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Life Time Fitness (NYSE:LTM)

Q1 2011 Earnings Call

April 21, 2011 10:00 am ET

Executives

Bahram Akradi - Founder, Chairman, Chief Executive Officer and President

Michael Robinson - Chief Financial Officer and Executive Vice President

John Heller - Senior Director of Investment Relation and Treasurer

Analysts

Sharon Zackfia - William Blair & Company L.L.C.

Paul Swinand - Morningstar Inc.

Scott Hamann - KeyBanc Capital Markets Inc.

Gregory McKinley - Dougherty & Company LLC

Edward Aaron - RBC Capital Markets, LLC

Brian Nagel - Oppenheimer & Co. Inc.

Anthony Gikas - Piper Jaffray Companies

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Life Time Fitness Earnings Conference Call. My name is Regina, and I will be your operator today. [Operator Instructions] I would now like to turn the presentation over to your host for today, Mr. John Heller, Senior Director of Investor Relations and Treasurer. And you may begin, sir.

John Heller

Thanks, Regina. Good morning, and thank you for joining us on today's conference call to discuss the first quarter 2011 financial results for Life Time Fitness. We issued our earnings press release this morning. If you did not obtain a copy, you may access it at our website, which is lifetimefitness.com. Concurrent with the issuance of our first quarter results, we have filed a Form 8-K with the SEC, which also includes the press release.

On today's call, Bahram Akradi, our Chairman, President and CEO, will discuss key highlights from our first quarter and our operations. Following that, Mike Robinson, our CFO, will review our financial highlights and update our financial guidance for 2011.

Once we have completed our prepared remarks, we will answer your questions until 11:00 a.m. Eastern Time. At that point in the call, Regina will provide instructions on how to ask a question. I will close with a tentative date of our Second Quarter 2011 Earnings Call. Finally, a replay of this teleconference will be available on our website at approximately 1:00 p.m. Eastern Time today.

Today's conference call contains forward-looking statements and future results could differ materially from those statements made. Actual results may be affected by many factors, including the risks and uncertainties identified in our SEC filings. Certain information in our earnings release and information disclosed on this call constitute non-GAAP financial measures, including EBITDA, free cash flow and other non-GAAP operating measures. We have included reconciliations of the differences between GAAP and non-GAAP measures in our earnings release and our Form 8-K. Other required information about our non-GAAP data is included in our Form 8-K.

Also, I would like to take a moment to remind you, our Annual Shareholder Meeting takes place at 2:00 p.m. Eastern Time today at our corporate office in Chanhassen, Minnesota. Accordingly, we will be preparing for and conducting that meeting and will not be responding to e-mails or phone inquiries until afterward or approximately 3:00 p.m. Eastern. Your patience and flexibility are appreciated.

With that, let me now turn the call over to Bahram Akradi. Bahram?

Bahram Akradi

Thanks, John. I'm pleased to be here to share my thoughts and perspective on our first quarter of 2011 results. We had a good first quarter. Revenue growth was strong across the board. Dues revenue for the quarter was up 9% from a year ago and our in-center revenue had its fifth straight quarter of double-digit growth at over 12%. Net income was up nearly 17%, and actually up 20% on an adjusted non-GAAP basis over last year.

Mature same-center sales were up 3.8%, continuing the positive trend of the last several quarters. Attrition for the quarter was 8.4% versus 8.5% a year ago, and our trailing 12-month attrition was 36.1%. As we have stated before, an annual attrition rate of 36% or better is our long-term goal.

I am pleased with these results. They reflect the ongoing progress we have made in driving member experience and connectivity.

We remain focused on the 2011 objectives we laid out on the first quarter call. We continue to strengthen our balance sheet. In fact, our leverage is now at the lowest point in 5 years and is approaching our goal of debt-to-EBITDA of 2:1. The strategy we have employed over the last 2 years of delevering the balance sheet and generating free cash flow has put the company in a great position as we look to refinance our revolving credit facility this year.

Our revenue performance in the first quarter gives more confidence that our stretch goal of $1 billion of revenue for 2011 is achievable. This is not our guidance, but rest assured we will do all we can do to achieve this milestone.

We continue our transformation of Life Time into a Healthy Way of Life company. Our expanding array of offerings gives people the best chance to find their area of passion and achieve their health and fitness goals.

Executing on these objectives has put the company on a solid footing. Now, our primary focus is growing the company. Whether it's inside or outside our centers, we will improve and add to the programs and services that are important to our members. Our business model is strong and the investments we're making further differentiates us for long-term growth and success.

With that, I now turn it over to Mike Robinson, our Chief Financial Officer. Mike?

Michael Robinson

Thanks, Bahram. I'd like to provide you with some additional details on our first quarter performance and financial results. First of all, let me remind everybody that starting with the fourth quarter last year, we're recognizing noncash performance share-based compensation expense related to a grant of long-term performance-based restricted stock approved by the Compensation Committee of our Board of Directors in June 2009.

This grant was to serve as an incentive to our senior management team to achieve certain EPS targets in 2011 and 2012. These EPS targets were intended to be aggressive goals in excess of baseline expectations.

In the fourth quarter, the company determined that the 2011 EPS performance criteria required for vesting of 50% of the stock or approximately 450,000 restricted shares was probable.

In the first quarter, we recognized approximately $1 million of noncash performance share-based compensation expense. We expect to recognize an additional expense of approximately $3 million or approximately $1 million per quarter in the rest of 2011. While we report our results inclusive of these expenses, we will refer to adjusted or non-GAAP earnings ratios and guidance throughout our comments.

