Life Time Group Holdings, Inc. Q3 FY2024 Earnings Call

Greetings, and welcome to the Life Time Group Holdings, Inc. Q3 2024 Earnings Conference Call. At this time, all participants are in a listen-only mode. Instructions will be provided. As a reminder, this conference is being recorded. It's now my pleasure to turn the call over to Ken Cooper, Investor Relations. Please go ahead.

Good morning, and thank you for joining us for the third quarter 2024 Life Time Group Holdings earnings conference call. With me today are Bahram Akradi, Founder, Chairman and CEO; and Erik Weaver, Executive Vice President and CFO. During the 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 those forward-looking statements made today. There is a comprehensive discussion of risk factors in the Company's SEC filings, which you are encouraged to review. The Company will also discuss certain non-GAAP financial measures, including adjusted net income, adjusted EBITDA, adjusted diluted EPS and net debt to adjusted EBITDA, or what we refer to as net debt leverage ratio and free cash flow. This information, along with the reconciliations to the most directly comparable GAAP measures are included when applicable in the Company's earnings release issued this morning, our 8-K filed with the SEC, and on the Investor Relations section of our website. With that, I will turn the call over to Erik.

Thank you, Ken, and good morning, everyone. We appreciate you joining us this morning. We're excited to share with you our third quarter results, the full details of which can be found in the earnings release we issued this morning. For the third quarter, total revenue increased 18% to $693 million, driven by a 20% increase in membership dues and enrollment fees and a 16% increase in incentive revenue. Center memberships increased 5% compared to last year to end the quarter at more than 826,000 memberships. When combined with our digital on-hold memberships, total membership ended the quarter at approximately 877,000. Average monthly dues were $198, up approximately 13% from the third quarter of last year. Average revenue per center membership increased to $815 from $722 in the prior period as we continue to benefit from higher dues and increased in-center activity. Net income for the third quarter was $41.4 million versus $7.9 million in the third quarter 2023. Adjusted net income was $56.3 million versus $26.7 million in the prior year period, an increase of $29.6 million. Diluted earnings per share was $0.19 compared to $0.04 per share in the third quarter last year and $0.26 per share on an adjusted basis compared to $0.13 in the prior year period. This was an increase of 100% versus the prior year period. Adjusted EBITDA for the third quarter was $180.3 million, an increase of 26% versus $143.0 million in the third quarter 2023 and our adjusted EBITDA margin of 26.0% increased 160 basis points as compared to the third quarter 2023. Net cash provided by operating activities increased 32% to $151 million as compared to the third quarter of 2023. For the second consecutive quarter, we achieved positive free cash flow. Free cash flow increased by $169 million to $138 million in the third quarter compared to the prior year period. While this number includes sale-leaseback and land sale proceeds of $74 million for the quarter, we achieved positive free cash flow prior to these proceeds. We reduced our net debt to adjusted EBITDA leverage to 2.4x in the third quarter versus 3.7x in the prior year period. With that, I will now pass the call over to Bahram.

Thank you, Erik, for doing such a fantastic job, and let me extend my thanks to our more than 41,000 team members who made this great performance Erik just shared with you possible. I'm going to keep my remarks very short; the numbers speak for themselves. As many of you know, I am never satisfied, but I am as pleased as I have ever been with the accomplishments of our entire team over the last few years. We responded to the challenges presented over the last four years, reinventing, transforming, and improving every aspect of Life Time. We elevated our brand, we've evolved our clubs, and today, we're engaging with our members deeply and profoundly as never before. Our members love Life Time. At the same time, we have rewired our business and organizational structure to maximize efficiency. Today, we are, by far, the best version of ourselves that we have ever been. We offer the highest quality member experiences in the best facilities in the health and leisure industry. Our momentum has been spectacular, and it continues today. We exceeded every financial goal and every performance metric we set for ourselves: membership retention, revenue, adjusted EBITDA, free cash flow and EPS. Now that we have deleveraged our balance sheet, and we are generating free cash flow, our focus will be on continuing to deliver double-digit revenue and adjusted EBITDA growth. As you read in this morning's press release, we are raising revenue guidance to a range of $2.595 billion to $2.605 billion, and our adjusted EBITDA guidance to a range of $658 million to $662 million. We are now looking forward to take your questions.

Thank you. Now, we conduct our question-and-answer session. Instructions will be provided. Our first question is coming from Brian Nagel from Oppenheimer. Your line is now live.

