Greetings. Welcome to the Life Time Group Holdings Inc. Third Quarter 2025 Earnings Conference Call. Please note, this conference is being recorded. At this time, I'll turn the conference over to Connor Wienberg, Vice President of Capital Markets and Investor Relations. Thank you, Connor. You may now begin your presentation.

Good morning, and thank you for joining us for the third quarter 2025 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, we 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, 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 and earnings supplement 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, Connor, and good morning, everyone. Starting with our third quarter results. Total revenue increased 12.9% to $783 million. Average monthly dues grew 10.0% year-over-year to $218. Comparable center revenue grew 10.6%. We are proud of the sustained growth in our comparable center revenue, driven by continued strong performance in both dues and our in-center businesses. Particularly in our dynamic personal training. As a result, we have raised our full year comparable center revenue guidance to be between 10.8% and 11.0%. We ended the quarter with nearly 841,000 center memberships, including on-hold memberships, total memberships reached approximately 891,000, in line with our expectations. Net income for the quarter was $102 million, an increase of 147% and includes an approximately $5.7 million tax-effected gain on sale leasebacks. This compares to a $3.5 million tax affected loss in the prior year quarter. This quarter's net income also benefited from $16.2 million in tax-adjusted proceeds from employee retention credits received under the CARES Act. Adjusted net income, which excludes the impacts of gain and losses on sale-leasebacks, share-based compensation, ERC credits and other nonrecurring items was $93 million, up 65.2% year-over-year. Adjusted EBITDA was $220 million, an increase of 22%, and our adjusted EBITDA margin improved by 210 basis points to 28.1%. Net cash provided by operating activities rose approximately 66% to $251 million compared to the prior year quarter. Our consistently strong cash flow from operating activities remains a key driver of our long-term growth strategy. Free cash flow was $63 million for the third quarter. In Q3, we closed on the sale-leaseback of one property, generating net proceeds of approximately $34 million. We expect to complete between $55 million and $65 million of additional sale-leaseback transactions before the end of this year. We delivered another strong quarter and remain encouraged by our continued momentum as we approach the close of a successful year. We look forward to giving everyone a preview of our full year 2025 performance in our initial thoughts on 2026 in the second half of January. With that, I will now pass the call over to Bahram.

Thank you, Erik. We are pleased with another quarter of strong performance and growth. Thank you, as always, to our 43,000 team members. The core of our success has been our team members and our consistent delivery of the best places, programs and performance to our members. Our growth strategy is clear: first, accelerating new club growth; second, maintaining our maniacal focus on member experiences, growing member engagement and revenue per center membership. With the balance sheet strong and our net leverage ratio below 2x we remain well positioned for our accelerated development and construction of new clubs. We expect to deliver 12 to 14 new clubs in 2026 and beyond. This is our new baseline of new club growth. We're particularly excited for next year's new club openings. 11 of the 2026 clubs are large format. 13 clubs scheduled to open in 2026 are currently under construction, which provides great visibility for these openings. For more details on these locations, you can refer to the earnings supplement posted to our website this morning. As it relates to the second part of our strategy, which is growing membership engagement and revenue per center membership. Membership optimization is increasingly important as clubs are busier than ever. As highlighted in our earnings supplement, this includes, one, improving the mix with more couples and families and two, limiting qualified memberships in certain clubs. Our strategy is working, as evidenced by average monthly visits per membership reached 12.5% for the quarter, up 5.9% year-over-year. Total visits are up 7% year-over-year for the quarter, revenue per center membership is up 11.3% year-over-year for the quarter, and in-center business revenue was up 14.4% year-over-year for the quarter with particularly strong growth in dynamic personal training. Our strong performance and increases to our year-end revenue, net income, and adjusted EBITDA guidance are direct results of our focused strategy on growing revenue and adjusted EBITDA by delivering the best programs and experiences in every club and optimizing memberships. Given the high club utilization, we expect to further manage our membership mix to continue increasing revenue per center membership and anticipate an additional seasonal decline in membership units in the fourth quarter. Finally, a couple of updates on our growth accelerators. We now have 2.75 million non-club members, LT Digital accounts and expect to cross 3 million by early 2026. More importantly, we are very excited to release new features and capabilities offered by L•AI•C, our AI health companion for both our club members and our nonmember digital subscribers by the end of this year. Our trusted nutritional brand, LTH, continues to grow year-over-year, and we are expanding our product lines, and we expect to add 4 to 5 new MIORA locations in various clubs by early 2026 as we continue to see progress in our first 2 locations. With that, we will now open the call for questions.