We currently believe achieving the remaining 50% target in either 2011 or 2012 is not probable. Therefore, we have not recognized any compensation expense related to the remaining 50% of this performance-based restricted stock grant.

Now, let me talk about attrition and retention. For the year -- for the quarter, our attrition rate was 8.4% as compared to 8.5% last year. This includes approximately 40 basis points of improvement related to our change in methodology that went into effect April 1 last year. That is, we no longer count those potential memberships that elect to cancel during their 14-day trial as members or attritions.

Our first quarter attrition results came in a little better than we expected, especially given the price increases we took early in the quarter which typically result in short term increases in attrition.

Our trailing 12-month attrition rate is 36.1%, versus 39.3% last year. This includes approximately 120 to 150 basis points of improvement related to the methodology change I just mentioned. The estimated average life of the membership is 33 months, unchanged from last quarter.

We have stated that our internal long-term goal for attrition is 36%. While we're pleased with the improvement we've seen over the last year, we expect the improvement will get increasingly more challenging as we anniversary comparisons at more normalized levels. We expect second quarter attritions to be more or less the same level as 2Q 2010.

We finished the quarter with 650,784 memberships. This was a 6% increase from the first quarter of 2010 or just under 37,000 net memberships added. Sequentially, we had an increase of approximately 38,000 memberships from Q4.

For the first quarter, we grew the net balance of Flex Memberships by approximately 1,300 units to approximately 71,600 units.

Our total revenue was $240.6 million for the quarter which is up 9.5% from last first quarter. Our main revenue drivers include the number of open centers at March 31, 2011, was 90 compared to 87 at March 31, 2010. Of these 90 centers, 55 or 61% of our large current model and 70 or 78% of all the centers have been opened 3 years or more, which we classify as mature centers. We operate 8.9 million square feet of fitness facilities.

Memberships dues revenue grew 8.9% for the quarter which outpaced our membership growth of 6%. Our goal is to have continued dues growth in excess of membership growth. Our powerful dues annuity stream accounts for 66% of our total revenue.

The price increases I spoke of earlier that we put in place in early 2011 affected about 20% of our membership base, and will have a net effect of an increase of just under 1% in average dues across our system.

In-center revenue grew by 12.4% in the quarter. We are strategically driving this growth by increasing our products and services in our portfolio and lowering price points on select services to drive volume and to enhance member connectivity and involvement, which we expect to improve member retention and customer satisfaction.

Our revenue metrics are strong and consistent across the board. Our first quarter same-store sales were 5.3% and our 37-month mature same-store sales were up 3.8%. Revenue per membership in the first quarter was $379 per membership, which was up 2.9%. In-center revenue per membership of $118 was up 6% in the quarter. For perspective, in the first quarter of 2009 and 2010, we were at $103 and $111 of in-center revenue per membership, respectively.

We believe the improvement over both the last 2 years is evidence of our connectivity with our members, as well as the expanded program offerings and changes in program pricing.

We'd like to move the discussion on our cost structure. Overall operating profit margin in Q1 decreased 40 basis points to 16.7% from 17.1% in Q1 2010. Excluding the effects of the $1 million of noncash performance based restricted stock compensation expense, operating profit margin for the quarter remained flat at 17.1%.

For the full year, we expect operating profit or operating margins to improve slightly, even as we absorb approximately $3 million of additional noncash performance-based compensation expense.

The combination of presale cost and the typical lower start-up margins for the 4 large center openings from December of last year through the first half of 2011, naturally moving to higher profitability, and the business growth from the infrastructure and connectivity-related investments we're making are the primary drivers of this anticipated margin improvement in the second half of the year.

Center operating margins improved in the first quarter. Center operating costs were down about 40 basis points. This includes approximately 10 basis points of noncash compensation expense related to the performance-based restricted stock grants.

Center operating costs improved, driven primarily by costs in excessive enrollment fees running slightly less than the same costs in Q1 2010 and the efficiency improvements in club operations and our in-center businesses.

As we planned, marketing and advertising costs were up 50 basis points as we increased marketing campaigns spend, primarily for presales, and we continue to invest in our myLTBUCK$ affinity program. As we've discussed, we expect our marketing cost to be up over last year as we invest more in member retention initiatives, including myLTBUCK$, as well as in our in-center and corporate businesses. These initiatives are showing results as evidenced by our strong top line growth and significantly improved attrition rates.

G&A was up 40 basis points for the quarter as a percent of revenue at 5.3%. This includes approximately 30 basis points or $700,000 of noncash compensation expense related to the performance-based restricted stock grants. The other dollar increases in G&A are a reflection of some investments in overhead structure to help drive the retention and connectivity issues, initiatives at our centers and initiatives underway to grow other Healthy Way of Life related businesses.

Other operating expense was up 50 basis points for the quarter, primarily as a result of investment in our events and total health business infrastructure and costs associated with acquired businesses. While these operating expenses increased slightly as a proportion of our total cost structure, as expected, we are seeing commensurate top line growth. The associated revenues related to these other operating expenses increased 36% over Q1 2010.

We continue to see significant leverage in depreciation and amortization as we continue to grow our revenue well ahead of square feet expansion. These costs were down 60 basis points for the first quarter.

Interest expense net of interest income decreased to $5.5 million from $8.1 million last first quarter and was down sequentially from $6 million for the fourth quarter of 2010. This decrease in interest expense reflects our continued debt reduction in the quarter and the benefit from the low variable interest rates on our revolving line of credit. In 2011, we expect the interest expense to be down slightly from total year 2010 as continued debt reduction is offset by expected rate increases.

