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Life Time Fitness (NYSE:LTM)

Q4 2011 Earnings Call

February 16, 2012 10:00 am ET

Executives

John Heller -

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

Michael R. Robinson - Chief Financial Officer and Executive Vice President

Analysts

Paul Swinand - Morningstar Inc., Research Division

Sean P. Naughton - Piper Jaffray Companies, Research Division

Lee J. Giordano - Imperial Capital, LLC, Research Division

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Sharon Zackfia - William Blair & Company L.L.C., Research Division

Chris Weng - UBS Investment Bank, Research Division

Operator

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Final Year 2011 Life Time Fitness Inc. Earnings Conference Call. My name is Fab and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the conference over to your host for today, Mr. John Heller, Senior Director of Investor Relations and Treasurer. Please proceed.

John Heller

Thanks Fab. Good morning, and thank you for joining us on today's conference call to discuss the fourth quarter and full year 2011 financial results for Life Time Fitness. We issued our 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 fourth quarter results, we have filed the 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 fourth quarter and our operations. Following that, Mike Robinson, our CFO, will review our financial highlights and provide financial guidance for 2012. Once we have completed our prepared remarks, we will answer your question until 11:00 a.m. Eastern time. At that point in the call, Fab will provide instructions on how to ask a question. In order to give as many as possible a chance to ask a question, please limit yourself to only one question. I will close with a tentative date of our first quarter 2012 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.

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 2011 results and our big picture objectives for 2012. Let me begin by reviewing our 4 main areas of focus we set last year for 2011. We set a stretch goal of $1 billion in revenue a major milestone. Through intense focus on executing our business plans we not only achieved but exceeded at that goal delivering more than $1,013,000,000 of revenue. Last year, we stated that we wanted to reestablish a faster growth rate. Our growth drivers of newer square footage, price and mix optimization and continuous improvement of our in-center and ancillary businesses delivered revenue growth of 11% in 2011 versus 9.1% in 2010.

We wanted to achieve and maintain an investment grade-like balance sheet and credit profile. Our balance sheet is strong and our leverage ratios are in the range we want. During the year, we retired $70 million of mortgage debt. In June, we increased the amount and extended the term of our revolving credit facility. In December, we acquired 6 additional centers that we previously leased. In the process we assumed low rate mortgage loans from the seller and we substantially reduced our rent expense going forward. Altogether, we are very pleased by accomplishing our goal in this area as well.

Our fourth objective for the year was to position Life Time as a Healthy Way of Life company rather than a gym operator. This is and will remain a work in progress. To accomplish this, we will need to continue to improve and enhance the variety of programs we offer both internally and externally today to a specific interest groups such as weight loss, cycling, running, corporate health, athletic events, et cetera. I am very pleased with the progress we have made in 2011 and look forward to what we can accomplish in 2012 and beyond.

Turning to financial performance of Life Time in 2011. We saw improvements in many of our key metrics including growth in square footage, membership, revenue, average revenue per membership, cash flow from operations and net income. Attrition for the year was 35%. We are very pleased with this number. It is below our stated goal of keeping attrition lower than 36%. In 2011, our in-center businesses grew revenue nearly 16% over 2010, even better than the 14% they grew last year over 2009. Excluding the impact of non-cash performance share-based compensation expense, for the full year we delivered non-GAAP earnings per share of $2.42, a 16% increase over last year. Non-GAAP net income was $99.1 million, just shy of our stretch goal of $100 million. Including the impact of non-cash performance share based compensation expense, EPS was $2.26 and net income was $92.6 million. On behalf of our entire team I can say we are very happy with these results.

For 2012 our objectives remain similar. First, we are driving to deliver low double-digit revenue growth all the while striving for faster growth as a Healthy Way of Life company. This will remain the #1 priority for our company while remaining committed to having a strong balance sheet and delivering a strong brand. Second, we will ensure consistency and excellence in our programming across our entire company. This includes the programs and services we deliver in our Healthy Way of Life destinations, as well as the program and services we will deliver outside our facilities. Third, we want to continually improve ROIC in 2012 and the upcoming years. We want to grow our revenue, EBITDA and net income as we have continually accomplished since the inception of the company. And finally, we will continue to -- continue the evolution of our brand as the Healthy Way of Life company by providing programs and services inside and outside of our Healthy Way of Life destinations. We look forward to delivering on these objectives in 2012 and beyond.