Our first question comes from John Heinbockel with Guggenheim Partners.

Bahram, I want to start by discussing the in-center revenue opportunity. Considering that the spending remains a small fraction of your customers' total spending, where do you see the most significant opportunities? Additionally, regarding the penetration of dynamic personal training, what potential for growth do you foresee from its current level?

John, our personal training program is absolutely doing an amazing job under the positioning, branding, dynamic personal training, the particular execution of the team all the way from the corporate office under the leadership of Ryan, and then everybody who works with him, as well as the focus in the clubs from our RVPs and lead generals, all the way to the PTLs. We are executing a detailed plan, and the results are incredible. There are many clubs that are setting new records month after month. And then there are other clubs that are basically seeing what's possible and executing. So I think that possibility is right there, and we are very, very pleased with what they are doing, and my hats off to all of them, but there's still opportunity there. As we have mentioned on the other in-centers, there are our cafes and our spas and both of them showing some strength in the execution of certain strategies, but look, when we rolled out dynamic personal training, dynamic stretch and all the different new concepts and ideas, they actually took roughly about 6 to 12 months before you start seeing the momentum change. So we expect to see this momentum change early next year on the cafes and spas. So I feel like we have plenty of room there. As I mentioned in my remarks, we've been working diligently on MIORA and LCH, both of which are in the early stages of testing and development, introducing new products, seeing how people like it. And then we're going to really put pressure on growth and marketing of those in 2026 and beyond. So we feel really, really good about all aspects of the business, John.

As a follow-up, now that you're gaining significant momentum with club openings, how do you prioritize different channels beyond 2026, such as ground-up developments and club takeovers? Do you have a numerical target in mind that you prefer not to exceed to maintain a healthy level of execution?

Yes, I believe the new baseline is currently 12 to 14 clubs. The pipeline is very strong, and the real estate team is doing an excellent job. I am really excited about what we have in the pipeline. We are providing additional material online for you to get more visibility on club openings and their sources. We will have a range of facilities. Our urban clubs are performing exceptionally well, especially those we opened in Brooklyn, New York, and our suburban clubs are thriving as well. These clubs are rapidly increasing memberships, aligning perfectly with our preferred positioning for the company. We faced balance sheet constraints last year and in the first half of this year because we wanted to meet our BB credit standards, which we have successfully achieved. Our target for the debt-to-EBITDA ratio has always been under 2x, and now we have a significant opportunity to expand the business. We can explore various options for financing through the sale-leaseback market at the right time. We have a lot of flexibility to grow the business, and I am very excited about that.

The next question is from the line of Arpine Kocharyan with UBS.

You raised the comparable center revenue guidance and what that implies for Q4 is actually nicely ahead of expectations. But there is this near-term debate among investors about the average number per center growth and how that ties to your revenue, same-store growth trajectory. Essentially, we're going back to the question of price and ability to take price as investors are increasingly more worried about macro. Is there any way you could give an update on your current thinking on how you maximize revenue without leaning too much on per center membership, which I think you're sort of trying to control more? And then I have a quick follow-up.