Our tax rate for the quarter was 40.6%, up from 40.2% last Q1. Our expected effective tax rate in 2011 is expected to be slightly above 40%, driven by increases in nondeductible expenses.

That brings us to net income for the quarter of $20.8 million including $600,000 after-tax effect from the noncash compensation expense. Excluding that charge, net income for the quarter would have been $21.4 million, representing 20% growth over last first quarter.

Weighted average diluted shares for the fourth -- for the first quarter totaled 40.9 million shares. We expect our diluted share count to increase about 2% to 3% to 2011, above the 40.4 million share average in 2010.

Overall, we achieved diluted EPS of $0.51 for the fourth quarter, including $0.01 for our noncash compensation expenses. Excluding this expense, the quarterly EPS was $0.52, a 19% increase over 2010.

My next topic will be cash flow and our capital structure. Our cash flow from operations totaled $60.1 million for the quarter compared to $53.9 million last Q1. We have now generated 9 consecutive quarters of free cash flow. For the quarter, we generated nearly $22 million of free cash flow.

We continue to focus heavily on our capital structure, cash and debt available. We paid down $24 million of debt in the first quarter. As of March 31, we have $343 million outstanding, including letters of credit, on our $470 million revolver. That leaves approximately $138 million in cash and revolver availability.

Our net debt to total capital came down to 39.9% at the end of the quarter. Our covenant calculations for the quarter continue to show significant growth versus our covenant limits.

On April 4, we retired in full 10 mortgage loans from Starwood Property Trust totaling $69.6 million. You may remember these as the Teacher's Mortgages. We used our revolver and cash flow from operations to fund this retirement. All 10 mortgages were released, bringing the number of owned unencumbered centers to 49 with a net book value of approximately $1 billion.

As we've been communicating for sometime now, our long-term strategy is to attain and hold investment grade-like leverage ratios and credit metrics. For 2011, we plan to continue to delever the balance sheet until we reach a debt-to-EBITDA ratio of approximately 2:1 sometime in the second half of the year. From there, we plan to maintain debt leverage around 2:1 and channel our excess cash in our debt capacity into many growth initiatives.

I'd like to say a few words about our plans for our revolving credit facility. Over the last few months, we've been in preliminary discussions with banks about our many and extending facility. While we cannot make any guarantees, we hope to have a new facility in place in 2011 that gives us increased access to capital and added flexibility to run our business.

Regarding capital expenditures, we paid for approximately $38 million of CapEx in Q1 2011. This was comprised of approximately $31 million for growth and $7 million for maintenance and infrastructure support. In addition to cash, we spent on CapEx so our construction accounts payable balance decreased approximately $2 million from year end 2010.

We opened our Syosset, New York location in January. This center is performing well. We plan to open 2 additional large centers in 2011 located in Colorado Springs, Colorado and Summerlin, Nevada. Both are scheduled to open in May.

For 2011, we expect to spend approximately $150 million to $175 million for CapEx to open 3 large centers, commence construction of our 2012 centers and maintain our portfolio of clubs. This will be comprised of approximately $110 million to $125 million for growth and $40 million to $50 million for maintenance and infrastructure support.

Just as we did in 2010, we continue to look for opportunistic acquisitions that would expand our Healthy Way of Life offerings.

Let me comment on a few balance sheet variances. Accounts receivable grew over $1 million from year end 2010 driven by growth in our media business. Prepaid expenses are up $5 million from year end, driven primarily by the timing of payments for annual contracts such as insurance. Income tax receivable of nearly $10 million at year-end 2010 has been zeroed out with our first quarter profits.

Deferred revenue grew about $4 million for the quarter, driven primarily by preregistration for summer races, presales and sales of member activity packages. While deferred member origination cost continues to decline due to more current period expense related to direct costs in excess of enrollment fees.

With that, let me discuss our updated financial guidance for 2011. We expect our revenue will grow to $980 million to $995 million, up from $970 million to $990 million, driven primarily by growth in our in-center revenue and corporate businesses, as well as membership growth in our centers.

We anticipate our net income will grow to approximately $92 million to $95 million or 14% to 18% growth. Excluding the impact of the noncash compensation expense in 2011, we expect non-GAAP net income to be $94.5 million to $97.5 million.

We expect our diluted EPS will grow to $2.21 to $2.29 per share. Excluding the impact of the noncash compensation expense in 2011, we expect non-GAAP diluted EPS to be $2.27 to $2.35 per share.

Based on our first quarter results, we're increasing the bottom end and reaffirming our annual guidance. We don't expect this growth to be straight line each quarter. I'd like to point out that while we don't give quarterly guidance, you should expect that earnings growth will be slightly more heavily weighted in the second half of the year.

This is driven primarily by the fact that we've got 2 club openings with associated presale and start-up costs we expect to incur in the second quarter of the year compared to none last year. As you would expect, these second quarter center openings position us for the EBITDA growth in these centers for the second half of the year.

That concludes our prepared remarks regarding our first quarter financial results. We're pleased to take your questions now.

Question-and-Answer Session

Operator

[Operator Instructions] Gentlemen, your first question today comes from the line of Brian Nagel with Oppenheimer.

Brian Nagel - Oppenheimer & Co. Inc.