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

Michael R. Robinson

Thanks, Bahram. Let's start by discussing in more detail some of the events and initiatives that have occurred over the past few months. First of all, let me remind everyone that starting with the fourth quarter 2010, we are recognizing non-cash performance share-based compensation expense related to the grant -- 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 a retention tool as well 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 the 3- and 4-year baseline expectations set in 2009.

The company achieved the diluted earnings per share performance criteria for vesting 50% of the stock representing approximately 450,000 shares of restricted stock in 2011. In the fourth quarter of 2011, the company determined that achieving the 2012 diluted earnings per share performance criteria required for vesting the remaining stock was probable. As a result, during the quarter the company recognized accumulative non-cash performance share-based compensation expense of $6.7 million pretax for the 2012 tranche, in addition to $1 million pretax for the final non-cash performance share-based compensation expense related to the portion of the grant for which performance criteria was met in 2011.

So, in summary for the total year 2011, we incurred $0.16 of non-cash performance share-based expense, $0.06 related to the 2011 target and $0.10 as accumulative expense related to the 2012 target. For the fourth quarter, the expenses were $0.015 related to the 2012 target and $0.10 for the 2012 plan. The company anticipates recognizing the remaining portion of the 2012 performance share-based compensation expense of approximately $2.7 million pretax or $0.04 a share ratably in 2012. While we report our results inclusive of these expenses at times we will refer to adjusted or non-GAAP earnings ratios and guidance throughout our comments.

In early December, we completed the acquisition of 9 former Lifestyle Family Fitness facilities in Ohio, Indiana and North Carolina. While smaller than our typical centers, they complement our current locations in these markets. They allow us to reach key demographics in areas we don't cover with our current Life Time Fitness centers and take advantage of our powerful brand in these markets.

We leased 8 of these facilities and purchased 1 facility, the Fisher's Facility in Indianapolis. December revenue for these facilities was under $2 million with no meaningful impact on EPS. In the first half of 2012, we will remodel these facilities to give them the Life Time Fitness look and feel. They are in generally good condition so expect this remodel CapEx to be modest. While the revenue per membership is lower than our current portfolio and we will absorb some transition and integration costs in 2012, we expect a small positive contribution from these centers in 2012.

In January of 2012, we acquired the Racquet Club of the South located in Atlanta. This club complements our existing tennis programming portfolio and gives us a great central presence in the Atlanta market, one of the top tennis markets in the United States. Life Time Fitness now has 158 courts across its tennis portfolio which includes 16 of our locations. We will rebrand this facility Life Time Tennis Atlanta and plan to upgrade the property and remodel the clubhouse and small fitness facility in 2012. This will not have the same financial metrics as one of our typical centers. That is it will have a much smaller membership profile with a higher service revenue content. We expect Life Time Tennis Atlanta to be investment of modest cost in 2012.

Finally, in late December 2011, we acquired 6 facilities we already operate in the Minneapolis and Boca Raton markets from a landlord, W.P. Carey. We assumed a $72 million mortgage and paid the remainder in cash. The acquisition of these facilities gives us full control of these properties and allows us to control occupancy costs in the long term. In addition, we reduce our lease payments by over $8 million and improve our operating margins. Interest expense and depreciation will increase but it is a positive transaction financially.

Let me now talk about attrition and retention. For the quarter, our attrition rate was 9.6% compared to 9.9% last year. Starting with the second quarter the quarterly attrition is now directly comparable as we have anniversaried the methodology change in our attrition calculation that went into effect April 1, 2010. That is, we no longer count potential memberships that elect to cancel during their 14-day trial as members or attritions.

Our trailing 12 month attrition rate is 35% versus 36.3% last year. This includes approximately 30 basis points of improvement related to the methodology change I just mentioned. We are very pleased with the improvement and obviously we will continue to drive hard to continue this positive trend. However, our business model works well at 36% and we continue to target performance at that level, especially as we absorb the membership transitions from the recent acquisitions.

