Earnings Call Transcript - LTH Q3 2023

Operator, Operator

Greetings. Welcome to the Life Time Group Holdings Third Quarter 2023 Earnings Conference Call. As a reminder, this conference is being recorded. At this time, I would like to hand the call over to Ken Cooper of Investor Relations. Thank you. You may begin.

Ken Cooper, Investor Relations

Good morning and thank you for joining us for the Life Time Third Quarter of 2023 Earnings Conference Call. With me today are Bahram Akradi, Founder, Chairman and CEO; and Bob Houghton, CFO. 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 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 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 our net debt leverage ratio and free cash flow. This information along with reconciliations to the most directly comparable GAAP measures are included 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. I'm now pleased to turn the call over to Bob Houghton. Bob?

Robert Houghton, CFO

Thank you, Ken, and good morning, everyone. I'll walk you through some of our third quarter key highlights and metrics. Our revenue increased 18% to $585 million. The revenue in the quarter would have been approximately $2 million higher, if not for the delay in opening our Tampa Harbour Island takeover location. Also, our third quarter results last year included approximately $3 million in revenue related to two non-profitable triathlons that we sold earlier this year. The combined impact of these two items is about $5 million of revenue. Our adjusted EBITDA increased 101% to $143 million in the quarter compared to $71 million in the prior year quarter. Adjusted EBITDA margin increased by 10.1 percentage points to 24.4% versus 14.3% in the third quarter of 2022. Year-to-date revenue increased 23% to $1.66 billion. Year-to-date adjusted EBITDA increased 128% to $399 million compared to $175 million in the prior year-to-date period. Center memberships ended the quarter at approximately 784,000, an increase of roughly 56,000 or 8% compared to the prior year quarter. Total subscriptions ended the quarter at approximately 830,000. Average center revenue per membership increased to $722, an increase of 9% from $660 in the prior year quarter. Adjusted net income was $26.7 million compared to an $11.5 million adjusted net loss in the prior year quarter. Year-to-date adjusted net income was $91 million compared to an adjusted net loss of $67 million in the prior year period. Adjusted diluted EPS was $0.13 compared to a loss of $0.06 per share in the prior year quarter. Year-to-date adjusted diluted EPS was $0.45 versus a loss of $0.35 per share in the prior year period. Importantly, our net cash provided by operating activities was $115 million compared to $45 million in the prior year quarter. And year-to-date, net cash provided by operating activities was $331 million compared to $125 million in the prior year-to-date period. We are very proud that we have been able to reduce our net debt to adjusted EBITDA to 3.7x by the end of the quarter compared to 4.2x at the end of Q2 2023 and 7.6x at the end of Q3 2022. I will now turn the call over to Bahram.

Bahram Akradi, CEO

Thank you, Bob. I'm very proud of the entire team at Life Time for their tireless and passionate work in achieving our priorities over the past three years following the COVID interruption. Our first priority was to restore the number of visits and dues revenue to our clubs, and we successfully accomplished this in 2023. Our second priority was to rebuild our adjusted EBITDA margin to pre-COVID levels and even beyond, and with adjusted EBITDA margins up by 23% to 24% each quarter this year, we are pleased to have achieved this goal. Our third priority was to reduce net debt to adjusted EBITDA at a fast rate. With $506 million of trailing 12 months EBITDA at the end of the third quarter, we have now reduced net debt to adjusted EBITDA to 3.7 times, and we expect to go below 3 times by the end of 2024. Another key objective was to enhance member engagement through improved programs and experiences. Our visits per membership have increased by approximately 24% in the first nine months of 2023 compared to the same period in 2019. This increase in engagement is a vital part of our strategy, and it’s yielding the desired results, creating more loyal memberships and resulting in lower attrition rates than in 2019. Our team is clearly working diligently to fulfill all our established priorities. Our next priority is to achieve positive cash flow after all capital expenditures, without relying on any proceeds from sale-leasebacks. I am excited to share that we are on track to achieve this key goal about two years earlier than we anticipated just a year ago, thanks to our strong adjusted EBITDA outlook and the significant asset-light opportunities our team has been pursuing. We aim to reach a cash flow positive position by the second quarter of 2024. A long-term goal for the company has been to self-fund all capital needed for double-digit growth without any sale-leasebacks, and I am thrilled to be making progress on this goal by the end of the second quarter of next year. For the upcoming quarter, we expect revenue growth of 17% to 20% compared to the same quarter in 2022, with an adjusted EBITDA margin of 23.5% to 24%. This suggests quarterly revenue of $555 million to $565 million and adjusted EBITDA of $131 million to $135 million. It is important to note that we had planned to launch several revenue-expanding initiatives in early fourth quarter, but now we expect these to roll out in 2024. While we are not providing official guidance for 2024 at this time, we anticipate double-digit growth for both revenue and adjusted EBITDA, consistent with our prior expectations. More of this growth will stem from asset-light opportunities. Lastly, we are expecting a couple of letters of intent for additional sale-leaseback transactions. However, given our outlook to achieve cash flow positivity after capital expenditures by the second quarter of next year, we can approach negotiations for the most favorable sale-leaseback terms with patience and diligence, deciding on whether to proceed with any additional transactions at this time. We now look forward to your questions.

