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Town Sports International Holdings, Inc. (NASDAQ:CLUB)

Q2 2013 Earnings Conference Call

July 24, 2013 4:30 pm ET

Executives

Daniel Gallagher – Chief Financial Officer

Robert Giardina – Chief Executive Officer

Analysts

Scott W. Hamann – KeyBanc Capital Markets

Jared W. Madlin – Piper Jaffray, Inc.

George Kelly – Craig-Hallum Capital Group LLC

Kurt M. Frederick – Wedbush Securities, Inc.

Operator

Greetings and welcome to the Town Sports International Holdings, Inc. Second Quarter 2013 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host Dan Gallagher, Chief Financial Officer. Thank you, Mr. Gallagher. You may now begin.

Daniel Gallagher

Thank you for joining us today. This is the Town Sports International Holdings earnings conference call discussing results for the second quarter of 2013. I am Dan Gallagher, Chief Financial Officer of the company. I caution listeners that to the extent we make any forward-looking statements in this conference call, they are made pursuant to the Safe Harbor provision of the Private Securities Litigation Reform Act of 1995.

These statements are subject to various risks and uncertainties, many of which are outside of our control, which may cause actual results to be materially different from any forecasts we have made. These risks and uncertainties are described in our reports filed with the SEC. We have issued a press release discussing our results for the quarter, which has been filed with the SEC under Form 8-K. In addition, for those of you who do not have access to this release and filing, we’ve also made them available at our website www.mysportsclubs.com. This conference call is also being webcast and may be accessed via the Investor Relations section of our website. Also a replay of the transcript of the call will be made available on our website following the call.

I’ll now turn this call over to Bob Giardina, the President and Chief Executive Officer of Town Sports International for a discussion on the operations of the company. And then, I will give further detailed financial discussion later on in the call. Bob?

Robert Giardina

Thanks, Dan. Good afternoon, everyone. Thank you for joining us for our second quarter earnings call. Overall, we were pleased with our results for the quarter and have seen many signs of a quick rebound in our business after a soft start to the year, while at the same time, we are making great strides with the key initiatives we have been driving. It appears we have gotten past the macro factors that impacted the first quarter, such as the increases in personal income tax rates that went into effect in January, and we believe our business is moving in the right direction as we head into the third quarter.

Our club membership, attrition, comparable club revenue and personal training revenue all met our expectations for the quarter, while expenses were well controlled, resulting in adjusted EBITDA of $25.7 million, which was ahead of our expectations. We were disappointed with the revenue realized from our Sports Club for Kids programs. However, we believe this to be somewhat isolated and related to poor execution on our part, which can be corrected fairly quickly.

Total membership was basically flat with the end of the first quarter at 512,000 and average monthly attrition was where we expected at 3.3%, which is a comfortable level for the business. As we said on our last call, after operating for more than three years with basically the same group of clubs, we believe membership gains going forward will come from adding new units.

We continue to make progress on our pricing with our EFT dues collected averaging $59.50 per member in the second quarter, up from $58.80 in the same period last year. The improvement in rate has widened from the improvement realized in the first quarter and after five years of consistent year-on-year reductions in rate, we look at these increases realized in 2013 as a critical turning point for us.

In the second half of this year, we expect to continue to drive our rate by taking additional membership pricing, particularly in our larger urban markets like Boston and Manhattan. While we have been successfully increasing our average member dues charged, we have been very mindful not to discount one of our key cash flow drivers, our join fees.

Average joining fees collected per member in the second quarter increased by 4.4% to almost $65. Comparable club revenue declined 1.7%, which was an improvement from a 2.4% decline in the first quarter. As with Q1, price was a positive driver of comparable club revenue, but not enough to offset year-over-year membership declines.

However, we do expect that increases in personal training revenue, coupled with sustained increases in membership pricing will soon offset the decline in membership such that we expect to hit an inflection point in our Q3 comp with roughly flat results followed by a low single-digit increase in Q4.

Now let me move to personal training. This is where I want to spend some time discussing our plans and initiatives as this area of the business has terrific opportunity for us. After being down 6.8% in the first quarter, our total PT revenue was flat in Q2.

As a reminder, a component of the first quarter decrease in personal training revenue was due to a 3% decrease in overall price per session as we continue to transition to our personal training membership products and away from being primarily based on prepaid session packages. Our personal training membership products have been offered at reduced per session rates, when compared to the prepaid packages that we are shifting away from.