The estimated average life of a membership is 33 months, unchanged over 2011. We finished the year with 676,054 memberships. This was a 10.4% increase from year end 2010. Included in these numbers are just under 30,000 memberships related to the Lifestyle Family Fitness acquisition in December. These memberships come at roughly half the average dues rate of our overall membership base. Excluding the impact of this acquisition, memberships grew 5.5% for the quarter, a faster growth rate than we saw in previous quarters. For the fourth quarter, we grew the net balance of flex memberships by approximately 9,000 units to approximately 93,000.

The number of open centers at December 31, 2011, was 92 current Life Time branded centers plus 9 acquired centers compared to 89 at December 31, 2010. 57 are our large current model and 80 have been opened 3 years or more, which we classify as mature centers. At year end, we operated 9.5 million square feet of fitness facilities including approximately 300,000 square feet for the 9 acquired Lifestyle Family Fitness centers.

Our total revenue was $250.9 million for the quarter which was up 12.2% from last fourth quarter. Our main revenue drivers are as follows: membership dues revenue growth grew 11.3% for the quarter. Our powerful due stream accounts for 66% of our revenue. In December, we instituted a small price increase to approximately 80% of our membership base that equates to an overall dues increase of 1% to 2%. We will continue to look at our pricing and mix composition and be opportunistic when and where we think it is prudent.

In-center revenue grew by 17.1% in the quarter. We are strategically driving this growth by increasing our products and services in our portfolio, and sending members to use these services through our LT Bucks affinity program and continuously enhancing our connectivity initiatives. Our focus is to drive more member involvement, which we expect and are seeing will improve member retention and customer satisfaction.

Our revenue productivity metrics are strong and consistent across the board. Our fourth quarter same-store sales were up 5% and 5.1% for the year while our 37-month mature same-store sales were up 4.9% for the fourth quarter and 4.3% for the year. As a reminder, the recent acquisitions will be -- will not be included in same-store sales until the 13th month of operation.

Revenue per membership in the fourth quarter was $380 per membership which was up 5%. In-center revenue per membership of $114 was up 9.9% in the quarter. For perspective in the fourth quarter of 2009 and '10, we were at $95 and $104 of in-center revenue per membership, respectively. We believe the improvement over the last 2 years is evidence of our member connectivity and engagement as well as expanded program offerings. The recent acquisitions are included in these metrics and had a very minor downward effect.

Now I would like to discuss our cost structure. Year-over-year, operating margin decreased 80 basis points from 15.5% in Q4 2010 but at the same time profit dollars increased $2.3 million. Excluding the effect of the $7.7 million of incremental non-cash performance-based restricted stock compensation expense, operating profit margin for the quarter was 17.8%. Center operating margins continue to improve. For the quarter, center operating costs improved about 130 basis points including absorbing approximately 70 basis points for the non-cash compensation expense related to the performance-based restricted stock grants. For the year, center operating costs improved 80 basis points. Leverage from the increased dues revenue more than offset the negative margin mix resulting from the significant growth in our lower margin in-center businesses. Cost in excess of enrollment fees were up slightly compared to fourth quarter 2010 and were flat compared to full year 2010.

For 2012, we expect continued improvement in center operating margins driven by price and mix leverage and lower occupancy costs. For the quarter, marketing and advertising costs were up 30 basis points and for the year were up 50 basis points. We increased marketing campaign spend, continued to invest in our LT Bucks affinity program and incorporated marketing spend in new events and other corporate initiatives. As we've discussed, we expect our marketing cost to be up over last year as we invested more in retention initiatives including myLTBUCK$ as well as our in-center and corporate businesses. These initiatives are showing results as evidenced by our strong top line growth and significantly improved attrition rates.

For 2012, we expect some continued growth in marketing costs as a percent of revenue as we continue to invest in programs such as LT Bucks and initiatives focused on driving in-center and corporate business growth.

For the quarter, G&A expense was even with last year as a percent of revenue at 6.9%. For the year G&A up -- G&A was up 20 basis points. When we exclude the incremental share-based compensation expense, G&A as a percent of revenue was down 30 basis points for the quarter and down 20 basis points for the full year. All while continuing to invest in overhead structure to help drive the retention and connectivity initiatives at our centers and initiatives underway to grow our other Healthy Way of Life-related business. For 2012, we expect some leverage in G&A spend.