Operator, Operator

Our first questions come from Megan Alexander with Morgan Stanley. Please proceed with your question.

Megan Alexander, Analyst

Hi, thanks for taking our question. First one, maybe can you just talk a bit about your expectations embedded in the 4Q revenue outlook? It is a bit below where you implied previously. So is that driven by something you're seeing in membership joins or attrition or just some additional conservatism?

Bahram Akradi, CEO

No, it's not in membership or attrition. The impact is typically when we go from $585 million of revenue in the 3Q to the 4Q. For our size of the company now, there is at least $30-plus million, $35 million of revenue that doesn't exist between summer camps and other activities, summer activities. So most of the revenue drop is all from those. So we had initially intended to roll out a bunch of initiatives that are still in the process to sort of mitigate this drop. I don't really like to have any seasonal drops. So we're trying to find ways to add additional sales coming through programs and not services in the clubs, but like sales of apparel and nutrition and stuff dynamic nutrition. And that rollout has been delayed now to early '24. So we basically went back to the typical business. Business isn't really doing anything different than we expected. The core business is in line.

Megan Alexander, Analyst

Thank you. I wanted to follow up on the sale-leasebacks and some of the asset-light opportunities. I don't believe you mentioned the $300 million in proceeds we expect this year.

Bahram Akradi, CEO

You are right. Currently, we are waiting on some sale-leasebacks and letters of intent, which have been delayed. The parties we are in discussions with still plan to send those, but we have yet to receive anything. That said, the company's top priority right now is not sale-leasebacks or anything else, but rather to achieve positive free cash flow after accounting for all required maintenance capital expenditures, interest, and growth capital from internally generated cash flow, while also delivering double-digit growth. This is the position we want to be in. When the sale-leaseback market becomes attractive, we will pursue more sale-leasebacks. For now, we do not need them, so we will handle them appropriately. These transactions involve initial terms of 20 to 25 years with options extending for an additional 20 to 25 years, making them very long-term commitments. Therefore, we will not engage in a long-term transaction simply due to a short-term fluctuation in interest rates.

Megan Alexander, Analyst

Okay. That makes sense. That was kind of my question there. So it does seem it's just more of a short-term shift given the macro and the rate.

Bahram Akradi, CEO

It's very brief. Yes, we currently have numerous asset-light opportunities available. This allows us to maintain attractive locations and significant growth for the company without requiring a large capital investment. The company's cash flow and EBITDA this year, along with a projected double-digit increase for next year, will generate ample free cash flow after covering interest and maintenance expenses. This is sufficient for us to achieve double-digit growth in both revenue and adjusted EBITDA without needing external funding. This represents an ideal situation for the company. Previously, I estimated that reaching this goal would need around $700 million to $750 million of EBITDA without considering sale-leasebacks. Initially, building large clubs from the ground up would not be asset-light, and transitioning to an asset-light model with sale-leasebacks would have delayed our progress by a few years. However, with our EBITDA increasing at a faster pace and stronger asset-light opportunities, we can reach this significant milestone earlier next year, which I am very excited about.

