has remained consistent for us. We've made improvements, and it's around the mid-50 range, very steady. Ultimately, our customers are not those who opt for low-priced gyms. If they were looking for lower prices, they wouldn't be with us at all. To keep our customers, we need to provide a high level of service, like that of Four Seasons or Ritz-Carlton. Failing to do so could drive them away. The pricing strategy has been methodical and straightforward. Adjusting prices is not complex; if something doesn’t work, you can simply lower it by $5 or $10 without issues. We have completely eliminated promotions; since we mentioned it a year and a half ago, we haven't offered any. We are not pushing sales but instead assisting people in purchasing memberships. Our membership units are performing as well as ever, despite higher prices and no promotions. So far, there are no signs that our strategy isn’t effective. We just need to implement the programs I described more decisively across all clubs consistently.

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

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

We have a clear indication that our programs are functioning as expected. Our goal is to increase the average number of classes from 35 to between 80 and 100 classes per week. Initially, we need to invest in payroll to launch these classes, and then the membership revenue will follow. This also applies to our pickleball initiatives and other projects, which require upfront investment to establish the programs and cover associated costs before generating membership income. We are optimistic and aim to increase our membership count by 10% from current levels by the end of the year, based on the number of clubs opened. For us to achieve this growth, we must implement these programs consistently and effectively. Our cautious approach regarding EBITDA takes into account the necessary investments for these programs, so we can transition from December to January prepared to reach our revenue and EBITDA goals for 2023.

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

I have a few follow-up questions regarding the first two. First, it seems like these initiatives are performing well. How should we view the long-term EBITDA margin per center with these new programs and the associated higher incremental costs? It appears these costs will carry into next year and beyond. To support these programs over time, do you expect either an increase in membership or higher prices to achieve the typical EBITDA margin profit targets per center? I also have an additional question.

Great question. I'm glad you asked. Let me explain. When we add a robust class that fully engages with the waitlist, that class has a significantly higher margin revenue at the end. It generates many swipes, which lead to subscriptions. The math shows that some of these programs can achieve margins of up to 60% or 70% once they are fully implemented and operational. Initially, the costs are higher. However, as Tom mentioned earlier, these investments are among the most asset-light, creating a much higher revenue relative to cost. At first, it may seem like a cost, such as $75 or $100 for a class, but once we calculate the margins, it's around 35% to 40% on costs and a 65% margin overall. It will take time, but we are in a strong financial position, especially with the sale leasebacks. We want to manage our balance sheet effectively to keep our revolver largely unused, allowing us the flexibility to make the right investments to enhance and grow the brand. I am confident that these programs will provide better margins in 2023 compared to lower margin options. Tom?

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

I'm going to add to that as well. We have a significant operation in our corporate office, and we've invested a substantial amount of money in technology over the past several years, which will continue. However, as we expand the company, there is no need for a proportional increase in our overhead. With 50 or 60 additional large clubs operating, we can manage with the same technology and corporate office we have now. In fact, we've been reducing the cost of the corporate office, using most of the savings to enhance our technology focus. Overall, I believe our margins should improve, and there is no reason for them to decline.

That's really helpful. Just a quick follow-up on the memberships. I noticed that on-hold membership decreased compared to pre-COVID levels. Was that an advantage? Additionally, could you provide more insight regarding the expectations for third-quarter memberships? Typically, we wouldn't see an increase, but I believe you mentioned that there was a possibility for sequential growth this year. What is the balance between member retention and new member acquisition with the programs you are implementing? Also, did the on-hold membership positively or negatively impact the membership numbers this quarter or for the third quarter?

On-hold memberships weren't a significant factor this quarter; I would consider it to be normal. During the summer, we typically have many people coming off hold, so I wouldn’t describe it as a major influence this quarter. Initially, we believed we would see a slight increase compared to last quarter, but now I anticipate a decrease of a few thousand units this quarter. Historically, in 2019, we experienced a loss of 16,000 units in the latter half of the year. This year, I expect the decline to be smaller, primarily because of our investments in programming such as ARORA and active aging, which have resulted in reduced attrition and positive growth among our older members. However, some club openings that I anticipated would occur earlier in the third quarter were delayed due to supply chain issues by a few weeks or months. Consequently, we are now opening clubs later in the third quarter and more in the fourth quarter. This has altered my outlook for the third quarter. Nevertheless, with 10 new club openings and the positive trends we’re observing in the business, I believe we’ll maintain stable membership numbers, which would be quite an achievement for the latter half of the year.

Our next question is from Brian Harbour of Morgan Stanley.