For the quarter, other operating expense was up 190 basis points and for the year it was up 90 basis points primarily as a result of our investment in our athletic endurance events and the My Health Check business infrastructure. In the fourth quarter, we saw the expected cost run rates on our corporate businesses absorb costs associated with acquiring businesses, some higher legal costs as well as some losses on some asset dispositions. While these asset dispositions are now much higher than last year, they were grouped more in the fourth quarter due to the timing of remodel activity.

While other operating expense is increasing slightly as a proportion to our total cost structure, as we expect, we are seeing top line growth related to these synergistic Healthy Way of Life businesses. The associated revenues related to these other operating expenses increased 23.5% over Q4 2010. In 2012, while we -- we will continue to invest, we expect improvement in the cost/revenue relationship as we grow our corporate revenue.

We continue to see leverage and depreciation and amortization as we continue to grow revenue well ahead of our square footage expansion. These costs were down 20 basis points for the fourth quarter and 30 basis points for the year. In 2012, we expect depreciation as a percent of revenue to grow slightly as we absorb the incremental depreciation from the former leased facilities as well as increased remodel activity from acquisitions.

Interest expense net of interest income decreased to $4.9 million from $6 million last fourth quarter. For the full year 2011 interest expense was $20.1 million versus $27.8 million last year. This decrease in interest expense reflects the payoff of approximately $70 million in high rate mortgage debt early in the second quarter this year and low variable rate interest rates on our revolving line of credit. Interest expense in 2012 will increase due to the assumed W.P.Carey mortgages as well as expected increased debt balances.

Our tax rate for the quarter was 38.6%, down 0.5% from last fourth quarter. Effective tax rate for the year was 40%, up 20 basis points from 2010. We expect our tax rate in 2012 to be approximately 40%. That brings us to net income for the quarter of $19.8 million including $4.7 million of after-tax effect from the non-cash compensation expense. Excluding that charge non-GAAP net income for the quarter would have been $24.6 million representing 17.1% growth over last fourth quarter. For the year, net income totaled $92.6 million including the non-cash compensation expense mentioned earlier. Excluding that charge, net income for the year would've been $99.1 million, up 17.7% over 2010.

Weighted average diluted shares for the fourth quarter totaled $41.3 million. Weighted average diluted shares increased in the quarter as a result of including the dilutive effect of the 400,000-plus performance shares from achieving the 2011 performance target. We expect 2% to 3% share count growth for 2012. Overall, we achieved diluted EPS of $0.48 for the fourth quarter, up 12%. Excluding the after tax non-cash compensation expense of $4.7 million in the quarter, the quarterly EPS was $0.59, a 13.5% increase over 2010. For the year, we achieved $2.26 of diluted EPS including the non-cash compensation expense. Excluding this expense full year EPS was $2.42, 16.3% growth over 2010.

My next topic will be cash flow on our capital structure. Our cash flow from operations totaled $50.6 million for the quarter, compared to $46.1 million last Q4, up 9.8%. For the full year, operating cash flow totaled $227.9 million. This is up nearly 19% from 2010. For the year, we generated $62.6 million of free cash flow before acquisitions. $7.4 million of this came in the fourth quarter. We've now generated 12 consecutive quarters of free cash flow. This excludes approximately $70 million in cash spent on acquisitions in 2011. These acquisitions included yoga business and several small events businesses as well as the former Lifestyle Family Fitness centers and the net cash outlay for the acquisition of the leased properties we discussed earlier.

We continue to focus heavily on our capital structure, cash and debt availability. Total debt increased $74 million for the year. This increase is comprised almost entirely of the $72 million of mortgage debt we assumed related to our acquisition in December of the 6 centers we've previously been leasing. This debt matures in 2016 and bears an interest rate of 5.75%. As of December 31, we have $440 million outstanding including letters of credit on our $660 million revolver. That leaves approximately $228 million in cash and revolver availability. Our net debt to total capital was 41.5% at December 31 and our EBITDA leverage was under 2.5:1. Our covenant calculations for the quarter continue to show significant room versus our covenant limits.

For 2011, we spent approximately $165 million for CapEx to open 3 large centers, commence construction on our 2012 centers, remodel acquisitions, maintain our portfolio of clubs as well as improve corporate infrastructure. This was comprised of approximately $104 million for growth and $61 million for acquisition remodels maintenance and corporate infrastructure support. For 2012, we expect to spend approximately $200 million to $250 million for CapEx to open 3 large centers, commence construction on our 2013 centers, remodel acquired centers and maintain our portfolio of clubs. This will be comprised of approximately $140 million to $175 million for growth and $60 million to $75 million for maintenance, acquisition remodel and corporate infrastructure.