Megan Alexander, Analyst

Okay. Thanks Bahram. I'll pass it on.

Bahram Akradi, CEO

Thanks.

Operator, Operator

Thank you. Our next questions come from the line of Brian Nagel with Oppenheimer & Company. Please proceed with your question.

Brian Nagel, Analyst

Good morning.

Bahram Akradi, CEO

Good morning, Brian.

Brian Nagel, Analyst

First off, congratulations on another great quarter. The business continues to show positive signs. My first question, Bahram, is a follow-up to the previous discussion. We have discussed asset-light opportunities for some time, and clearly, these are crucial for achieving cash flow positivity earlier than anticipated. As you review the business from a broader perspective, do you compare the asset-light opportunities to your traditional finance model? Are there any other considerations we should take into account regarding these asset-light opportunities, given that they require less capital?

Bahram Akradi, CEO

Yes, there are several factors to consider. First, it may require more clubs to achieve the same level of revenue as some of our other locations. Therefore, we expect to have more club openings, including larger facilities and some smaller ones. We’ve also got clubs that are essentially new and fully funded by landlords at the outset. Additionally, we are continuing to secure longstanding locations for new developments. With a shift in growth strategy, we anticipate achieving double-digit growth in 2024, allowing us to pay down some debt, particularly in the third and fourth quarters, as we expect to see strong cash flow after accounting for growth capital. As EBITDA and free cash flow increase, we will have the resources to fund some of our new large locations from internally generated cash. However, I want to clarify that the company remains committed to the sale-leaseback approach; we are not stepping away from this strategy, but the timing is key. We need to assess the incoming letters of intent, considering that interest rates may decrease or stabilize over the long term. It would be unwise to finalize deals based on current rates without proper consideration. Additionally, since we have the capacity to wait and pursue sale-leasebacks under favorable conditions, it’s essential to be judicious. I have been clear that we will not overpay for sale-leasebacks, and we won't have to. Overall, I believe the company is in a strong position. It seems that during earnings releases, where we report revenue, EBITDA, and margin growth, the focus shifts towards potential negatives. There’s nothing negative about our business. I’m proud of our team's ability to meet every goal we've set. No matter outside perceptions, the company has established clear priorities and has consistently achieved them. That’s what I’m most proud of: our team executing what’s best for the company.

Brian Nagel, Analyst

That's very helpful, Bahram. I appreciate that. If I could ask one follow-up, you mentioned the improved member utilization of the facilities, which is definitely a significant positive. Is this improvement happening across the entire chain or are there specific areas where it's more evident? Also, while I know you want to focus on churn, we should consider that if members are using the facilities more often, they are much less likely to leave. This presents a major financial benefit, correct?

Bahram Akradi, CEO

Both of those are universal. When we came out of COVID, I expected the attrition rate to be lower than in 2019 due to more promotions and signature programs. To my surprise, it was consistently higher, but it was improving. It was higher than 2019, but the trend showed it was getting better. Starting around July and August of last year, the attrition rate began to drop below 2019 levels. In 2022 and 2023, we shifted our approach to student memberships. Previously, we automatically put them on hold and didn’t count them as attrition, but in 2022 we eliminated that policy, allowing them to decide whether to keep their membership or drop out and return later. This change resulted in an increase of $0.5 million to $1 million a month in dues, but it shows higher attrition on paper. If we adjust for this anomaly compared to 2019, our attrition has been lower for nearly every month in the last three to four months, and we anticipate this trend will continue in the next couple of months. This is the outcome we are aiming for. Additionally, we are seeing significantly more visits per membership, up 24% through the first nine months, which is a dramatic shift. The level of customer engagement is much higher, so we expect attrition to decrease, and we are starting to see that.

Brian Nagel, Analyst

That's very helpful. Again, congratulations. Thank you.

Bahram Akradi, CEO

Thank you, Brian.