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

Yes, let me clarify. We have introduced a brand new program for our small group training, referred to as SGT, which is distinct from our large group fitness classes like yoga and strength. Previously, these classes were included in the membership dues, and small group packages were sold for 8 to 12 participants in classes together, which were part of our personal training program and required separate fees. You would purchase a club membership and then pay an additional $150 or $160 each month for a set number of sessions. While this was cheaper than a personal training hour, it was cumbersome for customers. Our strategy now is to simplify small group training engagement to compete with boutique studios near our clubs. We've created what we call Signature Memberships. Depending on the location, these memberships might cost $249, $200, or $219 monthly in higher-priced markets, while more affordable clubs may offer it around $119. The Signature Membership itself was priced at $169 or $179, which allows access to small group training just like a boutique, participating in all classes with an easy-to-use app. Previously, we offered around 14 to 15 small group classes weekly, but we have expanded that to between 35 and 40 classes and aim to reach 70 to 100 classes across all clubs. This growth is incremental. Historically, each average club conducted about 100 large group classes weekly, which remains unchanged. The memberships linked to small group training are substantial, and we expect a minimum of 400 to 500 memberships per club when the program is running, potentially increasing to 800 or 900 participants utilizing small group training. This initiative helps us attract new memberships that we otherwise wouldn't have. Ultimately, we have restructured our business to adapt after the pandemic, ensuring we maintain our membership base. It's essential to note that before the pandemic, 18% to 20% of our members who were paying dues had not used the club in the past 30 days. The pandemic extended longer than expected, causing many high-end clubs to lose these non-utilizing members. As we recover, we’ve had to innovate to regain those members who were paying but not using our facilities. Currently, we have several clubs where dues are significantly exceeding 2019 levels due to the robust running of these programs, with some markets reopening sooner than others. We are confident that our adjusted strategy fits today's environment, rather than pre-COVID conditions, and we can see a clear pathway to achieving above 2019 revenue and margins for the majority of our clubs.

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

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

Our next question is from Simeon Siegel of BMO Capital.

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

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

Yes. So Simeon, when I finish this year, assuming we complete an additional $300 million in sale leasebacks to reach a year-to-date total of $675 million, I will end the year with an annual run rate of $290 million in rent expense. That will be my run rate at the end of the year. On the pricing, Bahram?

Yes. The pricing has not been an issue. Essentially, what we are doing is looking at markets, and we cannot keep people out of the club. The club in Edina is currently priced at $199, and each time I visit, I feel it should be more expensive because it's becoming overcrowded, even at that rate. It's the most expensive club in Minneapolis. We are analyzing the membership patterns, including when people are joining and the speed of that process. If memberships are not increasing as quickly as we would like, we need to first assess whether our programs are being executed correctly. If everything is running smoothly and membership growth is still lacking, then we may need to lower the price by $10 or $15. We monitor this daily, so it's not an annual or decade-long decision; it's made on a day-to-day basis. Over the past few years, we have simplified the process for customers, making it easy to sign up online, receive assistance at the club, go on hold, come off hold, or cancel their memberships. Everything has been designed with the customer in mind. I don’t see any concerning patterns in our execution. Some clubs are performing much better than others—like the one in Boston, which is exceeding its 2019 performance, while a few others are lagging behind. Not all issues can be attributed to geographical market conditions, as it is fundamentally about execution, and our teams are doing a great job in driving that effort. I don't believe the price is a concern for us, and we can make quick adjustments if necessary.

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

Our next question is from Chris Woronka of Deutsche Bank.

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

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

Okay. Great. As a follow-up, considering the increasing costs associated with developing the new clubs you've mentioned, are you contemplating any changes to the schedule or scope of projects planned for 2023 or 2024?

Yes, please proceed.

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

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

Could you share your latest thoughts on the long-term strategy regarding location types, specifically in terms of geography or the urban versus suburban footprint? As the environment continues to evolve with costs, return to office trends, and behaviors in different regions, I'm interested to know if your focus on long-term development opportunities has changed.

Great question. This is Bahram. What isn't often recognized is the brand strength of Life Time and what we can achieve when we establish one of our athletic resorts alongside an apartment complex or residential area. There's a significant opportunity to offset increased costs because we have a distinct advantage for developers, allowing them to command higher rents and achieve quicker occupancy in their buildings. We are actively collaborating with various developers to create an integrated ecosystem with the Life Time Living brand, which significantly accelerates the ramp-up and success of the apartment sector. We expect to continue growing and maintaining healthy margins due to the brand strength and the value Life Time contributes.

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

It's working really well. We've closely examined how to foster a culture that attracts top talent in areas like spa and personal training, where they communicate with one another and choose Life Time as their preferred workplace. We've made important adjustments to minor issues that may have been challenges in the past. When we enter a new market, there is always a strong interest in working for Life Time, and many individuals from various age groups are eager to join. We have no justification for any staffing challenges. Talent is not an issue for Life Time, and given our brand and culture, I don't expect it to be a problem in the future.

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

Our next question is from Dan Politzer of Wells Fargo.

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

That's an excellent question, Dan. It's great to hear from you. We have outlined our strategy clearly. Currently, our approach does not rely on the return of nonusers to succeed. Rebuilding that segment will take a significant amount of time, potentially five to ten years, considering that 18% of people are paying for memberships but not using them for a month. Therefore, we have developed our strategy to ensure we can achieve our membership goals, revenue from dues, and maintain margins without this segment initially. Over time, we expect this group to slowly return, but it is not a core part of our current plan. The programs we've discussed are being executed as intended, and I am confident we will meet our membership goals, revenue targets, and margins for 2023. I remain very optimistic about the upcoming year.

Okay. For my follow-up, I have a question for Tom. First, do you have a target EBITDAR to rent coverage ratio or a threshold that you wouldn't want to exceed? Second, we had estimated around $300 million plus of sale leasebacks in 2023. Given the current macro situation and your discussions with your real estate partners, what is your perspective on that number?

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

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

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

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