A few balance sheet variances to note include: prepaids increased approximately $4 million for the quarter, driven by prepaying insurance premiums for the next planned year. Prepaids were up $9 million from year end 2010 driven by the insurance premiums just mentioned and a goods and service tax receivable for construction costs at our Mississauga, Ontario site. Property was up $127 million in the quarter driven primarily by the acquisition of the leased centers in the Lifestyle Family Fitness acquisition discussed earlier. Goodwill was up $12 million related to acquisitions mainly the Lifestyle Family Fitness acquisition. Long-term debt was up $120 million for the quarter driven by the $72 million of mortgage debt assumed in the acquisitions of the previous leased centers, and incremental revolver borrowings used to fund the net cash paid on the lease centers and the Lifestyle Family center acquisition. Deferred rev was down $15 million in the quarter due to the acquisition of the leased centers.

With that, let me discuss our financial guidance for 2012.

We expect our revenue will grow to $1.11 billion to $1.135 billion or 10% to 12% growth. We anticipate our net income will grow to approximately $110 million to $115 million or 18% to 24% growth. This net income guidance includes an anticipated $1.6 million after tax and performance share-based compensation expense for the 2012 tranche of performance-restricted stock. We expect our diluted EPS will grow to $2.60 to $2.72 or 15% to 20%. This EPS guidance includes an anticipated $0.04 of non-cash performance share-based compensation expense for the 2012 tranche of performance-restricted stock. For the first quarter, we expect revenue growth in line with the annual guidance and low to mid-teen EPS growth. Keep in mind, we expect the largest EPS growth in the fourth quarter with comparisons that include the share-based charges in 2011.

That concludes our prepared remarks regarding our year-end financial results. We are pleased to take your questions.

Question-and-Answer Session

Operator

[Operator Instructions] And your first question will come from the line of Paul Swinand with MorningStar Inc.

Paul Swinand - Morningstar Inc., Research Division

Question on the driver of the in-center. I know you guys are -- keep driving that higher and higher and we keep saying, "How much higher can it go?" It seems to my eye, or it might be anecdotal but the clubs are very busy and very full. Do you do any analysis on the number of visits per existing member? In other words, is a driver actually that some members -- the same members are using more and more services or is the whole population of club members actually visiting the club more often now compared to historical?

Bahram Akradi

Yes, it's not that. It's actually the focus we have on improving the programs in every specific area that the customers are interested in and then doing a better job of connecting the customer to that area. Our initial connection to the customer is double now where it was probably 2, 2.5 years ago. So we'll take more people through programming, getting them started with the run program, cycle program, personal training. Those are the type of things that we are continually measuring. We have systems developed over the last 2, 3 years that -- we have daily reports on these things. It's broken down every which way and really it's all about connecting the customers to the area that they're most passionate about. And then the programs are much, much more robust than they have been. Personal training is doing great. Weight loss is doing great. Our yoga program is significantly better. Our spas are doing a better job. So it's across -- it's spread across the board.

Paul Swinand - Morningstar Inc., Research Division

Okay. So pretty much the whole population is finding something that they are connected to. It's not any 1 segment that's just visiting more frequently or something?

Michael R. Robinson

When you look at it, all of the in-center businesses across the board have been up in a relatively tight range. When you see 17% in-center revenue growth and you look at spa, café, the member activities areas, the personal training area, they're all up in kind of a 15%-plus, 15% to 20% range.

Operator

Your next question will come from the line up Sean Naughton with Piper Jaffray.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Just looking at the gross membership gains in the fourth quarter, it looked a little bit better than I would have anticipated based on the prior couple of quarters. Just wondering if you could comment on that. Is this an improvement of utilization? Or is this more a function of new and ramping clubs? Or are you having -- and do you still see the same level of discounting that's kind of going out there to drive some of these members to come into the club?