In the second quarter, over 50% of our PT revenue was generated from the PT membership product and given the strength we are seeing, we are now moving to the next stage of our product transition process and we are implementing a per session rate increase of $10 across the board effective September 1. This increase would apply to new personal training memberships and thus have a greater impact on Q4 personal training session revenue than it will on Q3.

At the same time, we will be increasing our rates on prepaid single sessions by $10 as well. We continue to anticipate that our PT membership based revenue will comprise approximately two-thirds of total PT revenue in Q4 of 2013. This is a win for Town Sports on many fronts. It’s an incremental driver of revenue, it helps to keep our club members engaged, and it gives us great visibility into personal training revenue by providing consistency in this revenue stream during slower training months such as the holiday month of December.

We’re excited about these revenue opportunities and are supporting the initiative in every way possible. That includes the continued rollout of our UXF zones and the implementation and the rollout of our new front-end registration booking system, which I will speak to in a moment.

We have discussed our UXF zones on past calls so I won’t get into the details of that other than the fact that we continue to see improvements in PT revenue at clubs that have the UXF zone and we continue to rollout approximately three zones per week. We currently have 72 UXF zones installed and we expect to have them in over 75% of our club base by the end of the year. It is worth repeating that the cost of a single UXF installation is fairly modest averaging about $25,000.

Moving to our MoSo implementation, we now have almost two-thirds of our clubs up and running on our new registration and booking platform developed by our partner, Motionsoft, and we expect the rollout to be substantially complete by the end of August. This product supports our personal training products and also provides us with tools we have not had in the past and will allow us to expand our fee based offerings in a member friendly fashion. As expected, the preparation, training and implementation of the new system have been a little disruptive to our team, but the effort and changes are worth the many benefits that come with the system.

Moving on to club growth, we continue to see acquisition opportunities in our markets, which allow us to acquire members at reduced costs and at the same time expand and strengthen our network. Greenfield opportunities, however, have been more of a challenge for us and we are going to fall short of our previously announced unit growth plans because of this. We remain committed to being disciplined and focused in our approach to club growth.

We are committed to signing leases in locations that represent markets where we have a high degree of confidence in executing our return expectations, and this prudent approach is taking longer than we originally anticipated. Furthermore, our planned club opening for 2013 in Greenpoint Brooklyn is now shifting into early 2014, which now puts our full year 2013 unit growth expectation at six clubs. We are also reducing our target for 2014 club openings from five to eight clubs, down from the previous expectations of six to twelve clubs.

Overall, we have seen a tightening in the urban real estate markets we have been focusing our growth on and this in part has contributed to delays in lease signings and therefore an overall reduction in our expected unit growth. Another sign that the New York City real estate market seems to be heating up is the increase in the number of inquiries we received about our single building that we own on the Upper East Side. We have owned and operated our club at this location for over 36 years, and while we have no plans to sell this property, we are pleased that the estimated value of this property has improved noticeably over the past few years, and at some point, the underlying real estate value could be unlocked for the benefit of shareholders.

I’m going to turn the call over to Dan, and he will elaborate more on our updated capital expenditure forecast and will also run through the Q2 financials and our outlook. But let me close by saying we are feeling really good about the direction of the business, especially given the strategic initiatives that are well underway, including the transitioning to personal training memberships, the increased pricing we expect to see both on membership and PT products, UXF Zone installations, and the rollout of our new registration and booking system. Dan?

Daniel Gallagher

Thanks, Bob. I will go through the income statement and highlights for the quarter and then discuss our outlook for the third quarter of 2013. In the second quarter, our consolidated revenue was $120.1 million, a decrease of 1.7% from the second quarter of 2012, which is a sequential improvement over the 3% decrease realized in Q1.

We ended the quarter with 512,000 members, which is flat to where we started this quarter and down 3.2% from where we ended the quarter of last year. As we said last quarter, some of this member loss was experienced in Q4 of 2012 in connection with Hurricane Sandy, and in Q1, we experienced member growth that did not meet our expectation.

Regarding the Fitcorp acquisition, approximately 1% of our members at quarter end were members at the clubs acquired in connection with the Fitcorp acquisition that we completed in May. The number of restricted memberships totaled 42,000 as of June 30, 2013. Monthly attrition for the second quarter averaged 3.3%, in line with our expectations and up slightly from the 3.2 % level of Q2 last year. Approximately half of the 10 basis point increase in attrition from the prior year is attributable to our club closures, including the two clubs closed related to Hurricane Sandy.