Right. Let me take a little bit of that and give it back to Erik, so both of us speak to that. The focus of the company has been on brand and member experience, delivering a brand that is unmatched, delivering a brand that the customer wants to be a part of and does not want to get away from it. When we went public a second time, our materials suggested repeatedly, we're focused on memberships from 90 days old to 90 years old and basically trying to provide incredible programming for all of these people. When we came right out of COVID, clubs were at about 40%, all clubs were at 40%, 50%, 45% of the membership capacity of the clubs. So we basically took in through all the programs, all the different types of memberships that we bring in to have enough traffic in the club, enough swipes in the club to make sure you run the programs. As the clubs have reached this optimum level of utilization, many of the clubs are operating at very, very high occupancy. Parking lots are full. Clubs are busy. So now in all of these clubs, the opportunity is in membership optimization, which basically means you manage to get more revenue per membership. Sometimes that means you focus on getting full-blown members, family memberships, which have very, very high average dues, and you select to restrict the number of memberships you get from third-party kind of discounted programs. So we are constantly going to manage the total experience of the customer. We're constantly going to manage the brand, we're constantly going to manage the growth of revenue and EBITDA. And that is really what the company is focused on. It's a little less focused on center membership units, because that is going to fluctuate with depending on club-by-club based on the position that club is at.

Yes. And just to add to that, Bahram talked about mix and he talked about engagement. If you see in the supplement that we provided, you can see there is that shift happening where we're getting more couples and families. And so that with the increased utilization is requiring fewer memberships for those clubs to reach the desired utilization. In fact, if you look forward to next year's pipeline and the year after, those clubs are actually getting business planned with units somewhere in the range of 3,500 to 4,000. And so again, it's just a testament to the utilization and that improving mix requiring that smaller base.

Yes. Many of the new locations are basically positioned in a way that they're ramping so fast with just the full price paying types of memberships that we basically do not open it up for restricted memberships or third-party paid memberships. So what I want to tell you guys is that we are going to continue to emphasize revenue growth and EBITDA growth in every single club.

Yes. And one last comment on that. As we hit those targets, we're still papering those things to do plus 30% cash-on-cash return. So the unit economics are still extremely attractive and in some markets can be better. So I just wanted to call out that that's all part of our growth algorithm.

That is very, very helpful. Just a quick follow-up. You mentioned all centers you're targeting to open next year are mostly under construction currently. Whether you're at the lower end versus the high end of that range, what is that a function? Is it just sort of construction timelines making it to next year or kind of more tied to sale-leaseback cadence that you're looking at for next year?

Yes. We're pretty comfortable that 13 of the 14 are for sure. And one club may end up a month earlier or a month later. And we're just making sure that what we're telling you is accurate. But the goal has been 12 to 14 clubs. And again, as I mentioned, 13 of them are pretty firmly in the pipeline, there is going to take some monumental event for them not to come out during the year.

Next question is from the line of Brian Nagel with Oppenheimer Company.

Great quarter. Congratulations. For my first question, just stepping back, obviously, we're seeing the numbers today, and your commentary is extraordinarily positive. But just given the concerns out there amongst investors about consumer dislocations. So the question I want to ask, as you look at your business, are you seeing anything, anything geographically, income cohort that would suggest some type of weakness or growing weakness in your consumer base?

Look, as you can appreciate, what I am proud of with our team. And again, this is really all about our team from the very top-level executive team all the way to the people who run the clubs, it's just an incredible passionate commitment to delivering a place that people want to go to and enjoy. As we look at the company's history over 35 years, we have opened clubs in a variety of markets. And right now, we are largely opening in more affluent markets. When the memberships were $39, $49, $59 a month, there were markets that were well suited for that. And they're not really well suited for $290 to $350 a month memberships. So the interesting thing, Brian, is that all the clubs are making money. All of our mature clubs collectively are making more money than they were making in the past. So all the execution that we have put in place is working. The consumer that goes to Life Time chooses Life Time because of all of its differentiation, and that exists in Omaha, Algonquin, Chicago suburb. It does also in New York, Florida, and California. But do we manage all of these the same? We have the same strategy to be the best provider, but they take different types of programming and techniques to try to continue to manage each and every one of those locations. And so we are not seeing any new trends. We're not seeing anything different than the past in terms of how the customer is responding to what we are delivering right now. We keep thinking that, that might change, and we keep hedging and embracing what if times get tougher, so we have strategies laid out, but we're not seeing anything at this point. Erik?