Operator, Operator

Thank you. Our next questions come from the line of John Heinbockel with Guggenheim Securities. Please proceed with your question.

John Heinbockel, Analyst

Bahram, I want to start with how Dynamic Stretch is progressing. Do you think it's still a $50 million opportunity for next year? Additionally, are there any other services or key initiatives besides the retail items you mentioned that we can expect next year?

Bahram Akradi, CEO

Dynamic Stretch is projected to be a $50 million opportunity next year. Yes, it is integral to our rollout as it enhances our trainers' engagement with customers, particularly those in pickleball. It’s really a fantastic program, and I’m pleased with the progress we’re making. However, I believe the significant impact will be realized in 2024. We have been very methodical with our priorities, and at present, the club's core business is solid. We have essentially caught up with membership visits in mature clubs, with total visits comparable to those in 2019. This reflects great sequential progress. Additionally, over the past three to four years, we have transitioned a portion of our personal training revenue into subscription models, which are included in the dues from our signature programs. When examining the overall situation, clubs are achieving similar or higher visit numbers while experiencing lower attrition rates. Dues revenues are significantly increased, and margins are better than ever, indicating that everything is functioning well. Now, with over 150 billion impressions annually, Life Time has a chance to expand by exploring how to leverage our brand, network, and audience. It's time to innovate and launch new initiatives that will drive growth for both the top and bottom lines, utilizing the same physical space.

John Heinbockel, Analyst

Okay. Great. Regarding the path to free cash flow, what do you consider an acceptable cap rate? I would guess it's likely in the mid-6s. What are the prospects for adjustable cap rates? I believe that was something you were considering. Lastly, to achieve free cash flow positivity next year, it seems like CapEx needs to be reduced by around $400 million, give or take, based on my calculations. Is that way off?

Bahram Akradi, CEO

When you talk CapEx, you're talking maintenance CapEx and growth CapEx combined?

John Heinbockel, Analyst

Total. Yes, total.

Bahram Akradi, CEO

We can fund more than that. It will likely be around $450 million, with over $300 million allocated for growth capital. This includes building new clubs, remodeling facilities that we acquire, or completing our share of leasehold improvements for the clubs that landlords are developing and handing over to us, or spaces that we are taking over. Therefore, there is ample capital to be cash flow positive after covering all growth capital.

John Heinbockel, Analyst

Okay. Thank you.

Bahram Akradi, CEO

Thanks.

Operator, Operator

Thank you. Our next questions come from the line of Chris Carril with RBC Capital Markets. Please proceed with your question.

Chris Carril, Analyst

Hi, good morning. So, yes, Bahram, you talked a lot about just the rewiring of the business and the cost structure. But as they're about to lap some of the step-up in margins that you saw in the 4Q of last year, can you expand a bit more on how you're thinking about the next opportunities for potential margin expansion and EBITDA growth here going forward?

Bahram Akradi, CEO

Yes, as I mentioned earlier, I believe the EBITDA margin will be around 23.5% to 24%. Is there room for improvement? It's possible, but I don't want to set unrealistic expectations. The focus now is on continued business growth. We have several clubs that will start ramping up with the new locations we've opened. Overall, the business is expected to grow as it continues its recovery from COVID in 2024, alongside the natural growth from same-store sales and the new stores. We've consistently aimed for double-digit growth in both revenue and net income. However, we won't see a 101% quarter-over-quarter EBITDA growth like we did last quarter with over $107 million, but there will still be substantial growth, aiming for around $131 million to $135 million. I'm proud of this increase, which significantly surpasses our previous expectations for the fourth quarter EBITDA. Our team is performing well, and I have no major concerns at this time.

Robert Houghton, CFO

Yes. Chris, it's Bob. Just to add a couple of points to that. We'll open eight clubs in the back half of this year. So we'll get a nice ramping benefit from all eight of those clubs next year. And then because we've rewired the corporate office, that won't grow nearly as fast as revenue grows next year. So those will be a couple of contributors to our EBITDA dollar growth in 2024.