I just want to start, Michael, with a couple of questions on insurance. You spent a lot, obviously you addressed churn in today's prepared remarks. We talked a lot about in the fourth quarter call, but is there any way to know, maybe in retrospect, to isolate what impact higher churn among some of those memberships we took to pricing actions sort of what recently may have had in these quarter's churn number?

Bahram Akradi

That's a good question. Let me walk you through the -- the numbers are small amount. I think that would be virtually a fraction of a percent difference in the -- if we had not raised the price. But ultimately we are trying to, first and foremost, do the right strategy for our company, experience of our customers and for our brand. And during 2007, '08, we did bring in some members who were members of clubs, much lower priced, that they went under, bankrupt, whatever. Those members, we made special deal for them to come in. However, we were not going to allow them to stay at that preferred rate for too long over our original members who had paid the money. So therefore, the right thing to do is to get them, over time, closer and then equal to what our original members are paying. So we just did what we had to do. We knew that, that will have some of these people who had a very, very low rate bump out and go out, but it doesn't matter. We're after a segment of the market. We're not serving the entire market. We want to have Life Time brands stand for highest levels of quality of programs and services and the facilities we offer. So the focus on our customer drove that decision and it's been the right decision.

Michael Robinson

Just to put a few numbers behind it, we would expect probably 50, 60 basis points of bump, but we did not see that much of bump.

Bahram Akradi

But we saw probably about half of that. So the attrition would have been maybe closer to the 8.1%, 8.2% for the quarter, versus the 8.4%.

Brian Nagel - Oppenheimer & Co. Inc.

So that's -- and I know it's difficult to say, but given your historical experience in some of these, are we clear with this issue now, or could this, say, outsized churn, spill into Q2, Q3?

Bahram Akradi

No. Here's what I would tell you. Last year, our attrition rates in the Q1 and Q2 were exceptionally good. We did not have satisfactory attrition rates, for me personally, in the 3Q and 4Q. So our opportunity to improve annual attrition rate isn't going to come from the numbers we have achieved last year or the first quarter of this year in the first Q. Those are really good attrition numbers. What we have to improve at Life Time is attrition numbers in Q3 and Q4. And if I tell you we work on that 14 hours a day, I wouldn't be lying to you. We're focused on that. I do believe that our attrition rate of 36%, however, is an impressive attrition rate considering still high levels of unemployment, and the fact that when we were running 32%, 33% attrition rates, we had a large portion of our clubs being just a year or 2 old. And a 1-year-old club has a lower attrition rate than a 3-year-old club. So those dozen clubs that we had in the year 1, would help the overall attrition rates somewhat, coming a little bit lower. So I -- and I want to emphasize that 35%, 36% attrition rates are good, good solid attrition rates. It's the attrition rate that signals us we're in good place, the programs are working, the adjustments to our business is working. Really now, our focus is expansion. If we can improve it from where it's at now, another half a point or another point, great. But it's solid, it's good enough. If we just maintain it, it's good. Not that we don't try to take it lower, but what we want to do now is focus on growth.

Brian Nagel - Oppenheimer & Co. Inc.

All right, very good. And then I just wondered if I could just jump over to on the expense side, Mike. I think, if my numbers are right, it's the first quarter in 4 quarters or so that you leveraged your center operating expenses. I think you've addressed this in your prepared remarks as well. But if you think of the factors that allow that to happen here in Q1, were they unique to Q1 or is that something maybe we should start modeling out as we look through the balance of 2011?

Michael Robinson

They are not unique to Q1. Let's spend a minute on this because I think it's important. Yes, we saw center operating margin pressure well over the last year or so, and it was being driven by 3 elements. The first element were costs in excess of enrollment fees. We still have significant costs in excess of enrollment fees, but we have anniversary-ed high levels and, in fact, saw slight improvement on that in the first quarter. That was a driver in the improved center operating margins. The second element of this is the faster growth rate in our in-center businesses. We've been seeing double-digit growth rates in our in-center business now for, again, well over a year. And those come in at lower margins than the center margins on average. And so just by waiting, it does. Now, we don't mind seeing that at all. However, the good news there is we're also starting to see a little bit of profitability improvement in those businesses. And that, again, helps the overall center operating margins. The third area is we are investing in our business in the clubs to drive the retention and the connectivity initiatives that we've been talking about and talking about, and probably sound like records on it. But it is very, very important to the holistic view that the 4 wall-to-wall view of our centers is in driving better customer satisfaction and driving better retention rates. And we believe, ultimately, by driving better top line growth. And we're seeing those things. We're going to continue those investments, but again -- and we haven't fully anniversary-ed all of those, but again we're seeing what we want from results in other areas because of those investments. It's our view that we anticipate that we'll continue to have center operating margin improvement the rest of this year.

Brian Nagel - Oppenheimer & Co. Inc.

Perfect. Thanks and congratulations again.

Michael Robinson

Thank you.

Operator

Your next question comes from the line of Paul Swinand with Morningstar.

Paul Swinand - Morningstar Inc.

Thanks for taking my call. My first question would be on the enrollment fees. Have you analyzed that by market? Are there certain markets that are lower fee? And some clubs use that as a way to create buyers' remorse from the customer from quitting. I know you guys talk about $4,000, $5,000 life of membership value. Is there a reason that that's going to maybe keep going down in some markets, but then does it really matter to you guys? Is that something maybe that's sort of going away from the industry?