I have two questions. I guess, one bigger picture, maybe one smaller bit put them together. But first off, along on the bigger picture side, so of all the work on the balance sheet, your debt ratio is now at or below the targets you articulated previously. How should we be thinking about, sort of say, the growth profile of Life Time going through there, particularly as we start looking towards 2025 and new openings? And then the second question I have this is just shorter term, just with respect to guidance, once again, maybe beat the street estimates and we lifted guidance for the year. You don't give quarterly guidance now, but I guess the question I'm asking is, are you actually with this guidance increase lifting your own internal targets for the fourth quarter as well?

Okay, let me start with your first question. Our targeted EBITDA is a debt to EBITDA range of $1.75 billion to $2.25 billion, which I believe is appropriate for our company, especially given that we have over $3 billion to $3.5 billion in market value of real estate. Without that, I would prefer our debt-to-EBITDA to be around 1 to 1.25 to 1.5. The Life Time brand is exceptional and provides significant returns. Our perspective is that our balance sheet needs to reflect that. Thanks to our partners and team, we have been focused on achieving our desired leverage. Additionally, being a cash flow positive company after growth capital investments allows us to have control over our future. We have indicated that it costs approximately $25 million to $30 million net out of our pocket per location, which we envision as a large-format equivalent per 100,000 square feet. Currently, we are pursuing about 100 deals. The pipeline looks promising for 2025 and even stronger for 2026 and 2027. We will manage our growth to ensure we continue delivering excellent results while maintaining our brand reputation and generating an additional $50 million to $100 million in free cash flow annually. The remaining capital is intended for company growth. We will have substantial free cash flow after interest expenses, which will be significantly lower now due to our recent achievements, for 2025 compared to 2024 and 2023. After covering interest and maintenance and modernization capital expenditures, we will have extra capital to initiate projects, accelerate growth, and still keep positive free cash flow. Regarding your second question, we have consistently provided guidance with figures that we believe are achievable. We aim to account for any potential macroeconomic challenges conservatively and ensure that the numbers Erik and I present are ones we are very confident we can meet. This does not mean that this is the maximum we can achieve; it simply represents a commitment not to fall below that level.

Yes, just to add to that, the guidance, we increased it because we're obviously seeing still very positive trends in the business. And so, the implied guidance for Q4 on a revenue basis is about 15% year-over-year growth and about 16% on adjusted EBITDA. And then for the second half, it's 17% on the revenue side and 21% on adjusted EBITDA. So still a very great momentum in the business that we're seeing.

Our next question is coming from John Heinbockel from Guggenheim Securities. Your line is now open.

Bahram, I want to start with the 100-plus deals in the pipeline. How would you segregate those out, the ground-ups, right, maybe take club takeovers, your various channels, right? Residential buildings, how would you segregate that out? And then I know you talked about the 10 to 12 LOEs. What do you think is the organization's capacity can you eventually do more, if you look out a couple of years, do more than the 10 to 12? Or you would prefer to limit it to that?

No. As it appears right now, next year could see 10 to 12 locations; for 2025 and 2026, we're likely looking at 12 to 14 already, and I believe that number can increase. We have a pipeline and are actively pursuing deals. Some projects take longer to come to fruition than others. Ground-up developments naturally require more time to assemble, particularly those involving high-rise residential buildings. We are actively working on deals that have been in the pipeline for quite some time. What I can share is that we're not just building smaller spaces; we are focusing on areas ranging from 40,000 to 140,000 square feet across various real estate opportunities. Each deal has its own timing that works for both the developer and us, making the rollout uneven. Next year may include more club takeovers and transformations, while the following year will likely see a significant increase in ground-up projects. I suggest everyone consider a blended approach moving forward. Looking three to four years ahead, based on our ongoing discussions and the strong performance of the Life Time living facilities for owners, we are achieving about 15% to 20% higher rent consistently. Furthermore, retention rates are unprecedented at about 20%, compared to as high as 40% in other apartment complexes. Our ramp-up periods are also quicker. With five, six, or seven of these locations already operational, we have solid data to back this up. As I consider the next four to five years, I anticipate many more of these developments coming online. However, for now, I would suggest that we look at a three-year plan for 30 to 40 locations, with roughly half being ground-up projects.

As a follow-up to that, the incentive revenue spend per month per member is around $75. In theory, it could be higher if members engage with all your offerings. However, there has been a reluctance to aggressively market that. How do you envision increasing that wallet share in the coming years? Are there any strategies you plan to implement to speed up that process, or do you think it will grow organically?