Chris Carril, Analyst

Got it. Okay. Thanks for all the details. And then I guess for my follow-up, can you maybe talk a little bit about what you're seeing from your more recent club openings in terms of demand levels, pricing observations? Any detail around what you're seeing in those recent openings would be great. Thank you.

Bahram Akradi, CEO

Most of the clubs have been opening ahead of our projections in terms of dues revenue, and they are reaching cash flow positivity and contribution margin positivity at the club level significantly faster than our previous models. When we compare to 2019, clubs are sometimes achieving contribution margin positivity in just the second or third month, which is impressive. They are consistently exceeding our business plan.

Chris Carril, Analyst

Great. Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Kate McShane with Goldman Sachs. Please proceed with your question.

Kate McShane, Analyst

Thanks for taking our questions this morning. Just as a follow-up to one of the previous questions, some of the initiatives that you had planned for the end of fiscal year '23 for revenue, is that then rolled into Q1? Or is it later into '24? And then our second question is just around membership fees. Can you talk a little bit more about what you're seeing with response to higher membership prices? And as we look into '24, how are you thinking about additional rate increases on your legacy memberships?

Bahram Akradi, CEO

Great questions, Kate. First, I plan to launch these initiatives soon. There are several components we need to integrate, which is causing the delay. We are overhauling our digital offerings and developing an online business that encompasses our products, apparel, nutritional items, dynamic nutrition, and athletic events, all to create a seamless experience for our customers. Currently, we aren't effectively utilizing the various connections across our programs, making it somewhat challenging for customers to make purchases. Important work is underway to streamline the process so that once you're in the app, transactions will be easy. For example, if you attend one of our athletic events and want to buy a related t-shirt, it should be much simpler than it is now. There's progress being made in this area. As I mentioned, our main focus has been on achieving over $500 million in EBITDA, which took precedence over these improvements. Now that we have reached that goal, we're concentrating on these enhancements. I hope to see them implemented by the first quarter, but at the latest, we should see everything integrated by the second quarter of 2024, providing more opportunities for our customers. Our focus remains on maintaining the high quality of any product we offer. It must have a compelling reason for existence. Regarding your second question, the pricing strategy for the company has been based on delivering outstanding experiences in our clubs. While COVID brought its challenges, it also gave us a chance to make significant changes that were harder to implement prior. Adjusting the pricing of our clubs was a key part of that. Most of our clubs are now at the appropriate price point in my view. I believe that about 20-25% of them might still have potential for slight increases in the next six to twelve months. However, the majority of price adjustments have already been made, and we are pleased with the resulting revenue balance and member engagement. We believe in curating our membership levels, ensuring that a club can serve around 6,500 members effectively rather than 9,500. This way, we can foster more engaged customers. Overall, I would estimate that around 80-85% of this work is completed. We'll be addressing the markets where we’ve previously lagged in execution. Our goal is to provide an experience that delights customers; after that, price adjustments will become secondary. Most changes in pricing have been implemented, but we still have many members paying below the full rack rate. As we’ve indicated before, we will not increase their rates all at once; rather, it will be a gradual process over the years, which helps in building loyalty. Lower attrition rates also open up avenues for revenue growth in the clubs.

Kate McShane, Analyst

Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Dan Politzer with Wells Fargo. Please proceed with your question.

Dan Politzer, Analyst

Hi, good morning, everyone.

Bahram Akradi, CEO

Hi Dan.

Dan Politzer, Analyst

I wanted to talk on a little bit of the center OpEx. That takes us out in - just said, it's been the biggest driver, I think, to your earnings base the last several quarters. This is an environment we keep hearing about rising costs across our companies that we cover. So I guess how are you thinking about OpEx and managing costs into 2024, either on a dollar basis versus 2023 or a per center basis? But I know this could be a little bit noisy given your evolving mix of new centers ramping and asset-light conversion. So any kind of high-level thoughts on 2024 and more on the cost side.

Bahram Akradi, CEO

I believe you're asking whether we anticipate an increase in operational costs, correct?

