LIFE TIME FITNESS INC LTM
December 03, 2014 - 2:08pm EST by
jer1225
2014 2015
Price: 54.81 EPS 3.03 3.34
Shares Out. (in M): 39 P/E 18.0x 16.4x
Market Cap (in $M): 2,145 P/FCF NA NA
Net Debt (in $M): 1,175 EBIT 234 260
TEV ($): 3,310 TEV/EBIT 13.9x 12.5x

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  • Real Estate

Description

Life Time Fitness operates 112 large format athletic centers and recently announced intention to explore the formation of a REIT. LTM has a $3.3 enterprise value and real estate worth ~$2.2B – $2.6B, implying the Opco is currently trading for 1.3x – 3.0x EBITDA.

  1. While I want to focus this discussion on the value of the real estate, I wanted to briefly present the summary financials for LTM. I am not going to argue that the gym business is great business or that trends are not a little soft right now (comped down 0.9% in Q2 14 against a 3.8% positive comp in Q2 13), but LTM has a differentiated product and has outperformed the industry for a very long time. LTM SSS, margins and EPS growth have been historically very healthy and stable.

 

 

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014E

2015E

Sales

257

312

390

512

656

770

837

913

1,014

1,127

1,206

1,297

1,420

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

80

96

120

149

198

222

241

254

273

325

345

368

408

   Margin %

31.1

30.8

30.9

29.1

30.1

28.8

28.8

27.9

27.0

28.8

28.6

28.4

28.7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

EPS

0.72

0.88

1.13

1.37

1.78

1.91

1.82

2.00

2.26

2.67

2.93

3.03

3.42

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capex

(41)

(157)

(191)

(262)

(416)

(463)

(147)

(132)

(165)

(224)

(349)

(484)

(454)

                                                                                                                            

  1. Now to triangulate the value of the real estate from multiple data points. First, the company has spend $2.6 building the centers since 2001. The real estate has likely appreciated over time and has an in place tenant, suggesting it should be worth more than construction cost. At its last analyst day, management confirm that new centers cost $250 -$300 / ft implying a value of $2.1B – $2.55B. Capex to date

2014

330

2013

122

2012

102

2011

111

2010

132

2009

146

2008

463

2007

415

2006

261

2005

190

2004

145

2003

69

2002

80

2001

86

Total

2,652

 

  1. In Q2 2014, LTM repurchased two 105K sq. ft. centers for $65M that it entered into sale leaseback transactions in 2003 for $43M. Assuming 32.5M per center * 80 owned properties = $2.6B. While we cannot extrapolate the value of all real estate from two purchases, it is certainly a relevant com and supports the view that the real estate has appreciated 4.2% CAGR over last 10 years.

 

  1. In February 2013, LTM entered into a mortgage for 5 centers for $75M. Again we obviously can extrapolate to the whole estate, but assuming 50%-65% LTV implies each center is worth 23M – 30M or $1.85B - $2.4B.
  2. In December 2011, LTM bought back 6 previous leased centers from WP Carey for ~$122M or a 6.7% cap rate. A 6.7% cap rate on 175M rent implies $2.6B EV for the real estate.

 

  1. In August 2008 at the height of the financial crisis, sold 4 gold properties for 25M or $217 / foot each and sold two onyx properties for 30M or $275 / foot…….

 

  1. LTM currently pays $42M in annualized rent for 2.1M sq.ft. and 1M sq. ft. of ground leases. Assuming the 10 ground leases cost $5M / year, implies LTM is currently paying $16.95 per foot. Applying this rent to their 8.5M owned sq. ft. implies ~$150M of rent worth $2.15B at a 7% cap. The leased properties skew older and toward LTM’s lower end Bronze Clubs (where dues are 1/3 the rate of Diamond clubs). (Importantly, 9 of the 32 leased properties were acquired in 2011 from Lifestyle Family Fitness for $70M and had dues levels half the average of LTM). Given the overall club skew mix, I believe the whole chain can support closer to $20 rent per foot or $175M of rent. At $175M rent would be 15% of 2015 sales (compared to 25% at CLUB) . Additionally, 2015 EBITDAR of $450 ($408M EBITDA) would more than adequately cover $217 of rent ($175M new rent to REIT and $42M legacy rent) given the stability of the business.

 

  1. Taking the above all together and assuming the real estate is worth $$2.2B, implies the Opco is trading at 3.3x EBITDA.

Split Math

Opco

Propco

Total

EBITDA

233

175

408

New Opex

 

10

 

D&A

36

109

146

EBIT

196

56

261

Interest

2

38

40

PBT

194

18

221

Taxes

77

0

88

Net Income

117

18

133

EPS

2.96

0.46

3.36

 

 

 

 

Debt

59

1,050

1,109

 

 

 

 

Net Income

117

18

133

D&A

36

109

146

Maintenance Capex

(47)

(33)

(80)

FCF

107

95

201

 

 

 

 

FCF / Share

2.69

2.38

5.07

 

  1. On the above, assuming the opco trades at an unlevered 12.5x P/E and the REIT has a 95% payout and trades at a very conservative 8% dividend yield, implies the real estate is worth $2.2B and the Opco is worth $1.5B and the combined co is worth $65 or ~40% upside.

Risks

  1. Company decides not to pursue the REIT and stock declines to pre-announcement levels. This does not seem likely given the activists in the name and the CEO owns ~$100M of stock.
  2. Fundamentals deteriorate from flatish to something worse. This is possible, but I take comfort in the concept’s historical performance. I believe the stock over reacted in Q2 to a -1% comp and 50bps of YTD EBITDA margin erosion.
I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Annoucement of Opco/Propco

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    Description

    Life Time Fitness operates 112 large format athletic centers and recently announced intention to explore the formation of a REIT. LTM has a $3.3 enterprise value and real estate worth ~$2.2B – $2.6B, implying the Opco is currently trading for 1.3x – 3.0x EBITDA.