We expect average monthly attrition for the third quarter of 2013 to be flat to the third quarter of 2012 and approximately 3.7%.

As Bob mentioned earlier, both our average dues charged and average joining fees collected have increased from that of prior year with average monthly EFT dues charged of $59.50 in Q2 2013 versus $58.80 in Q2 2012, and average joining fees collected of $64.90 per member this second quarter versus $62.10 the same period a year ago.

Total ancillary club revenue was down 4.3% to $24.1 million from $25.2 million a year ago. Within ancillary revenue, personal training revenue was roughly flat at $17.6 million. These are sequential improvements over the 9% drop in ancillary club revenue and a 6.8% drop in personal training revenue realized in the first quarter.

In particular, we are very pleased with the rebound we have seen in personal training revenue and how our transition to the personal training membership is progressing. Given these recent trends we are expecting a modest increase in personal training in the third quarter and then a further increase in the fourth quarter when considering the September 1 price increases we’ll be instituting on our personal training products.

Comparable club revenue at clubs opened for over 12 months decreased by 1.7% for the quarter. Comparable club revenue was affected by a decrease in membership of 3.1%, a flat impact in ancillary club revenue, joining fees, and fees and other, partially offset by a price increase of 1.4%. We expect the ancillary revenue component of our comps to improve in each of the next two quarters, driven by increases in personal training revenue. These increases in personal training revenue coupled with an expected positive comp in the price component are expected to drive our comp to positive territory in Q4.

Turning to expenses, total operating expenses decreased 3.1% to $105.1 million for the second quarter of 2013. Operating income for the second quarter was $15 million, up 8.7% from $13.8 million in the second quarter of 2012. These operating results include the benefit of $2.5 million of insurance proceeds related to property damage claims in connection with Hurricane Sandy. Q2 2013 depreciation increased over Q1 2013 due to an acceleration of depreciation at one of our clubs that is related to our giving back space to the landlord in return for a rent concession.

We expect Q3 depreciation levels to be similar to Q2 and then Q4 depreciation should revert back to something closer to the $12.1 million experienced in Q1. As Bob mentioned earlier on the call, we are more than halfway through our rollout of our new registration and booking system. The licensing costs associated with this rollout is reflected in our G&A expense line and we expect to see year-on-year increases in G&A in Q3 and Q4 driven in part by the additional licensing cost that come along with the continued rollout.

Net income for the quarter, adjusted for the insurance recovery and impairment of fixed assets, was $4.8 million or $0.19 per share compared to $5.4 million or $0.23 per share in the second quarter of 2012. Adjusted EBITDA of $25.7 million came in ahead of our expectations, but was down 4.3% compared to the $26.8 million of EBITDA in Q2 2012.

We are very pleased with the cash flow we are generating with cash flow from operating activities for the six months ended June 30, 2013, totaling $44.5 million. Total gross debt outstanding as of June 30, 2013 was $315.7 million with our cash position at $69.5 million, resulting in a net debt level of $246.2 million compared to net debt of $278 million as of December 31, 2012, a net debt reduction of $31.8 million over the first six months of 2013.

Given the reduction in our club unit expansion for 2013 we have reduced our capital expenditure estimates and based on our current forecast, we now expect to end 2013 with close to $80 million of cash, putting our expected net debt figure below $235 million. As is our practice, we continue to consider opportunities to maximize shareholder value, including the best uses of our cash.

I want to touch on something Bob mentioned earlier about the increased value of the property we owned on East 86th Street & Lexington Avenue in Manhattan. While the value of this property has likely increased significantly over the past two years, we do not see this improvement in the Manhattan real estate market as a temporary situation nor do we see it as something that needs to be acted on urgently. We certainly have no immediate needs to monetize this property given our significant cash position and our expected near-term increases in cash.

Capital expenditures including acquisitions were $15.2 million in the first six months of 2013 compared with $7.1 million in the first six months of 2012. I want to mention two club closings that will both take place on July 31, 2013. We’ll be closing one of our recently acquired Fitcorp clubs. This club is located in the south end of Boston, where we already have two existing Boston Sports Clubs within five blocks or less. We are upgrading the memberships of the members at the soon to be closed clubs, such that they can benefit from the use of any club in our Boston network, including these two clubs that are very nearby.

