Life Time Group IPO: Time To Relax, Not Invest (NYSE:LTH)

IPO Initial Public Offering 3d concept

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Life Time Group (NYSE:LTH) has seen a public offering which was not well received. The timely offering by private equity owners made investors cautious as the company is still not fully recovered from the pandemic; it still trades at huge multiples and employs a great deal of debt, despite the offer proceeds.

Empowering A Healthy, Happy Life

Life Time Group was founded thirty years ago with an aim to create happy and healthy communities, driven by a focus on great size, scope, quality, architecture and design for families to enjoy each other. Services offered in these resorts include yoga, swimming, fitness, spa, classes, training, food, racquet courts and relaxation, among others. Basically each center is a combination of health wellness and fitness.

A culture of care employed by 30,000 team members has been at the basis of the success of these centers, including a wide range of services and amenities. Some 1.4 million individual members, represented by over three-quarters of a million in actual memberships, visit these centers on a regular basis. By now the company has some 154 centers across 29 US states as well as a Canadian location.

The run-up in the business has been nothing short of amazing and impressive. Just a $94 million business in 2000 the company has seen very steady growth in each year through 2019, even during the 2008/2009 crisis, after which revenues were cut in half again in 2020 of course. The fall in revenues in 2020 was held back to a great extent because of membership revenues where they were sticky and not so much related to actual activity, as this revenue source makes up roughly two-thirds of total revenues. The extent of activity and usage of these facilities is huge, with an average member revenue running at over $2,000 in 2019.

Valuation & IPO Thoughts

Management and underwriters of Life Time Group aimed to sell 46.2 million shares in a preliminary price range between $18 and $21 per share, yet pricing was set at the lower end of the range. This made the company raise $832 million in gross proceeds. Those proceeds are very much needed as the company operated with $2.23 billion in net debt ahead of the offering, as I believe that pro forma net debt comes in around $1.5 billion.

With 198 million shares outstanding, the company’s equity is valued at just over $3.5 billion, for a pro forma enterprise valuation of $5.0 billion at the offer price.

The business generated $1.75 billion in sales in 2018 on which an operating profit of $196 million was reported. Revenues grew further to $1.90 billion in 2019, yet operating profits fell to $168 million due to a faster increase in the expense base, notably rent. Of course, 2020 was a dismal year with revenues cut in half to $948 million, as a huge operating loss of $359 million was reported. The first half of 2021 showed quite a big improvement in the operations, but still quite a bit below the 2019 run rate.

Revenues for the first half of the year rose 17% to $572 million as a reduction in expenses made operating losses improve a bit. Losses narrowed by nearly $50 million to $139 million, still a substantial loss. Promising was that the second quarter was quite a bit better already with revenues reported at $323 million and losses posted around $57 million.

As the company is still in recovery mode, shares have not seen a strong debut. Shares fell to $17 and change in the first days of trading, reducing the valuation to approximately $4.8 billion, as this valuation includes quite some net debt of course.

If we look at 2019 as a normal run rate, we have a business which could post sales of around $2 billion and operating margins around 10% under normal conditions. If this is realistic, and we apply a 4% cost of debt to the net debt load, as well as apply a 20% tax rate, net earnings of $112 million come in at $0.55 per share.

However, these calculations were based on good conditions, as we are still a long way from achieving and posting these earnings of course. After all, equity is valued at 30 times earnings in a normal year, which is a year not yet seen, as leverage is very high in the meantime of course.

Concluding Thoughts

I like the concept as this is clearly not a fitness play, but much more a greater diversified health and wellness play. The company already has quite a large membership base which is quite active, as the biggest risk in the near term remains trends related to the pandemic.

Competition comes from a variety of other venues as many health and fitness centers are increasing the quality of their services as well, as the great number of services provided by Life Time makes that some users might opt ​​for a membership of specialized services as well. This is certainly if other operators have focused and high-quality offerings as well.

That said, the valuation discussion above makes me very cautious. Even if the company can return to its 2019 results, and a bit more, the company trades at around 30 times earnings while it is still quite leveraged on the back of the perceived quality ownership position. Given all this, I am finding this an easy pass, as it seems like a well-timed offering, recognized by market participants given the lackluster welcome which shares have received.

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