Bahram Akradi

Well, look, we analyze these things, obviously, every which way. We know that a customer that pays some dollars of enrollment fee has a better retention rate than the customer has that pays 0 for enrollment fee. We, of course, measure -- the dollar amount is insignificant. I mean, our average attrition, our average rate for enrollment fee may be $80 to $100 is what we basically totaled budget for the year. So we give up half of that to achieve the membership counts that we need. In fact 1% discount on our -- I mean it's a ridiculously non-event in terms of the monetary value. It's really what it means in terms of the quality of the membership we are signing up, et cetera. So we're looking at it in every which way, from a quality, from the numbers. But when you look at that number, and what we have to give up, if we give up $30 or $40 of our budgeted number times 80,000 memberships, 90,000 memberships we sell in a quarter, that number, because it's below the commissions we pay, becomes direct cost and really affects our short-term margin of the club. So one of the ultimate situations is we can get the full enrollment fee of it, let's say, call it $100, which would than offset our commission structure. That would be great because immediately it will help the margin, center margin numbers, and it would have immediate impact on the numbers. But it's not significant enough that would make us walk away from playing with that to get the membership counts we need.

Paul Swinand - Morningstar Inc.

Okay, very interesting. Well, in that same line, do you think of the customer that's going for that discount? I mean, I would have thought that maybe that was more an economic thing, and as the economy improved people would be less price-sensitive. Do think it's more an economic issue or a competitive issue?

Bahram Akradi

Well, I think it's both. You got to look at the fact that the industry is -- a lot of people are not charging anything upfront and that they disguise it by charge -- making the customer pay the first and last month of dues. And since they are, most of the other companies are not worried about the SEC. They work on cash basis. Collecting the last month of dues in terms of cash upfront for them would be the same as collecting some sort of enrollment fee. So it really, our strategy -- and this is an important question, I want to make sure I give you the real important answer. Our goal is to differentiate Life Time, so we really don't have to play in the price segment. And when you look at our average, when you look at our average member price, member price, versus all other national chains, our average member price is significantly more. We are 2x to 3x more than, what I call room full of fitness equipment places. So we have focused ourselves on delivering programs, not just places, high quality of people and very, very incredibly, well-orchestrated and run facilities. All 3 of those things. And we want to get to the place that where the price is really not the factor. I feel like we are 80% of the way there from 2 years ago, 2.5 years ago. I'm very, very comfortable with the way we have strengthened our brand. And now we have the position, just a little bit of enthusiasm in the economy, allows us to have more opportunities with Life Time. For right now, we're very comfortable with the way things are.

Paul Swinand - Morningstar Inc.

Okay, great. Thanks for that. And quickly on the in-center, obviously that's doing well above expectations. It keeps going up quarter after quarter. How much further can it go? And I guess, I would want you to analyze it by, I know you've got a lot of new programs, can you continue to gain penetration in the new programs and for how long?

Michael Robinson

Well, we cut this many, many different ways. To answer your question, how much higher can it go? In our mind, the sky is the limit. And that's really how we approach and how we look at the leaders of all of these businesses to drive that.

Bahram Akradi

But we don't budget that.

Michael Robinson

We don't know, we don't budget it. We're not going to guide that way. But there are tremendous amount of opportunities, both in the introduction of new types of products and services over the last year or so in our spas. We've added capacity through the introduction of LifeClinics which are chiropractic services in a few of our clubs. We can continue to roll that out across the system in a measured way. We've added medi-spa facilities in some of our spas, the same type of thing. And so that's just one example in one of our business lines. And we're looking at and have been driving expansion of products and services across all of these business lines. A second thing, and you've properly pointed it out, is penetration itself. Can we get more customers to purchase our products and services, and can we get them to spend higher ticket prices in doing that? And from a marketing perspective, we're focused on that. And from, again, an engagement and involvement and a connectivity perspective, we're focused on that. So we look at this, and we believe that across the board, we have tremendous opportunities here.

Paul Swinand - Morningstar Inc.

Okay. Thank you again. Good luck.

Operator

Your next question comes from the line of Scott Hamann with KeyBanc Capital Markets.

Scott Hamann - KeyBanc Capital Markets Inc.

Just when you kind of take a look at the entire membership base right now, I mean is it possible to kind of parse out who is below the rates that you think they should be paying? And then with that information, do you think that the environment's right, or you have the ability to take an additional price increase on those members or the newer other members besides the 20% that you did in the first quarter?

Michael Robinson

I'm going to give you just a couple of numeric thoughts and then I'm going to turn it over to Bahram from there. That 20% number that we talked about is really the major piece of that pool that we're looking at over time. Most of the rest is at or near the general rates that we have today. That said, over time again, we continue to feel that in good economies, with the continued expansion of services and how we are positioning the company, that pricing, we'll have pricing opportunities in the future.

Bahram Akradi

And I will echo that. I think that we have the opportunity. We still have that same group. I don't believe that most of that group reached to their rack rate. We gave them a bump, but we didn't give them a bump all the way to the rack rate or the rate that the new members are joining. So as those types of members drop out and we gain new members at the full rack rate, we see that the average dues of the member we sign up is more than the average dues of the members we lose. So we will see average dues improvement just due to the churn, that's one thing. The second thing is we, at the right opportunity, we will not do a price increase for a member, for any member, for more than once a year. It doesn't matter how low their rate is. So if we've given them a $2 price increase, we won't raise it again for at least 12 months for that for them. We don't have any legal obligation not being able to do this. It's just the company's moral policy that we won't do that from a customer service point of view. But we have opportunities. So in a long shot, my vision is every member in every club will pay the same rate, monthly rate, and we won't have special prices on the dues for anyone. So as time goes on, we have the ability to improve dues without necessarily raising the rack rate on a national basis.