We expect we will retain 75% or more of these members and that we will able to reduce our operating costs. We do however expect to pay rent at this location for little over a year. We are also closing one of our Washington Sports Club that is now at the end of its lease term. This club does not contribute to our earnings or cash flow and is furnished from our Washington Sports Club network and does not benefit from the cost like most others do.

Moving back to capital expenditures, we have reduced our full year 2013 capital expenditure expectations and we now expect total capital expenditures to be between $34 million and $37 million. This is a reduction of approximately $6 million from our previous guidance and reflects moving the opening of the Greenpoint Brooklyn Club to Q1 2014, and no further club openings in 2013. Similarly, with the real estate market strengthening and our discipline with respect to the quality of locations as well as the associated economics we now expect to open five to eight clubs in 2014 versus our prior expectations of six to 12 openings.

Now, turning to our outlook, based on the current business environment, recent performance and current trends in the marketplace and subject to the risks and uncertainties inherent in forward-looking statements, our outlook for the third quarter of 2013 includes the following. Revenue for Q3 2013 is expected to be between $118.5 million and $119.5 million, compared with $119.6 million in Q3 2012.

As percentages of revenue, we expect Q3 2013 payroll and related expenses to be approximately 37.4% and club operating expenses to be approximately 39.2%. We expect general and administrative expenses to approximate $6.8 million, depreciation and amortization to approximate $12.5 million, and net interest expense to approximate $5.5 million. We expect net income for Q3 2013 to be between $2 million and $2.5 million, and diluted earnings per share to be in the range of $0.08 per share to $0.10 per share, assuming a 39% effective tax rate and a weighted average of approximately 24.5 million fully diluted shares outstanding. We estimate EBITDA to approximate $21.75 million in Q3 2013.

That concludes our prepared remarks. We’d now like to turn the call over to any questions anyone may have.

Question-and-Answer Session

Operator

Thank you. We’ll now be conducting a question-and-answer session. (Operator Instructions) Our first question comes from the line of Scott Hamann from KeyBanc Capital Markets.

Scott W. Hamann – KeyBanc Capital Markets

Hey, good afternoon, guys. Just in terms of some of the membership trends that you’ve seen throughout the quarter, and guests here recently, but can you give us a little color, it seemed like last quarter, you had seen some pick up across all the membership categories. I’m just curious if any of that has changed or what some of the observations maybe?

Robert Giardina

Yeah, I think for the quarter, Scott, we’ve seen that both full memberships, restricted memberships and corporate sales, were fairly in line with what we expected. And when I say that corporate sales were probably a little bit weaker than we wanted, but they were better than the previous quarter. Early July now, we are seeing the pick up in probably all three categories, and we feel better about the guest traffic on both the individual sales as well as the corporate sales.

Daniel Gallagher

And I think our attrition is also so far performing in line with our expectations. We expect the quarter to be 3.7%, which is the same as last year, which happens to be the same as the year before also.

Scott W. Hamann – KeyBanc Capital Markets

Okay. And just in terms of the Fitcorp acquisition, can you kind of speak to the integration process and any observations that you kind of have there opportunistically?

Robert Giardina

Yeah, I think one of them I just mentioned, we’re going to be consolidating one of the clubs. One of their clubs is right in the middle of two clubs that we have in south end of Boston. So we’re going to close that club on July 31, we let the members know, a few weeks back, about a month back and we’re going to upgrade those members to passport memberships in the Boston market. So they can use any club in our network as well as the two clubs that happen to be less than five blocks away, and as we play that out, we see that as being a cost savings opportunity for us as we enter Q4 and into next year. But I think also regarding the transition of Fitcorp, we are spending time this summer, we haven’t done probably not even half of it yet, but we’re going to be upgrading the facilities as we planned.

So that when we rollout September, we can have very much refreshed clubs that were in need of some capital. We have yet to make that capital improvement at the clubs, but we’re well on our way and look forward to seeing some refreshed clubs up in Boston. Then in terms of the operations, it’s been very seamless with both members and employees. The employees that came onto the company from Fitcorp are terrific, well trained, great group of people that are just going to fit right within our system, and the members like the additional clubs they can now use to our Boston.

Scott W. Hamann – KeyBanc Capital Markets

Okay, great. Thanks.