Yes, we have identified several categories for improvement. My team has effectively enhanced our dynamic personal training (DPT), which has shown great growth. However, there is a disparity among clubs, with some achieving $5 million annually in DPT while others, of similar size, only reach $2 million. We regularly assess the top and bottom performers in various categories such as Café, Spa, PT, and Kids. As we achieve success in some areas, we allocate more resources to explore opportunities in others. There is still significant potential for better execution across the board. Some clubs excel in personal training, food, or spa services while others lag behind. Overall, we have room to improve in food and beverage, spa services, and personal training. Kids programming is another important area, but we are performing well there. Regarding MIORA, which I previously advised against overhyping, we have focused on delivering an outstanding customer journey, and we are making strides. Our goal is to establish a profitable business model, and we are currently experiencing rapid revenue growth, sometimes doubling week over week and month over month. By the end of this year, we aim to have a perfected model, allowing us to roll out MIORA in 40 to 50 locations across the country, ideally a few in each market. We already possess the necessary intellectual property, leadership, space, existing customers, and demand. We are also on the verge of launching Life Time Health (LTH), our brand for supplements and nutritional products, expecting significant year-over-year growth starting in 2025. Our digital subscription service is gaining about 100,000 subscribers per month, surpassing 1 million subscribers, which will enhance our partnerships and boost revenue opportunities for LTH products, as well as our apparel partnerships. As we expand our footprint and strengthen our brand, we will continue to explore avenues to increase our revenue and EBITDA using an asset-light approach. We anticipate delivering a modest low double-digit revenue and EBITDA increase of 10% to 12% annually, which is a respectable target. However, we will not commit to more than that, as we aim to avoid disappointing our investors by overpromising and underdelivering.

Your next question is coming from Megan Alexander from Morgan Stanley. Your line is now open.

Wanted to just maybe touch on the change in the leverage target around 2x. You're talking about at that midpoint versus the 2.5-ish prior. Can you just talk about the thinking around that a bit for us?

No, I think you might have misunderstood. Our target is to reach the low end of under three, which is a crucial point for many investors. However, some large investors have indicated that they are not interested until it is below 2.5 times. We believe the Company holds a strong BB credit rating. Despite Moody's or S&P possibly delaying their corporate rating for another quarter or two, investors have recognized our rate that aligns with a strong BB. We are very grateful for our achievements this past week. The benchmark that I believe establishes a strong BB rating is to be below 2 times debt to EBITDA. If you lack sufficient real estate assets, I find comfort in our ability to entirely retire our debt through a $1.5 billion sale-leaseback. This allows me to set a target between 1.75 and 2.25. Our current estimate is that we will be under 2.25 by the end of the year, which will allow us to take another step down on our revolver. We aim to maintain both an excellent brand and balance sheet to secure the lowest cost of capital. However, this does not limit our growth opportunities; we can expand within that framework as long as we see viable growth chances.

That's really helpful. Makes a lot of sense. And maybe just a follow-up on that. I think you said you could do as much as $1.5 billion of sale leasebacks. Obviously, the sale leaseback proceeds have come in better this year than what you were talking about to start the year. Is that still mostly opportunistic? Are you starting to see cap rates that are closer to what you'd like to see? And how are you thinking about kind of the market for sale leasebacks as we head into 2025?

Yes. Fantastic question, Megan. So, it's going to be incredibly robust. We are already getting inbound sort of conversations from our partners that they like to have a couple of hundred million dollars, $100 million worth of sale leaseback that if we can provide the assets. So, let's think about it this way. If we were to build 10 ground-up facilities that could take as much as $600 million of capital, all in. What we keep telling everybody, and we keep reiterating is $25 million to $30 million. So, if you take that number, take even the $30 million off of it on 10 of those, that's $300 million, $350 million. The other portion of it is recycling clubs that we have already built, if you know what I'm saying to you. So, we have right now at least half a dozen clubs we built just in the last year or two paid for all of the ground-up very, very amazing assets, large format, super large. We still own all the real estate. We haven't taken those to sell these back. So, when the incoming offers are attractive. And I think by the middle of next year, we will see sell leasebacks based on our credit more favorable than the best sale leasebacks we've ever done. And I expect us to do about $250 million to $300 million worth of sale leaseback on an annual basis. Take that money and recycle it so that the net invested capital in each new ground-up is no more than $25 million, $30 million. Does that make sense?