Dan Politzer, Analyst

Yes, whether it's labor, insurance, marketing, or any aspect of your center operating expenses, that has driven much of the upside relative to our valuation. As we look ahead, there are various factors to consider regarding the cost environment, which has posed challenges across the board.

Bahram Akradi, CEO

I don't really see anything unusual. Traditionally, you expect labor costs to rise by about 1% to 3%, which is related to normal inflation. However, at the moment, we're not facing any significant challenges. There are no issues with employees, and there's no shortage of workers. In fact, more people are applying for jobs now than in the past two to three years, and the number of applicants for personal training positions has doubled. So, we really don't have any excuses for that.

Dan Politzer, Analyst

Okay. Great. And then another kind of follow-up question on just the conversions. As you think about next year, I don't know if you've given a number specifically in terms of new units. I think we're usually penciling 10 to 12. So I think as we look in the website, I think maybe two of those are asset-light and seven are the big asset-heavy type build. So one, wanted to see if you have an expectation for a number of new units next year and maybe the mix. And then similarly, how we should think about the evolving change in whether it's dues per membership or mix of in-center revenues versus the other ancillary services as you shift to more of these asset-light conversions?

Bahram Akradi, CEO

No, when we talk about being asset light, this isn't a different business model. I appreciate the opportunity to clarify this. We do not plan to offer a different experience or product, nor a different price point with the asset-light approach. It's simply that these ventures are asset-light. We are acquiring existing facilities, remodeling them to provide the Life Time experience. Landlords are supplying us with these facilities and providing significant tenant improvements to acquire them. Given the pressure on the real estate market, we anticipate many more opportunities like this rather than fewer. However, we are not intending to change our pricing or the experience we provide. I'm glad you asked to clear up any potential confusion. It will still be the same Life Time with the same pricing and margins. The difference lies in that we do not need to invest a large amount of capital upfront. Looking at this company with a long-term perspective, three to four years from now, our EBITDA will allow us to fund all of our new developments through internally generated cash flow. We remain committed to sale-leaseback arrangements, and when interest rates decline, we will take advantage of that opportunity. If we combine the proceeds from these sales with our internally generated cash flow, we will have significantly more cash flow than the company needs. At that point, we could either reduce debt even more, which is reasonable to a degree, or I could approach the Board about implementing a share buyback plan when the time is right. Right now, I want to emphasize that our primary focus is to ensure Life Time controls its own destiny. This is what we are aiming for in the second quarter of next year: to be cash flow positive after covering our growth expenses. I truly appreciate the questions. They not only enhance clarity but also help you build your models. For me and Life Time, we have been steadily accomplishing what is essential for the company, and currently, we are in a very favorable position.

Dan Politzer, Analyst

Got it. Just to clarify, should we anticipate a certain number of units for next year? Is 10 to 12 still a reasonable estimate?

Bahram Akradi, CEO

Yes, 10 to 12 is a good range. As I mentioned earlier, I wouldn't change your model just yet since we need to provide more information. It may take a few more clubs to achieve the same revenue growth, potentially up to 14. However, I'm unable to give guidance for 2024 at this moment. For now, you can plan for at least 10 to 12, with the possibility of more. I want to clarify that even if we reach 14, it doesn't necessarily mean an increase in your revenue or EBITDA. This is because some of these locations will be larger, 60,000 or 80,000 square feet, which requires more to reach our targets compared to the 120,000 square feet clubs. This approach allows us to grow both our top line and bottom line in a more flexible manner.

Dan Politzer, Analyst

Understood. I appreciate all the color. Thanks guys.

Bahram Akradi, CEO

Thank you.

Operator, Operator

Thank you. Our next questions come from the line of Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Simeon Siegel, Analyst

Thanks. Hi, guys. Good morning.

Bahram Akradi, CEO

Good morning, Simeon.

Simeon Siegel, Analyst

Bahram, just on the last question because I think this might be helpful, could you help differentiate from asset-light models where you plan to partner with a third party who might be doing more of the heavy lifting and you collect a very high margin flow-through versus what I think sounds like might be really just getting opportunities to run the same existing approach to clubs you do, but getting lower cost because you get to benefit from other underperforming locations? Does that make sense?