Robert Giardina

Thanks, Scott.

Operator

Thank you. Our next question comes from Sean Naughton from Piper Jaffray.

Jared W. Madlin – Piper Jaffray, Inc.

Hey, thanks. This is actually Jared Madlin on for Sean this afternoon. Thanks for taking the questions. I guess, first of all, I wanted to dig into the personal training price increase on the memberships, the $10. I guess, what is the average price of the memberships you’re selling there? And then have you done any testing in specific clubs of the member response to the price increase or what gives you confidence that price increase won’t have a negative impact there?

Robert Giardina

Hi, Jared, it’s Bob. We have a number of different memberships that we offer. We offer anything from a one session per month to a 12 session per month. So we don’t try to give out the averages in terms of the number of memberships or the value. But we also sell individual sessions, where a member can come in and buy an individual session for approximately $90 per session. These sessions in the membership are, of course, discounted to that number. Many of our trainers are very comfortable with the idea of raising the price up. In terms of margin, they will actually benefit from that margin, because most of them are on a percentage share. So a lot of the trainers are actually saying that the members are used to paying for the one session. They like the membership strategy right now, they like going on in discounted program and actually a lot of it is coming from the trainers themselves.

Jared W. Madlin – Piper Jaffray, Inc.

Okay, got it. And I guess on the other ancillary, I think you’ve touched on this very briefly at the start of the call, but why didn’t the success in the personal training, the improvement in the rate of growth there translate over the ancillary side of the business?

Robert Giardina

I think, it did improve, but we were negative, I think 6.8% in Q1. We were very happy with the volume of what I’d call PT memberships in Q2 and that’s going to affect Q3 and Q4 more than it does Q2. So we’re expecting to come out on the positive side in Q3 on PT revenue, after being negative in Q1 and flat here in Q2.

Jared W. Madlin – Piper Jaffray, Inc.

Yeah. I mean on the other ancillary side of the business, it looks like that rate of growth didn’t improve as much as the personal training business did. I was just curious you might have mentioned…

Robert Giardina

Yes. I think maybe the one program that disappointed us was our Sports Clubs for Kids program. and I think there were a couple of factors we lost a couple of key people in that area of the business at the beginning of the summer, which impacts our summer camp program. And I think a lot of the teams weren’t focused on at the way they should with all the new initiatives and rollout of our systems and some of the other things that are happening in the clubs. But we do think it’s a fairly simple thing to correct, and it’s not a large part of our business, it’s a very small number.

Jared W. Madlin – Piper Jaffray, Inc.

Got it, and then I guess in the average membership life declined that number was very steady for out all of last year. And the second quarter where we’ve seen a decline there, I guess just what’s driving that?

Robert Giardina

I mean, we do a whole litany of statistics to come up with that number. I don’t think there is one particular thing that’s driving it, other than our projection of what the average member life is going to be for the group of members that joined in the last two years.

Jared W. Madlin – Piper Jaffray, Inc.

Okay. And then I guess just lastly here on the Fitcorp acquisitions, I think you’ve spoken to this before, but can you just maybe remind us when do you expect these clubs to contribute positively to EBITDA and the membership pricing is similar to your current club base, correct?

Robert Giardina

Yeah. I think what we can say is, we’ve owned these clubs for weeks now, not months even. And overall, we expect right now, it’s negative EBITDA, and we expect that to get better each and every month. I would expect Q1 to be positive EBITDA for the Fitcorp chain. and overall, I’d expect Q4 EBITDA to be as a company, to be more in line with Q4 of last year, as we’ve observed some of the transitional costs, as Fitcorp got the opportunity and closed the one club we just referenced.

Jared W. Madlin – Piper Jaffray, Inc.

Okay. and the dues?

Robert Giardina

It’s very similar to ours, they have been and we’ll continue to be.

Jared W. Madlin – Piper Jaffray, Inc.

Great, thanks guys.

Robert Giardina

Sure.

Daniel Gallagher

Thanks, Jared.

Operator

Thank you. (Operator Instructions) Our next question comes from George Kelly from Craig-Hallum Capital Group.

George Kelly – Craig-Hallum Capital Group LLC

Hi guys, just a couple of questions for you. First, I’m wondering if you could give a little more detail on the new software system that will be, so I think you said it will be fully implemented by the third quarter. and what I’m hoping to understand better is, do you expect over time, so if we look out for the next year or two, do you expect this to be a material revenue generator and what specific kind of fees and options will be the biggest component of that revenue?