Next question is coming from Chris Woronka from Deutsche Bank. Your line is now live.

So Bahram, when you discuss the various club takeovers or conversion opportunities that are different from the new builds, when you examine those existing assets, you're clearly targeting a return on invested capital and some form of free cash flow yield in the end. Do you believe you'll find more potential for revenue growth in existing centers or takeovers? Is there a greater chance to enhance, whether it's through rent or improved operating models for existing clubs? How should we think about the opportunities that matter most to you?

Not at all. I'll provide two examples. One club has recently opened in Tampa, and last year, we took over two clubs, one in Tampa and one in Detroit. The Tampa club opened this year, in August, and the Atlanta facility is set to open in November. Both deals are excellent; they start as leases with landlords contributing additional tenant improvement dollars. When we take over an existing club, it often resembles a new build because we already have the necessary zoning and location approval for a club business. This simplifies some challenges, but we entirely redesign the space from the beginning. Sometimes we receive a piece of land or a shell, and since it's already zoned for such use, the process, instead of taking years, can be completed in about a year to 18 months. We expect these projects to deliver similar returns to our other ventures. Our business plan focuses on maintaining consistent returns, generally in the range of 30% to 40% IRR on a net invested capital basis. We look at these projects systematically. Additionally, there are strategic takeovers where we might target assets for initiatives like Tennis or Pickleball, which complement our plans. To simplify our guidance for you regarding the $25 million to $30 million net invested capital per large format equivalent, we aim to provide a schedule for openings based on how many hundreds of thousands of square feet we anticipate per quarter. This approach will help avoid complications in predicting future openings and make it easier for you to create models.

Okay. That's super helpful. And yes, we'd certainly appreciate any color on that. I have a quick follow-up, if I could. And that just on the LTH, the brand, branded things you'll be doing. Is there any way to put together a framework now for how big that opportunity is? And how do you measure it? Is it going to be based on per revenue you ultimately generate per digital member plus in-center member? Or how are you going to know that you've reached the full potential whenever you do?

Yes, I recommend looking at companies like Thorn. Examine the top high-quality brands, and I want to highlight Thorn as I personally use many of their products alongside my own. There are other excellent brands to consider as well, particularly those known for high-quality production, which is quite rare. It's difficult to trust nutritional products since they are not regulated as drugs are, and that's why I take around 80 supplement pills each day. I won’t consume anything that hasn’t been tested for its contents. For over 20 years, we've maintained the discipline to create the best products. Initially, we lacked the scale to truly invest in this area, but with the Life Time subscription growing by 100,000 subscribers each month, along with the expansion of our athletic events and partnerships, our brand is generating approximately 130 to 140 billion impressions and continues to grow. Now is the right moment to build a business that could potentially reach a $500 billion supplement market in five to ten years. No one is better positioned than Life Time to succeed in this space. My long-term vision is that if we don’t establish a $500 million business from this, I won’t consider my vision achieved. This is not solely about profit; we can make a substantial positive impact on society, as there are few supplement lines that are rigorously tested in labs, and often the actual contents don’t match what is advertised.

Our next question today is coming from Michael Hirsch from Wells Fargo. Your line is now live.

At your Investor Day, you announced your long-term target of 4% to 5% growth from fully ramped centers. 2024 exceeded that. So, I'm just wondering how should we think about this for 2025?

So, Michael, this is Bahram. I'm going to start taking those 40 pills with my shake and give a chance to Erik to give you some good state. Erik, come on.

Yes, we're still benefiting a little bit this year from some of the pricing, but the 4% to 5% is still what we're modeling long term. So, for next year and going forward, that's going to begin to normalize into that 4.5% range.

Okay. And then as my follow-up, I know you mentioned 10 to 12 openings for 2025. You had opened two new centers during the third quarter. and then the Atlanta location in November. So, I'm just wondering, was there anything specific in 2024 that led to around seven new openings versus the 10 to 12 targets?

We've experienced some project delays, but it's important to view this as a multiyear process rather than just focusing on the year-by-year changes. Right now, it looks like by 2026 we will have compensated for everything in 2024 and more, with significant club openings. Although there are delays in the schedule, we are still making progress and we're optimistic about securing additional deals. It's not finalized yet, but we're exploring potential growth for 2025. We have been very careful to meet the financial commitments we've made to you regarding both revenue and profits, while also allowing for the flexibility needed in our execution. We have strong momentum in our core business, enabling us to manage these slower openings effectively to seize in-center opportunities and overall portfolio growth. By the time we reach a growth rate of 4% or 5%, we will need to have a solid plan for new club openings and additional growth initiatives, like MIORA or our LTH partnership, to maintain our goal of double-digit growth. But we will find a way to deliver what we've committed to you.