Scott Hamann - KeyBanc Capital Markets Inc.

And then just a follow on to the center op expense. You obviously saw some improvement, it sounds like year-over-year, from the acquisition costs and enrollment fee dynamic. And I think the impact last year was kind of on the order of $50 million, you can correct me if I'm wrong on that. But Mike, is your anticipation that we should see this dynamic kind of be in that similar range as 2011 plays out? Or do you think that has the opportunity to get a little bit better?

Michael Robinson

Well, if the first quarter is any indication, we got -- we saw some slight improvement. I'm not expecting it to move substantially, but we did see some slight improvement.

Scott Hamann - KeyBanc Capital Markets Inc.

Good, thanks.

Operator

Your next question comes from the line of Ed Aaron with RBC.

Edward Aaron - RBC Capital Markets, LLC

I wanted to just ask a quick question on the guidance. When you took up the top line by 100 basis points for growth, the earnings guidance really didn't change much, so I guess a little bit at the low end. But just when I think about the fixed cost leverage in your model, I would typically think that 100 basis points of higher top line would translate into something a little bit more meaningful on earnings. And I was just hoping you could maybe walk me through that.

Bahram Akradi

As Mike has mentioned numerous times to you guys, we are investing heavily in establishing our opportunities of growth. So we're investing in our programs that would allow this company to have future growth in 1 place. That's the one place we're spending money. The second place we're spending money is significant dollars, and it adds up to millions of dollars on an annual basis now, on retention programs where we weren't spending money before. So as he mentioned before to you, we're going to spend more money on marketing as a total. However, the excess dollars we're spending and marketing, it's not in as much in getting new members as it is retaining the existing members, okay? So myLTBUCK$ that we give the customers, we call them back. We don't work on -- we hope for redemption. We have systems in place that these people actually redeem these dollars they have available to spend. Because that helps us connect them more to their areas of interest. So we are going to spend more to have a differentiated product. So I think that the guidance that Mike gives you is pretty thoughtful guidance. And we think it's for the long-term good of the company to invest those dollars and make sure our programs, our customer service and our customer experience is not duplicated anywhere else.

Michael Robinson

So another point in that, Ed, do we think we'll see leverage? Yes, we will. It's just the timing of it, how it flows through. And we believe these are the absolute right things to do for the company for the long term.

Edward Aaron - RBC Capital Markets, LLC

Got it. Thank you. And then, Bahram, I wanted to go back to the comment that you made earlier about kind of your view of last year and how you're more satisfied with the attrition performance in the first half than the second half. Is there a seasonal factor in your business as you look back that you think might have caused that, that you're able to address in a better way this year?

Bahram Akradi

Yes, I can explain to you what has happened. So we typically have a good number of membership joining the club in the end of, kind of May, second-half of May, early June, mostly due to the school ending and the pool seasons and those summer camps. So we get these families and students that come in during this kind of a early, early summer. And then we unfortunately have -- they have their minds set that they are going to be there for 90 days and then they drop out the next -- so they're just joining for the pool. Our opportunity is to find out what do they do? How many kids in the family? What are the ages? What are the programs we can offer them? It's really becomes a individualized CRM [customer relationship management]. Thinking about every single customer individually have -- and it's not just the thought, it's a comprehensive system. Our sales commission has to be set up that way, our club incentives. We have rearranged our department heads in the clubs to focus on -- we have rearranged the daily focus on how we meet and talk about each customer that we signed up yesterday. So we hope that this year those programs, all kind of new, all kind of in sleep mode last year, I hope that they will actually have a much better impact because we are now doing them systematically. We track them daily. We sent out reports to the field daily. They're commission-structured. The incentive base is based on that. So we hope that this year in the second -- again, end of Q3 and all of Q4 is where I like to see -- if I could make 1% change in our total attrition rate, go from 36% and change to 35% and change, if I could make that, I would like to make it all in the last 4 months of the year.

Edward Aaron - RBC Capital Markets, LLC

That's helpful. Thank you. And then one last, I guess more of a housekeeping question for Mike. The interest expense guidance is down slightly. If we shake out a few million dollars lower year-over-year, just taking into consideration where you came in, in Q1 and then the mortgage debt that came due, I'm just hoping you could help us better understand why we're coming out too low there?

Michael Robinson

Sure. I think there's just a couple of things in there. One of them is when we complete the revolver extension in that, we'll have some unamortized costs that will have to flow through the interest expense line at that time. And the second thing is just outlook in interest rate expense. Our expectation, I don't know when this is going to happen, but our expectation, combination of when we do renew, we believe that we'll be paying something a little bit higher than what we're paying right now. And we also expect that interest rates are going to go up here over some time. So it's your view or in our view of that, that my guess is the difference is.

Edward Aaron - RBC Capital Markets, LLC

Okay. Thank you.

Operator

Your next question comes from the line of Greg McKinley of Dougherty & Company.

Gregory McKinley - Dougherty & Company LLC

Thank you. Bahram, you had addressed the belief that you're going to see some dues increase just by bringing in new members at higher due structures than those that leave without touching, what you call the rack rate. Given the investments you've made in services in the centers, is increasing that rack rate on the discussion table at all or not at this point? And then secondly, Mike, I wonder if you could just walk through a couple of the key drivers that you talked about myLTBUCK$ and marketing and advertising, any other color on specific investments you're making there that are driving the expense increase, as well as any color you might add on the G&A line and other operating expense line growth?