Yes. No, I would reiterate that. I mean we've talked about dynamic personal training, new business revenue in September was the highest for that quarter. Same thing in our spas, revenue per technician was up, and our group fitness classes on average were up 7.6%. So by all indications, we're seeing exactly what Bahram was talking about.

That's very helpful. I appreciate all the detail on that. My second question, just with respect to capital allocation. So it's great to see now you were ramping new center growth. You talked about the 12 to 14 for '26 and most of those now are under construction. So the question I have is, to what extent, especially with at least some ideas, the stock are underperforming, languishing relative to some very strong fundamentals. To what extent are you thinking about potentially using capital to buy back stock here?

Yes. So I'm going to respond to that. Our #1 objective here is to remain extremely strong on the balance sheet so the company has all kinds of options in any kind of environment. When the environment gets tough, we want to be in a win position. In a stronger environment, we want to be in a win position. And based on where we are today, we are still adding even if we do $350 million, $400 million of sale-leaseback next year. We're still adding net asset value. We're still building more new assets, new club development, more money spent than that, than we are taking to sale-leaseback. So basically, the company continues to get stronger. So at some point, this is a Board discussion to decide, should we be buying some stock back. That's definitely on the table for discussion at the Board level. No decision has been made at this moment. But all options are on the table. The company is super strong. And that's exactly where we like it. We like to have this opportunity to basically go one way or the other if we need to. The main focus right now is to step on growth and make sure we have the ability to keep delivering these clubs. As I mentioned, 11 of these 14 clubs are ground ups. So they're taking a substantial amount of capital to build them. We're going to continue to invest in our programming and modernizing the clubs to make sure all clubs are adapted to all things people are looking for in total health and wellness today. So we just like the flexibility, but every option is on the table.

Our next question comes from the line of John Baumgartner with Mizuho Securities.

Thanks for the question. First off, Bahram, I'd like to ask about relative value. As you see it, because fitness industry dues are moving higher across multiple concepts for the first time in years. And I'd imagine that some of these concepts, the boutiques, the studios, their prices are increasing, but the offerings aren't really evolving much to match that. So I'm curious, are you seeing anecdotally anything that's pushing some folks or stimulating more interest from folks to trade up or into Life Time because of that value gap? I realize the number of members isn't necessarily your main KPI focused. But have you seen tipping points historically in that relative value versus other concepts where you capture more market share that sort of high-quality engaged consumer that you prioritize?

Yes. We're totally seeing that happening in our clubs. I mean, when you look at our urban markets where there are many studio offerings, we're really not seeing any impact. Nobody is leaving a Life Time to go to studios. But on the reverse, we do see the reverse of that taking place. Overall, despite transitioning the company to the super high end, which was part of our multifaceted strategy after COVID to completely reposition the company to the highest level and the best programs being delivered under one roof, everything is working. Really, the clubs are, as evidenced by the utilization of the clubs, having more utilization than they've ever before with sometimes literally 50% of membership count of what they used to be at 2019. And so the utilization is higher. The customers are using the clubs a lot more. They're seeing the value in the business, they appreciate the brand, and they see the differentiation, so the strategy is working. Life Time is working.

Yes, you pointed out relative value. We're noticing an increase in couples and families. Our pricing model still offers a significant value proposition when considering all the amenities included with a membership. When you compare that to a studio, just one or two studios can quickly exceed the cost of a couple of memberships. Therefore, the value proposition remains very strong, and that is what we are observing.