Bahram Akradi, CEO

I would like you to repeat that question. I didn't hear you clearly.

Simeon Siegel, Analyst

Can you clarify if the last point suggests that you are securing favorable terms from underperforming assets compared to others? The asset-light approach is familiar to us, but it seems to be coming from a stronger position than when we previously discussed your living and work models, where you might partner with someone whose workload is heavier while you enjoy a high margin. Is there a distinction to be made here?

Bahram Akradi, CEO

That's a great question, Simeon. The asset-light discussion around Life Time Work and Life Time Living involves using our brand, intellectual property, and management system much like Marriott or Hilton. It's primarily based on license and management fees. Currently, our asset-light clubs can be categorized in two ways, but we're not yet ready for anyone to model anything based on our discussions. If we expand internationally beyond areas like Canada, we are likely to apply a model similar to Life Time Living and Life Time Work, relying on our intellectual property. In the U.S., our contribution margin is so strong that we prefer to operate our facilities directly. I'm not saying we would entirely avoid management deals if it makes sense, but generally, Life Time's locations are owned and operated by us, either through leases or ownership. Regarding your question about our asset-light strategy, we are currently acquiring buildings at less than the cost of just the land. These are older clubs, which we remodel into 100,000 square foot facilities at significantly lower capital investment than building new ones from scratch. Sometimes landlords with underperforming tenants are approaching us with these opportunities. Our reputation for handling landlord relationships appropriately, especially during difficult times when others weren't paying rent, has helped us secure favorable deals that are asset-light for us, similar to how we've built our other clubs. Does that clarify your question, Simeon?

Simeon Siegel, Analyst

Yes, perfect. Great explanation. Bob, one quick question about the change in CapEx reporting. Is this a change in how you're approaching CapEx spending or just how you're reporting it, considering your comments about wanting to see the environmental shifts this year?

Bahram Akradi, CEO

I want to be clear that I need full flexibility in how we allocate capital to seize all upcoming opportunities while ensuring that everything meets Life Time's standard of being like new, regardless of whether they are 10, 20, or 25 years old. It's important to avoid creating confusion. If I decide to move $50 million from one area to another, I don't want that to cause misunderstandings. Therefore, we will report the total capital on growth and maintenance CapEx as a single amount going forward.

Robert Houghton, CFO

So Simeon, just a reporting change, not a change in how we deploy.

Simeon Siegel, Analyst

Perfect. I want to make sure of that. All right. That's great, guys. And best luck for the rest of the year.

Bahram Akradi, CEO

Thank you so much.

Operator, Operator

Thank you. Our final question is coming from the line of Robbie Ohmes with Bank of America. Please proceed with your question.

Robbie Ohmes, Analyst

Good morning. Hi Bahram, a couple of questions. The first is, can you give any commentary on kind of how 4Q membership trends are versus expectations? Have you seen any changes or hesitancy related to student loan repayments or anything like that?

Bahram Akradi, CEO

How do I see memberships going? We don't have a significant change in our expectations regarding membership. This is because new membership sales don't really alter the overall net membership, which is what matters. You might see a slight decrease in attrition, meaning you could sell a few thousand fewer memberships in a month, but lower attrition will balance that out. Essentially, it's all about net membership. Currently, we feel we are right on target with our projected dues revenue for the core segment. To clarify, there isn't a surge of new sign-ups. From what I understand, the activity from your other services or businesses reflects a moderate trend. It's neither terrible nor outstanding; it's steady. The advantage of our business model is our strong subscription base, where monthly sales contribute significantly to our overall revenue and EBITDA. Thus, net membership remains the crucial factor, and we are performing well in that area.

Robbie Ohmes, Analyst

Got you. That's helpful. And then one of my other questions was just the center operations costs are running sort of flattish this quarter. How are you kind of holding the center operation costs per average center kind of flattish with the swipes going up?