Bahram Akradi

I'll take the dues for you. We have isolated opportunities to change their rack rates. We just changed 3 or 4 clubs as of May 1. In 1 or 2, we actually raised the rack rate once. And we felt it's not enough, we're raising it the second time. So we look at the club. We look at the flow of the new memberships coming in and the number of total memberships we have in that club. And then we decide, are we running at a capacity and a occupancy where we feel like the experience has kind of a tapped-out, or do we have the opportunity to get more members in? If we have opportunity to get more members in then, obviously, we're not going to raise the rack rate. If we feel like the club is at the other end, its kind of close to its number of people that can grow comfortably and don't damage the brand, means we don't bring in a lot more members, then we raise the rack rate, and then we gradually bring the other members up throughout the time. So this is not a once in a year decision. This is decisions we go through, at the minimum, once a month. So there's constant adjustments in our pricing. As you could see, our dues grew 9%, nearly 9%, while our membership counts grew 6%. So you can just do the math. There is opportunity still embedded in all of the number of members we have today. There's an opportunity as the churn goes, there is opportunity. And then there's also, as we improve, to your point, these programs and services and differentiate Life Time the way we like it to be understood by the community, then I think we can charge maybe a little more in some of our clubs. And some of our clubs, I think, they're already at a good price.

Michael Robinson

So let me address your operating cost questions. And let's start with marketing and advertising. I think what I talked about really encompasses that. I mean, if you look at the marketing and the advertising, the biggest net increase there is the LTBUCK$ program. And the LTBUCK$ program is designed and focused on allowing and giving the opportunity for members to come in and try out products and service that we offer. And then from there, hopefully, we drive more revenue coming out of the in-center businesses, more sales opportunity because of that and better retention. And we're seeing exactly that from those. That's the biggest driver. If you want to step back and look at it, 2, 3 years ago, we were spending 4% of revenue on marketing. Last year, we spent about 3%, maybe a little under 3%. We're going to bring that back up a bit. And really, what the ulterior -- the motive has been to drive better connectivity, bring people in and allow for and get better connectivity to drive more in-center revenue and retain people. On the G&A line, we're actually -- that G&A line absorbed 30, probably 30 basis points or so of that share-based compensation. Other than that, it would have been relatively flat. That said, examples of investment there, we brought in an M&A expert that we did not have a year ago. And I think you've started to see some of the fruits of that with some of the acquisitions that we did last year, and hopefully, that we can continue to deliver here over the next several years that, again, enhance the product and service offerings and build this Healthy Way of Life business. In the other operating expense, which was up 50, I think 50 basis points or so, what I would encourage everybody to do there is look at that in relation to the revenue, the other revenue line or the corporate revenue line on our P&L. If you step back and look at that, at 2.5% of total costs, our revenue in the associated areas was up 36%. And I would encourage people to look at it because that's how we're looking at. We want to build the infrastructure to be able to deliver and grow revenue in areas like events, like our media business, like our health -- or our total health business. On a pure dollar basis, something that many of you could relate to, a year ago, we had no infrastructure cost in the events business. Now with the acquisition, the middle of last year of the Chicago Triathlon and other events from that and the Leadville business, as well as appointing Ken Cooper in that area, we absorbed roughly $0.5 million of infrastructure costs in that business in the first quarter. Now, we don't have a lot of activities going on. There's not a lot of revenue that goes on in that in the first quarter. Most of that revenue comes late second quarter and in the third quarter. But our expectation is, and you have seen good examples of that, that that's a business that we are growing. And in fact, it well over doubled in size in the last year. So there's a method behind everything that we're doing and why we're doing it. And hopefully, people can get a sense of that as we're talking here.

Gregory McKinley - Dougherty & Company LLC

Yes, thank you.

Operator

Your next question comes from the line of Tony Gikas with Piper Jaffray.

Anthony Gikas - Piper Jaffray Companies

A couple of questions. I was just wondering if you could talk a little bit about your consumer right now, what are you hearing from them? What do you see from them? Does it feel like you're fighting for new customers right now, particularly in some of the more mature centers, or is it a little easier than that? And is the ramp in new centers continue to be, as you've seen on historical centers, it's opening pretty swiftly? Second question just source of capital for future centers as you ramp up from this kind of 3, 4 centers over the course of the next few years, I know you're trying to manage your leverage ratios so maybe just your preferred sources of capital going forward?

Bahram Akradi

Okay. Tony, this is Bahram. With the first question, I think getting new customers coming in at all times while the unemployment is still above 5%, 6% is going to be challenging. So we have to work hard, get the customer in the door and then get them to realize the quality and the programming. And this is in general speaking now, and it's not at all consistent across the board in all of our clubs. So we have markets and new clubs where the memberships are rolling right into the door. And we have places where we have to work really hard to get the membership counts we want. But as a whole, the litmus test for that is the day we're able to get $100-plus of enrollment fee and cover the entire cost of the commissions we pay to our sales folks, that would be the day I would say that acquiring of a customer is relatively comfortable, okay? But right now, we're still not there. We have to kind beep and bop and find ways to do that. Your second question regarding the -- and the new centers, well, your second question was on new centers. And the new centers last year, this year, they have all been great. I mean, we have had, really, some of the clubs have had historical performances either in units, Beachwood, Ohio was historical counts of memberships. Syosset has been phenomenal in terms of -- it's probably historical high in average dues, in total dues revenue generation in just the first 2, 3 months of the club. I mean, we have -- and Summerlin and Colorado Springs, both are going as good or better than expectation. And I'll turn it over to Mike.