Robert Giardina

George, this is Bob. I think in terms of the software that we’re rolling out. it is a complete program for the club, but we’re starting up with our registration and booking, and we’re starting up from that point of view, because it will help support our ancillary business, personal training in particular, and then some other fee programs that we’re doing on the small classes. Consumers both members and non-members will be able to go to our website, select a program, come in when they wanted to come in, book their trainer. So it will have a nice impact on our business overall to be able to offer a program to both members and non-members. We had to move in this direction, and it allows our trainers to have more visibility in terms of their scheduling and what they’re able to do as well. So we see a lot of benefits coming out. As Dan said earlier, three quarters of this will be rolled out over the next month. and then by September, we should have closer to 90% of it rolled out. So we’re going through the integrations, we’ve got a lot of the lifting done already, and now it’s just getting more in line.

Daniel Gallagher

If I could add to that, during the quarter as some of our clubs roll out, then we saw for MoSo, the field team leaders have to go into training for two days, and then a week after, they spend the week integrating it. So it’s been a little bit of a distraction to the field. And where we’re looking forward to is, having that behind them, and what they’ll have is a much more user-friendly system. So our system that we’re replacing is not very intuitive, it’s actually a little clumsy and you kind of have to be here for a little while to understand how to use it, while our new system is much more intuitive and it uses the very latest technology as opposed to very old technologies. so it’s going to allow us to do a lot more things using the platform going forward.

George Kelly – Craig-Hallum Capital Group LLC

I guess just if I could expand on that a little bit though, I mean it sounds like ease of use, in order to make it easier for people to book in it, but doesn’t it open up your classes to non-members more, and do you expect non-members so far we got in 2014, non-members to make up a much bigger percentages of some of your classes?

Robert Giardina

At this point, we’re not really sure if it’s going to make it a bigger point, a percentage of, because if we do a better job on our scheduling and understanding what our members want. We may have more members taking advantage of those slots. I’d rather get the consumer to buy a membership versus buying a one-off. so obviously at the club level, the goal is to get an individual to buy a membership either club membership or personal training membership. If we can’t get them to purchase one of those programs, then we want them to come in and buy single sessions. so we are always going to be driving them towards the membership program first.

George Kelly – Craig-Hallum Capital Group LLC

Okay, got you. And then secondly on, you talked about increasing the rate for personal training, are you still planning, I think you may have talked about it a little bit, but just general, dues increases is that coming do you think later this year.

Robert Giardina

Yeah. so in September, we will be raising the rates as we mentioned $10 per session per personal training. and then in October, specifically, in the New York and Boston urban market, we will be raising our top tier membership, our passport program, by $10 per month, now that will be the selling rate.

George Kelly – Craig-Hallum Capital Group LLC

Okay.

Robert Giardina

so I think this quarter gave us the confidence in terms of the stability in the clubs, the transition that we’re going through with the system to allow us to put those increases in place.

George Kelly – Craig-Hallum Capital Group LLC

So then will you have two different prices points for the passport membership?

Robert Giardina

No. the passport will be the same everywhere. so currently it’s 89-99 across the board, they’ll raise up to 99-99, but we primarily sell more of those passport memberships in the urban markets, New York and Boston.

George Kelly – Craig-Hallum Capital Group LLC

Okay, got you.

Robert Giardina

That’s why that affects those markets more.

George Kelly – Craig-Hallum Capital Group LLC

Okay. and then lastly, you talked on your prepared remarks, just about the value of the building and wondering if you could just throw out a range of kind of what you’ve seen recently with the people that have prepared, I don’t know if it’s formal option or whatever, but can you give a range?

Robert Giardina

Yeah. I think we can give a sense, I mean we’ve been operating in Manhattan for over 35 years, and we have 37 clubs here. And this is where our headquarters is. So we have a very good sense of the market here in New York and we believe the value of that club, and a sale price value right now will be in excess of $60 million. I think I mentioned that we had no intentions of selling this right now, but it is nice to know that we have something that we can monetize in the future if the need be, but we don’t see the New York market suddenly dropping and that we need to act on this now, certainly not with over $69 million of cash on hand.