Bahram Akradi, CEO

That's a great question. Our center costs fluctuate based on the type of revenue we receive. During the summer months, we see strong revenue from our summer camp, although the margin from increased pool deck activity isn't as high. While we have more customers during this time, we also need to hire a lot more lifeguards. If we look at it on a month-to-month basis, it can vary significantly even within the same quarter. For instance, July and August tend to be similar, but September is quite different. Over a three-month period, our team is performing better than the budget indicates. The top line revenue matches our expectations, and the bottom line is slightly improved, as you can see in the results. However, in the fourth quarter, the revenue mix changes. We anticipate about $20 million to $30 million less revenue because the summer revenue isn't present in that quarter. Our goal is to maintain a steady EBITDA margin of 23% to 24%, but achieving this requires navigating various challenges.

Robbie Ohmes, Analyst

Got it. That’s very helpful. Thanks so much.

Bahram Akradi, CEO

Thanks Robbie.

Operator, Operator

Thank you. Our final question will come from the line of Chris Woronka with Deutsche Bank. Please proceed with your question.

Chris Woronka, Analyst

Hi, good morning, everyone. I appreciate you including me. We've already covered a lot of topics, but I'd like to rethink the conversion aspect from a different perspective. You've explained the strategic and financial rationale behind it, but there's some confusion in the market about its implications for your company. Is there any way to provide numerical insights to illustrate its significance?

Bahram Akradi, CEO

Yes. It will take some effort for us to create examples of clubs. We have clubs built through conversion that yield better returns than some of our best new builds. Conversely, there are instances where our new builds perform better than conversions. However, when considering the overall picture, particularly with Life Time today, it seems many view these as newly established entities when in reality, they aren’t new; it's just the tempo of development that has changed. Back in 2006, the company operated around 20 or 30 clubs, and I took over multiple clubs at once, leading to significant growth in our overall size and the scale of our clubs. These processes can vary in duration. But viewed over the long term, every one of those clubs is a valuable asset, and they are now seen similarly to our new builds. People do not regard them as entirely new. It’s essential to acknowledge that when we open a club, regardless of the square footage or external appearance, the internal programming remains consistent with our established programs like Strike, Ultrafit, GTX, and Alpha. The key considerations are the investment required and the timeline before generating revenue, with conversions typically allowing quicker revenue and EBITDA realization than acquiring land, which can take several years before profitability from the investment is realized. The best way to view Life Time today is as a portfolio. With 170 locations, we can effectively categorize the company in this manner, managing a diverse portfolio of assets. Our executive team and management are committed to ensuring consistent growth in revenue, EBITDA, and memberships while maintaining brand quality, which will create additional revenue growth opportunities. I believe our results will demonstrate this. I am proud of our achievements over the past three years and anticipate continued revenue and EBITDA growth at a favorable rate, irrespective of market fluctuations. Considering the current higher interest rates and their effects on various economic sectors, we aimed to reach cash flow positivity sooner rather than later, especially after accounting for our growth capital needs. I am genuinely pleased with our current standing in this regard.

Chris Woronka, Analyst

Okay. Thanks Bahram. And if I can, just a super quick follow-up. You've talked in the past about how potentially, I guess, the right word is franchising some of your concepts or licensing some of your concepts, not locations, but Dynamic Stretch or something like that. That's still on the table in terms of generating some 100% fee-based income?

Bahram Akradi, CEO

I would just tell you that Life Time is completely open-minded to benefit from the programming and the power of our brand. But we're always going to protect the brand. So we're not going to jump into what sounds great and have somebody weak the brand, but Dynamic Stretch, Ultrafit, many of the programs we have could become a franchisable model at any given time we decide to do it. They are amazing programs with great success, and there is no way we couldn't do those as good as anybody else. So that's a possibility, but it's not a straight line in the game plan of the company at this moment.

Chris Woronka, Analyst

Okay. Great. Thanks.

Bahram Akradi, CEO

Thank you so much.

Operator, Operator

I appreciate everyone. Great questions. Hopefully, we provided the right color for you guys. Looking forward to being with you guys again in three months. Have a good day. Thank you. This does conclude today's teleconference. We appreciate your participation. You may disconnect your lines at this time. Enjoy the rest of your day.