Great. And then my follow-up, back to LTH Nutrition, I think the strategy there is for more of a phased rollout. But I'm curious, Bahram, your perspective on the consumer reports investigation into the contaminants and supplements, especially the protein powders, does that lead you to revisit how you build this business? I mean, is there an opportunity to lean a bit harder, especially with non-Life Time households to leverage your third-party purity testing and kind of grow or market this business a bit more aggressively or differently?

It's a great question, and that’s exactly the strategy for 2026. We've been working on establishing the Life Time nutrition brand, which we didn't own until last year. We had the chance to buy the brand, which allowed us to align LTH with Life Time, something we hadn’t managed to do before. This is one of our strategic moves. The second part is to unify our product offerings. Our work with Life Time began by analyzing the nutritional space and recognizing that the lack of regulation has led to many products lacking proper manufacturing and third-party testing. This testing can be costly, resulting in many not pursuing it, leaving products with either ineffective ingredients or contamination. Our strategy has always been to be the best. If we can't be the best, we shouldn’t proceed. We invest significant effort in formulating our products correctly and conducting rigorous testing. For example, some vegetables can carry heavy metals that may enter protein powders. It's crucial to ensure minimal levels of these substances in our products, and we have top-notch cleaning processes to test them. To address your point, we need to streamline our offerings, making the packaging more consistent, which is currently in progress for this year and early next year. We're also evaluating product success. I can personally vouch for our Dream for sleep supplement—it's a significant success right out of the gate. We are methodically developing and testing our products, repackaging where necessary. Our strategy for 2026, as I mentioned, is to continue pushing forward and possibly invest more in marketing, although we're still a bit early in that process. Right now, we’re observing growth, as our team and our members are recognizing the quality of our products and the trustworthiness of our brand, and we want to ensure we thoroughly test these aspects, using Life Time as a trial before expanding further.

Our next question is from the line of Kate McShane with Goldman Sachs.

These questions kind of verge a little bit into 2026. So I'm not sure how much you can answer at this point, given that you're not giving guidance. But we wondered of the 13 clubs that you have under construction, we know there's a nice list of them in the presentation today. We just wondered what the breakdown was between new and existing markets. And if there was a little bit more in the new markets, what does it mean for marketing spend into 2026? And then just our other question unrelated was about expenses in general, what you're maybe seeing or expecting on the labor side of things as you go into '26 in newer markets?

It's great to hear those questions. Let me address the first one for you, Kate. When we build from the ground up in any market, whether it’s new or established, it doesn’t really matter. Considering Life Time's history of over 30 years and the loyal customers who appreciate our brand, if one of them relocates to San Diego where we currently don't have a presence, we still perform well when we open clubs in new markets, just as we do when opening another club in Dallas. I don’t see any difference at this moment. We're experiencing significant success in both new and established markets. Regarding wage growth expectations, I believe that as the cost of living rises, wage growth is inevitable. We are incorporating all these factors into our planning. While we won't provide guidance for the quarter or for 2026, our team—led by Erik, P.J., and our financial analysts—is diligently evaluating what costs may increase and how we can address these challenges, such as hedging against energy costs. The credit goes to our team for managing aspects like health care insurance so effectively. All the recognition should go to them for their exceptional performance across the business. It’s essential that as prices rise, like the cost of chicken and other inflationary pressures faced by consumers, our team members working in the clubs also receive pay increases to cover their living expenses. We have planned for that.

Yes. And I would just add to that, to your point, we'll give 2026 outlook here at the end of January. But as far as labor expenses in our centers, those have been trending roughly around the level of CPI 2.5%, 3%, and we wouldn't expect that to be any different. Bahram mentioned utilities, of course, utilities with energy demand, there's always going to be a potential for increase there. But we do a number of things to hedge and rate lock in a lot of our markets. So I would say we've managed exposure nicely there. And of course, R&M supplies, COGS, those things will always be subject to regular inflation. But for the most part, I think we've done a nice job of managing a lot of those risks.