Daniel Gallagher

And George just to add to that, I think I want to just mention that our slowdown in growth is absolutely tied to the success or the increases that we’re seeing in real estate costs. So we’re seeing in our value, but we’re also seeing in the recent negotiations that we’re moving forward with. So we’re being very careful not to move outside of the model that we’ve defined in terms of where we’re going to be and how disciplined we’re going to be, but landlords are actually using the recent sort of spike in real estate costs to their benefits. So we’re going to slow it down in terms of our growth to make sure we get the right deals.

George Kelly - Craig-Hallum Capital Group

Okay, thank you.

Robert Giardina

Thanks George.

Daniel Gallagher

Thanks George.

Operator

Thank you. Our next question comes from Kurt Frederick from Wedbush Securities.

Kurt M. Frederick – Wedbush Securities, Inc.

Thanks, good afternoon. I have sort of a couple of questions, one is on I guess the roll-out of UXF zones, can you just talk a little about what happens when you open them like how long it takes for you to see the benefit of them opening, and then just if there is any transition as far as the staff training and things like that?

Robert Giardina

Yeah. In terms of the zones, it’s immediate, because what we do is we go into a club and within one day, we basically reposition the club and rollout 600 square foot to 800 square foot turf area with this new area and new equipment. Prior to that about a week prior to that, we’ll bring the trainers in and we train them on the different types of equipment they were putting in the zone. Probably more important than anything else, it sends a message to the members that they have this new facility, this new area within the club that they can use. So it opens up a lot of dialog between the trainers and the members by asking now how do you use it? So whereas we see almost an immediate lift on the personal training side and that’s really what the goal is, is to create more excitement within the clubs, to get members to ask how to use it, to get trainers more engaged with our members and to see a lift in the personal training, and that’s what’s driving the change that we are seeing in the personal training and that’s what’s driving the price increase that we are going to be putting in.

Kurt M. Frederick – Wedbush Securities, Inc.

Okay, you said that these about 75% of the clubs would have it by year end, is that the end goal, or are you going to eventually do more than that?

Robert Giardina

My goal is to get 100% of the clubs. Now the probably the last 10% to 15% of the clubs will be a little bit more difficult because of the configurations of the clubs, but we still need to offer the program in all the clubs. And even currently today, even though the zones are only rolled out in 75 clubs, we are offering new exact training in all the clubs. So it doesn’t have to have the zone to be able to offer the training. We just see a better lift in the clubs that we do have the zone.

Kurt M. Frederick – Wedbush Securities, Inc.

And then what’s up on the part of Fitness Division, the release that came out a week or two ago. Could you talk a little bit about that just on kind of what the strategy is there in order to penetrate the new markets and then just kind of timing of what and when do you kind of like a push, I mean and just kind of economics of that model?

Robert Giardina

But so, in terms of the overall strategy of the private trainers – private centers, we are planning on staying again within our own markets. We are primarily going after corporate centers. We currently run three private centers for universities, Georgetown and Harvard, so we do some universities, again within our market and our goal first and foremost is to be able to leverage our commercial base to those either corporate clients or students. So again, it’s really getting our brand within those clubs. As an example, we may be working with the corporation in Boston, but the goal was to let them have access to the other Boston Sports Clubs and then have their family members have access to the clubs as well. So we see that, this is an opportunity, there are about 300 private centers within our four markets today that we are pursuing, most of them are being managed by their own teams or other operators. So it’s just going to be a slow process in bringing them onboard. But again, we are just going to try to get into involved with them and offer them more than just managing the center. We really want to run wellness programs within their facilities as well as offering the packages within our clubs.

Kurt M. Frederick – Wedbush Securities, Inc.

Do they generally have long-term contracts with…?

Robert Giardina

It’s typically short-term, two years to three years sometimes four years and they typically renew. Again, the more offerings that we can give them, wellness programs, usage of our other facilities, go on with those there, we’ve had the university clubs now for 15 years.

Kurt M. Frederick – Wedbush Securities, Inc.

Okay. That’s all I have. Thank you.

Robert Giardina

Thank you very much.

Operator

Thank you. At this time, we have no further questions. I would like to turn the floor back over to our speakers for closing comments.

Robert Giardina

Thank you. That concludes our call. We appreciate the time everyone spent. We look forward to releasing our third quarter results sometime in October. Thank you.

Daniel Gallagher

Thank you.

Operator

Thank you. This does conclude today’s teleconference. You can disconnect your lines at this time. Thank you for your participation.

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