Michael Robinson

Tony, your second question was sources of capital. And I can guess what it can give you is kind of a market report. With the strength of our balance sheet, and we believe and not only we believe, we get it very consistently from others, the strength of the balance sheet really has given us significant opportunities across many, many fronts for additional sources of capital. We'll continue to look at -- our goal and what I stated in the prepared remarks is we'll clearly, our cash flow is very strong. It continues to grow. We're going to put all our cash flow back in once we hit these leverage ratios, put that cash flow back into the business. And the debt capacity that we have and still maintain somewhere around our 2:1 leverage ratio. That debt capacity is going to come from revolvers, revolver capacity. It's going to come from potentially a term loan capacity. It could come from mortgages. We're starting to see the mortgage markets come back at reasonable prices. There are a number of avenues that we can and will be able to access to be able to fund any growth that we have.

Bahram Akradi

And I'd like to close the gap on something that -- Mike talks about approximately by the time we finished Colorado Springs and Summerlin, Nevada, we'll have 51 open facilities with no mortgage against. And as while Mike puts in the conservative book value of $1 billion in that, those 51 facilities under no circumstances could be purchased for land and built in nowhere near $1.5 billion or more in today's market. So the real value, real estate value of those assets, the real estate value is significantly higher. So even if you were to go ahead and get a 35% loan-to-value on a mortgage basis -- no, I'm not suggesting that's what we would do -- just that alone will provide us the financing we would need. So right now, this effort we put forward strategically and tactically over the last 2 years, we could not be happier with the overall execution of this management team. And putting us at that 2:1 debt-to-EBITDA, which is basically an investment grade kind of a metric that you chase. And so as a result of that, Mike and John have all sorts of options in front of them, all sorts of options in front of them for financing. And we basically have every option possible. And we have to pick the one that is the best and is most flexible, and allows us to grow the company the way we like to grow it now that we have done all the things we wanted to do to be prepared for a much faster growth rate coming forward in the future years.

Anthony Gikas - Piper Jaffray Companies

Okay, that's very helpful. Thank you, guys. Good luck.

Bahram Akradi

Thank you.

John Heller

Okay, so let's wrap up.

Operator

We do have one final question. It is from the line of Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair & Company L.L.C.

So a question, I guess from -- you were just kind of alluding to this, in this theme of development going forward, I mean, what -- you must be thinking about 2012 at this point and beyond. So what should we expect for new club openings in '12 and then going forward?

Bahram Akradi

Well, let me give you a perspective. As you guys know, the gestation time for our boxes is long. But what I can tell you is we have some incredible, incredible sites under contract right now that we're working on. We're really, really excited about the places we're going and the opportunities we have now, particularly this lower real estate, not kind of a frantic, crazy real estate market. Our main area of interest is the East Coast. We have lots of activities there. So I can't give you any exact timing. It would not be prudent to do that. But I can tell you we have heightened activities. We've been working for sites for quite some time and we have some great stuff in the works. We will expand our company much faster starting the second half of this year and into 2012. However, I would tell you, Sharon, it would be a balanced growth of more -- we're going to look for more locations, as well as other businesses that we have that supports our clubs and Healthy Way of Life approach combined. And we will give you guys more details on this by probably 3Q. But we're really, really excited about the potential of the combination of these things we're doing.

Sharon Zackfia - William Blair & Company L.L.C.

Does that mean something along the line of acquisitions? Because when you say other kinds of things, it's quite mysterious.

Bahram Akradi

Well, acquisitions are a part of it, and it's not just acquisitions of clubs but also acquisition of businesses that supports the Healthy Way of Life approach that we have put together. And it provides all of the better programs for each of our interest groups. So it all ties in together as a Healthy Way of Life company. It gives us many, many ways to grow the top line and the bottom line of this company.

Sharon Zackfia - William Blair & Company L.L.C.

Okay, and then...

Michael Robinson

Sharon, it's not meant to be mysterious. In fact, there are areas that we have talked about like events or wellness, like opening these LifeClinics or chiropractic clinics that are a piece of this pie. And I just encourage everybody, as you think about it, think Healthy Way of Life. And we're seeing that growth manifest itself now. It doesn't happen overnight. It will, in some cases, be gradual. But it's areas that we're working on, focused on and delivering on.

Sharon Zackfia - William Blair & Company L.L.C.

Okay, that's fair. And then just one last question, I thought the 38,000 new member adds in the quarter was actually quite impressive, and I'm just curious as to whether or not that was above your internal plan?

Bahram Akradi

The short answer is yes.

Sharon Zackfia - William Blair & Company L.L.C.

All right, I like short answers. Thanks so much.

Bahram Akradi

Thank you, Sharon.

Operator

Ladies and gentlemen, that concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

John Heller

Regina?

Operator

I'm sorry, I'll turn the call back over to you for closing remarks if you would like to make closing remarks.

Bahram Akradi

Thank you.

John Heller

Thanks, everyone, for joining our call today. As I mentioned at the start of this call, we will be holding our Annual Shareholder Meeting this afternoon at 2:00 p.m. Eastern Time. This meeting will be webcast, so please see Investor section of www.lifetimefitness.com to participate if you do not wish to attend in person. We look forward to reporting to you our second quarter 2011 results which tentatively has been scheduled for Thursday, July 21, 2011, at 10:00 a.m Eastern. Until then, we appreciate your continued interest in Life Time Fitness. Thank you and have a good day.

Operator

Ladies and gentlemen, thank you so much for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a wonderful day.

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