    1. While I want to focus this discussion on the value of the real estate, I wanted to briefly present the summary financials for LTM. I am not going to argue that the gym business is great business or that trends are not a little soft right now (comped down 0.9% in Q2 14 against a 3.8% positive comp in Q2 13), but LTM has a differentiated product and has outperformed the industry for a very long time. LTM SSS, margins and EPS growth have been historically very healthy and stable.

     

     

    2003

    2004

    2005

    2006

    2007

    2008

    2009

    2010

    2011

    2012

    2013

    2014E

    2015E

    Sales

    257

    312

    390

    512

    656

    770

    837

    913

    1,014

    1,127

    1,206

    1,297

    1,420

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    EBITDA

    80

    96

    120

    149

    198

    222

    241

    254

    273

    325

    345

    368

    408

       Margin %

    31.1

    30.8

    30.9

    29.1

    30.1

    28.8

    28.8

    27.9

    27.0

    28.8

    28.6

    28.4

    28.7

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    EPS

    0.72

    0.88

    1.13

    1.37

    1.78

    1.91

    1.82

    2.00

    2.26

    2.67

    2.93

    3.03

    3.42

     

     

     

     

     

     

     

     

     

     

     

     

     

     

    Capex

    (41)

    (157)

    (191)

    (262)

    (416)

    (463)

    (147)

    (132)

    (165)

    (224)

    (349)

    (484)

    (454)

                                                                                                                                

    1. Now to triangulate the value of the real estate from multiple data points. First, the company has spend $2.6 building the centers since 2001. The real estate has likely appreciated over time and has an in place tenant, suggesting it should be worth more than construction cost. At its last analyst day, management confirm that new centers cost $250 -$300 / ft implying a value of $2.1B – $2.55B. Capex to date

    2014

    330

    2013

    122

    2012

    102

    2011

    111

    2010

    132

    2009

    146

    2008

    463

    2007

    415

    2006

    261

    2005

    190

    2004

    145

    2003

    69

    2002

    80

    2001

    86

    Total

    2,652

     

    1. In Q2 2014, LTM repurchased two 105K sq. ft. centers for $65M that it entered into sale leaseback transactions in 2003 for $43M. Assuming 32.5M per center * 80 owned properties = $2.6B. While we cannot extrapolate the value of all real estate from two purchases, it is certainly a relevant com and supports the view that the real estate has appreciated 4.2% CAGR over last 10 years.

     

    1. In February 2013, LTM entered into a mortgage for 5 centers for $75M. Again we obviously can extrapolate to the whole estate, but assuming 50%-65% LTV implies each center is worth 23M – 30M or $1.85B - $2.4B.
    2. In December 2011, LTM bought back 6 previous leased centers from WP Carey for ~$122M or a 6.7% cap rate. A 6.7% cap rate on 175M rent implies $2.6B EV for the real estate.

     

    1. In August 2008 at the height of the financial crisis, sold 4 gold properties for 25M or $217 / foot each and sold two onyx properties for 30M or $275 / foot…….

     

    1. LTM currently pays $42M in annualized rent for 2.1M sq.ft. and 1M sq. ft. of ground leases. Assuming the 10 ground leases cost $5M / year, implies LTM is currently paying $16.95 per foot. Applying this rent to their 8.5M owned sq. ft. implies ~$150M of rent worth $2.15B at a 7% cap. The leased properties skew older and toward LTM’s lower end Bronze Clubs (where dues are 1/3 the rate of Diamond clubs). (Importantly, 9 of the 32 leased properties were acquired in 2011 from Lifestyle Family Fitness for $70M and had dues levels half the average of LTM). Given the overall club skew mix, I believe the whole chain can support closer to $20 rent per foot or $175M of rent. At $175M rent would be 15% of 2015 sales (compared to 25% at CLUB) . Additionally, 2015 EBITDAR of $450 ($408M EBITDA) would more than adequately cover $217 of rent ($175M new rent to REIT and $42M legacy rent) given the stability of the business.

     

    1. Taking the above all together and assuming the real estate is worth $$2.2B, implies the Opco is trading at 3.3x EBITDA.

    Split Math

    Opco

    Propco

    Total

    EBITDA

    233

    175

    408

    New Opex

     

    10

     

    D&A

    36

    109

    146

    EBIT

    196

    56

    261

    Interest

    2

    38

    40

    PBT

    194

    18

    221

    Taxes

    77

    0

    88

    Net Income

    117

    18

    133

    EPS

    2.96

    0.46

    3.36

     

     

     

     

    Debt

    59

    1,050

    1,109

     

     

     

     

    Net Income

    117

    18

    133

    D&A

    36

    109

    146

    Maintenance Capex

    (47)

    (33)

    (80)

    FCF

    107

    95

    201

     

     

     

     

    FCF / Share

    2.69

    2.38

    5.07

     

    1. On the above, assuming the opco trades at an unlevered 12.5x P/E and the REIT has a 95% payout and trades at a very conservative 8% dividend yield, implies the real estate is worth $2.2B and the Opco is worth $1.5B and the combined co is worth $65 or ~40% upside.

    Risks

    1. Company decides not to pursue the REIT and stock declines to pre-announcement levels. This does not seem likely given the activists in the name and the CEO owns ~$100M of stock.
    2. Fundamentals deteriorate from flatish to something worse. This is possible, but I take comfort in the concept’s historical performance. I believe the stock over reacted in Q2 to a -1% comp and 50bps of YTD EBITDA margin erosion.
    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Annoucement of Opco/Propco

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