And I want to add a comment. Look, I talk to investors all the time. Our environment is dynamic, our world is dynamic. Things change; sometimes they change slowly, sometimes they change rapidly, and you need to constantly be ready for adaptation. This team is doing an amazing job of thinking about adapting as necessary. We are very proud of what the team has been executing over the last several years. With that, we'll just deal with the future as it comes.

Next question is come from the line of Eric Des Lauriers with Craig-Hallum.

Congratulations on another impressive quarter. Can you elaborate more on dynamic personal training, which has certainly been a key factor in incentive growth for several quarters? What changes have been contributing to that growth? Additionally, how should we consider capacity regarding continued growth in dynamic personal training? Do personal trainers have the capacity to take on new clients, or are they mainly booked throughout the day? Please help us understand the capacity for ongoing growth in dynamic personal training.

That's a really, really complicated question. The response is not going to be something you like. There are some trainers who are booked solid. They don't have other hours to sell. So their opportunity is to adjust their price up a little higher and charge a little more, sometimes they do and sometimes because of their loyalty to their customer base, they don't. It's their call. Some trainers are new. They come in. We have a great opportunity right now with the Life Time brand, the dynamic personal training, the clubs to attract really solid people for that business. We have an incredibly robust program for them. The top performers get compensated extremely well and are taken care of really well, and we're continually adding to the number of productive trainers at a very good pace. Some clubs are doing dynamic personal training revenues that are record-breaking month after month. And some clubs have the opportunity to do significantly more than what they're doing based on their particular location and their membership base and dues base. So it's the management and it is not the simple answer for the whole company as a whole; it's club by club, location by location, trainer by trainer.

That's helpful. And it certainly sounds like there's room for this to continue to be a growth driver, though. I appreciate that it certainly varies center by center. Next question for me. Just on the decision to expand new locations. Can you just comment on what you're seeing from the few that you have opened now and just expand a bit more on that decision?

We established a target of 10 to 12 new club openings a year or two ago, while also considering opportunities to acquire clubs that could be effectively converted. This strategy was designed to balance club growth with maintaining a healthy balance sheet to achieve our credit goals. I'm proud to share that we reached our credit target a year earlier than anticipated, thanks to our team's successful execution. After achieving this, we shifted our focus to reviewing our pipeline to see what we could accelerate. Our balance sheet is now strong, and our top priority is growth. We have significant opportunities to enhance existing clubs and introduce new ones, particularly since some clubs have seen decreased utilization. As part of our growth plan, we are also enhancing our digital strategy to provide a better experience for members through AI, which will offer new features in late December, January, and February. This initiative aims to broaden the Life Time brand's reach, both to individuals near our clubs and beyond. We are also working on promoting our products, like Life Time's protein powder, with user-friendly options for sharing and purchasing. Additionally, our MIORA offering focused on longevity is progressing well, and we expect to open 4 to 5 more locations in different markets within the next 90 days, with plans for more aggressive expansion by the end of 2026. We will keep adapting our business to meet customer demands and position ourselves as a premium provider in the market, a strategy that has been effective so far.

Our next question is from the line of Owen Rickert with Northland Securities.

First, where do Life Time Living and Life Time Work fit into your roadmap going forward? And maybe how should investors think about their contribution to growth over the next several years?

That's a great question. Life Time Work has been functioning well at the unique locations we've established. Their performance is on par with our clubs and doesn't significantly impact our overall numbers. However, there is potential for growth, especially when they are positioned next to our clubs, as they tend to perform well and often have waitlists. Life Time Living shows even better performance; we have six or seven locations that have outpaced expectations, with faster ramp-ups, higher rates per square foot, and better retention compared to traditional apartments. This approach is innovative and benefits from significant visibility, with around 200 billion annual Life Time impressions. We are exploring options to provide capital expenditure that won’t strain Life Time’s balance sheet, allowing us to use those resources for our core business, which has a high internal rate of return post-sale and leaseback. Although our apartment business shows a 25% improvement over standard apartments, it still falls short of the returns from our club operations. Therefore, we are diligently working on a different funding vehicle that won't rely on Life Time's funds for development. We are collaborating with partners to brand their apartments as Life Time Living and have secured the necessary financing. The new location in Paradise Valley requires minimal investment from Life Time, with the majority of capital coming from external sources, and it will be positioned adjacent to our upcoming Paradise Valley club. It is part of our growth strategy to expand the Life Time Living, Life Time Work, and Life Time Club campuses, with a distinct capital structure separate from our club business.