Next question is coming from Alex Perry from Bank of America. Your line is now live.

I just wanted to go back to the guidance raise a bit. What gives you confidence to lift the guide and maybe sort of dissect the pieces for us? Is it you're seeing less membership churn than you would normally seasonally see? Are you baking in higher expectations for pricing, which continues to be a tailwind for you? Just maybe go through some of the pieces that led to the raise.

Yes. This is Erik. So, a couple of things here. We're still seeing really great flow-through from our membership dues. So that's one big piece. In retention, as you mentioned, continues to be very strong. You also probably saw in our release, our same-store sales was north of 12%. And another big driver of that, and Bahram talked about it earlier, was our DPT. So, we continue to see very strong demand in DPT, which is a big driver of that. So, all of those things are, again, as we've talked about, just the consumer, continuing to show strong demand gives us absolute confidence in being able to raise that guidance.

Alex, I want to provide more detail. We have consistently communicated that our customer retention is at an all-time high. When I say customers love Life Time, I truly mean it. We are seeing the best retention in the company's 34 to 35 years of history, and it seems like it could improve even further by 2025. For now, I can share that we expect to finish the year with retention above 70%. For anyone familiar with this business, retention is the most critical metric, similar to our partner business, which is strong as well. The brand is connecting well with customers, creating more opportunities for us to develop additional products. Ultimately, retention is key, leading to strong membership dues, and when dues are solid, everything else naturally follows.

Perfect. And then just on pricing, are you expecting the same level of year-over-year price lift as we move into the fourth quarter? And then as you think about your pricing structure for next year, as we move into 2025, will you likely reset prices even higher to start the year given the membership demand you're seeing?

I believe we have successfully repositioned the Company to our desired state. We aim to be the ultimate athletic country club destination. It's not just a gym; it serves as a secondary or even tertiary place for our customers. On average, they are utilizing the facilities nearly every other day, which contributes to our strong retention due to this unprecedented level of engagement. We are actively exploring ways to enhance desirability across all facets of our business. This strategic work involves collaboration among myself, Parham, the President of Club Operations, Real Estate, and our entire team of regional vice presidents and lead directors. The demand we are creating provides us with pricing power. However, how we adjust pricing depends greatly on each club's daily visits. For instance, clubs averaging 3,000 visits each day are already busy, so we are cautious about adding more visits. We are now considering increasing the enrollment fees at new locations from approximately $300 to $1,000 or even $500 to manage the clubs effectively. For larger clubs, those with 55,000 or even 60,000 swipes a month, there's potential to add more memberships. It’s important to remember that we’re not rushing to push these clubs to 70,000 or 80,000 visitors. Currently, we see opportunities in some locations and have recently adjusted the rack rates. These changes are not merely to raise prices but are about enhancing the club experience and ensuring the right customer mix. Importantly, the gap between the rack rate and what customers actually pay provides insight into customer acceptance. Once the rack rate is established over a month or two, it becomes clear that some customers may find it unacceptable. The difference between what customers are paying and the rack rate creates a financial buffer for us. This $17 million to $19 million difference offers flexibility to either attract new members or implement modest price increases for existing members who currently pay below the rack rate. These members are generally content because they remain below the rack rate and appreciate their loyalty to the Company. This approach benefits everyone involved, including our investors, maintaining steady same-store metrics even when other retailers face challenges.

Next question is coming from Alex Fuhrman from Craig-Hallum. Your line is now live.

Great. Bahram, you alluded to this in what you were just saying, but it looks like over the past couple of months, just in September and October, you've taken up the new member price at a pretty meaningful number of your clubs here. Does that mean we should expect to see you starting to kind of reach out to new members over the next couple of months in those clubs now that the gap between what they're paying and the rack rate is expanding?

It's a good question. No, it's not just those clubs. We typically review this around seven or eight times a year, skipping about three to four months. There are around 30,000 to 50,000 members affected, and the AI suggests who will receive the dues increase letter. Our approach involves systematic categories, meaning it's not limited to all members of a few clubs but spans the entire membership base. For example, about 500,000 people might be on the low rack rate, possibly even 600,000. The system sorts through those members, identifying individuals who signed up six months ago and are paying below the rack rate; they will not see a dues increase right now. Generally, we only implement dues increases once a year. We've developed a very sophisticated AI algorithm over the last seven to eight years, which has improved significantly. This year, I've seen its best performance compared to last year; when those letters go out, we hardly experience any additional attrition.