Our next question is from the line of Molly Baum with Morgan Stanley.

I just wanted to ask 2 quick follow-ups on the new club openings for next year. So the first of which is, I know you highlighted that you're going to be opening larger clubs next year. Are there any important considerations that we should keep in mind from a margin standpoint or maybe from a new club ramp standpoint as we think about 2026 versus 2025?

Yes. I mean for those clubs, I mean, those are going to have margins that are going to be, I would say, relatively similar. We do expect those clubs with the larger square footage though, on a per average basis will have higher average revenue per club. So that would be one expectation to keep...

These are what you should look for. Higher average revenue, lower membership count, as Erik mentioned, our new business model for the new clubs, we don't need more than 3,500 to 4,000 memberships to achieve the best outcome, the best optimal returns. And then you should also expect that we are going to press you guys on not keep calling for more EBITDA margin. Last year, we started at 25%. We told you not to model beyond that. You asked, can you do better? We said, we didn't say we can't do better. But now we've got to consider that as we get into the next year, opening 13 or 14 new clubs, there will be a negative margin from those at the early stage of the opening. We feel really, really good about where the business is at, as strong as we've ever felt. I just want to make sure that we guide you guys correctly with all of that. But those clubs should do really, really well.

Yes. The average size is approximately 95,000 or 94,000 for next year. You can incorporate this into your models because in 2025, it was about 66,000. This is an important point to consider as you adjust your remodel.

Got it. And then just quickly on my follow-up. When you think about the balance of using sale-leasebacks for self-development for new club growth, how are you thinking about the implied interest rate on leases versus using that on the balance sheet? Is there an opportunity to improve your lease terms going forward? Or does it ever make sense for you to keep the stores on the balance sheet with your lower cost of debt?

Yes, it's a combination of factors. After the sale-leaseback, the internal rate of return on the capital still in the business is significantly improved. Additionally, we currently have a low financing charge, and I anticipate that our cap rates will decrease. We expect to move forward with sale-leasebacks that have more favorable cap rates as interest rates decline. Your question is insightful, and we will carefully evaluate these decisions in the future, weighing all aspects.

Yes. I mean the obvious objective there is the cheapest cost of capital, right, whether that's a sale-leaseback or debt.

Our final question is from the line of Chris Woronka with Deutsche Bank.

Thanks for fitting me in, and I appreciate all the details provided so far. I have one question for you, Bahram. As you continue to open new clubs, particularly new builds, and possibly some conversions, what do you consider in terms of design? I'm curious not just about efficiency but also what customers are looking for. Do these centers need more features like sport courts or additional training space? Is there any aspect of the design and construction process that will evolve over time, and what impact might that have?

Yes. Look, all large club formats from 30 years ago have been designed with maximum flexibility to offer the programming that is necessary for the time. We've done those transformations that you guys have seen. Nobody has a crystal ball to know what 10 years or 15 years from now will look like. Whenever we work on a design, I was working for hours last night on design with my team, you have to think about as much flexibility as you can. That's all you can do. You can basically plan for how things can change. What do you do with that space? And that's an ongoing work. It is not something for next year or for last year. That's been going on for 30 years and is going to go on for the next 30 years.

At this time, this concludes our question-and-answer session. I'd like to turn the floor back to Connor Wienberg for closing comments.

Yes. Thank you, everyone, and thank you for joining us this morning. We look forward to having you on the next call.

This will conclude today's conference. Thank you for your participation, ladies and gentlemen. You may have a wonderful day. Please, you may disconnect your lines at this time.