Next question is coming from Owen Rickert from Rockland Capital Markets. Your line is now live.

Congrats again on another phenomenal quarter. And it sounds like the vast majority of clubs are very high performing. But as we take a look at some of the clubs in the portfolio that may be not as high performing, what's the goal of these? Is it renovation of the club, getting new equipment, providing more offerings? I guess just all in all, how do you look at these locations? And what is the plan going forward with these ones?

We are currently implementing a comprehensive business plan for every location of the Company. Each site has a specific vision and identified opportunities, along with areas for enhancement. We are evaluating whether changes in programming, facilities, or leadership are necessary. This process is thorough and analytical and results in a detailed business plan for each location, helping us understand the ultimate opportunities available at this time. We will execute these strategies appropriately. While I can't provide specific answers right now, I can assure you that we have a strong strategy evaluation process in place, which we systematically execute.

Next question is coming from Logan Reich from RBC Capital Markets. Your line is now live.

I just had one on the incremental flow-through, maybe this one is for Erik. Just on the marginal flow-through of revenue to EBITDA, it looks like it's been running around 30% to 35% over the past several quarters. And obviously, I know you guys aren't sort of guiding us towards margin expansion. But just given the incremental flow-through over the past several quarters, I guess, I'm sort of curious what would be the puts and takes potentially driving that incremental flow-through down such that margins would be in the similar range? It looks as though you guys would get some fixed cost leverage. But obviously, there's some puts and takes in there. So maybe you could just walk us through those?

Yes. I mean one of the things that we've really said is we want to make sure that we're leaving ourselves enough room to kind of reinvest back into the centers as we need to. So, as we look into Q4 and forward, we're doing things to make sure that we're making those clubs like and making sure that all the repairs and maintenance and all that, keeping it in that like new condition. So, that's going to be one of the things that we're investing in. But again, on the flow-through, we're continuing to see it on the dues side, as we mentioned before, Bahram talked about retention. So, we get a lot of flow through from that. And so that's one of the main drivers. And then as I mentioned on the DPT side, that's also been very, very strong for us, especially in the third quarter.

The caution we want to convey is that we guided you to an EBITDA margin of 23.5% to 24.5% from the start of the year. Some of you have asked why we can't achieve more. You are all insightful individuals; you analyze the numbers. We didn't say we can't do more; we simply prefer that you don’t adjust your models and continuously raise expectations. There's no need for that because my primary goal, as the visionary founder of the company, is to ensure the brand continues to improve, not regress. As Erik mentioned, we aim to provide guidance that won't lead to disappointment. I would advise you not to set expectations significantly above a 25% EBITDA margin. We want to invest in our brands, our programming, and our facilities to ensure that the clubs are modernized and feel new. Our team members need to receive appropriate training and incentives. If we exceed those expectations, we can consider that, but it is prudent to maintain the margin range we have provided. I am unsure how many companies actually achieve a 25% EBITDA margin; it seems like a standard that isn’t easily attainable. If you keep raising expectations higher and higher, ultimately the company may resort to unsound practices to meet those unrealistic goals. So, I strongly advise all of you to keep that 25% margin in mind and not to get overly enthusiastic as we expand. Some of the more challenging areas, like the Spa and Cafe, may actually drag margins down. The overall club will likely generate more revenue, but the margin will be squeezed since these sectors are unlikely to deliver a 25% EBITDA margin. However, increased engagement in the Cafe and Spa is beneficial because it leads to more membership dues, which is positive. On the downside, the margins for those businesses are quite low.

We reached the end of our question-and-answer session. I'd like to turn the floor back over to Founder and CEO, Bahram Akradi for closing remarks. Please go ahead.

Thank you so much. I really appreciate all of you, analysts, and investors. We are really, really happy about the accomplishments this year. We feel like we're in a really, really great position to go into the fourth quarter into next year. And looking forward to continue to deliver what we promised to you. And I couldn't be more grateful to the Life Time team for literally just passionately delivering and giving the results that you guys are seeing. So, with that, I'm going to thank you guys, and have a great day.

Thank you. That does conclude today's teleconference. You may disconnect your lines at this time, and have a wonderful day. We thank you for your participation today.