Bahram Akradi

As we have stated to you guys before, the membership for the clubs isn't coming like a natural tailwind or anything like that. We have very, very strong operations around membership acquisition and retention. We have this dedicated group. It requires literally weekly maneuvering and focus on both retention and acquisition. We measure daily these things and we drive marketing initiatives, sales promotions, attrition efforts to -- on a daily basis, weekly basis. And the results are really due to the efforts of my team and I'm -- I am very, very happy with what they put forward in terms of how engaged they are at the very -- at every level from club level to the corporate office. We believe we can continue to improve. I don't want to promise anything more than 36% as our targeted number for attrition but of course, our effort is to continue to improve attrition and keep gaining more membership. But the way that I believe we will continually remain successful is intense focus on always being the best programs across whatever the customers' interest points are.

Sean P. Naughton - Piper Jaffray Companies, Research Division

Okay. And then just quickly -- just a quick question on the center operating expenses. What kind of drove some of that acceleration? I think, Mike, you talked about some of the rent reduction but does -- I know this may sound a little strange, but does weather have any sort of impact on you guys with less snow removal or lower utility costs and should we expect this type of leverage moving forward?

Michael R. Robinson

Yes, it's a good question. The big drivers continue to be the dues leverage that we're seeing. We invested significant dollars in the focus on the connectivity and in improving these programs. We'll continue to invest dollars on that but we've anniversaried that and what we are starting to see is the dues increase and the mix -- deposited mix leverage come through on that center operations line. Things like repairs and maintenance and utilities have an effect but it's a very, very, very minor effect. The big driver here is the dues and the ability to drive leverage on that.

Operator

Your next question will come from the line of Lee Giordano with Imperial Capital.

Lee J. Giordano - Imperial Capital, LLC, Research Division

I was wondering if you could talk a little bit more about your acquisition strategy going forward. Do you see significant opportunity to acquire similar chains to Lifestyle Family Fitness? I guess what kind of opportunities do you see there?

Bahram Akradi

This is Bahram. We are always looking and as we look at the acquisition, we're looking at a number of different categories of acquisition. Healthy Way of Life destination or club facilities is one. Athletic events, Healthy Way of Life events is another one. We're also looking in the area of health where our company, myHealthCheck is operating which is a corporate health initiative and allowing companies to do their outcome-based healthcare plan, healthy Way of Life Media and Healthy Way of Life Education. And that's how we're basically formulating Life Time as a Healthy Way of Life company, so we are basically spread across 5 silos. We look at lots of different opportunities. We pulled the trigger on very, very few so I can't tell you at this point, I don't think -- and the company can tell you that there are specific opportunities and when we're going to commit to anything, but we are constantly looking in our M&A activities to see things that enhances the Life Time as a Healthy Way of Life brand with synergistic businesses that will help 1 another. And we are very, very committed to grow the business that way and we think we will see opportunities pop up that we will actually pull the trigger on as you guys have seen some in the past year. There should be some additional ones in each of the upcoming years. We're really looking forward to it. We can't make any specific commitment.

Operator

Your next question will come from the line of Brent Rystrom with Feltl.

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Looking at how you raised prices both on existing members and new members, would it be fair to assume kind of the 3 following things: that comps could kind of accelerate as the roll through or the rollover of -- your attrition rolls through when those higher dues come in. Would that imply kind of comps that started the base level in the first quarter and kind of build as that rollover occurs in the year? Secondly...

Bahram Akradi

Hi Brent, this is Bahram. I think our same-store sales have been -- the comps have been really stellar. I mean, we -- I think we've showed our strongest same-store improvement fourth quarter and then obviously for the year in a number of years.

Michael R. Robinson

Mature -- in mature centers.

Bahram Akradi

In mature centers. So our expectation is we're obviously going to continue to grow mature centers comp and the -- as we've told you guys before, there is a limit to it. The clubs ultimately have a saturation point in the number of members you can keep in a particular club and as you get closer to that ultimate capacity then your opportunities ends up being a little bit of a price change as you mentioned. Members who have kind of a legacy pricing, a little bit better pricing than the current rate that the new customers are joining as attrition goes through that actually helps the average dues slightly improve in each club automatically. So you can see some of that. And we believe as we grow our programs to reach to the level we hope to get to, which would be absolutely the best program for each category, the price will become less important altogether. So we will have a little more price elasticity in the future. Exactly when we get to that point where I feel like we can raise the prices $5 instead of $1 or $2, I don't know. But I think there is a continuous opportunity for the average dues to go up in the same fashion they have been going up the last year or 2 and in the natural course of our business. Mike, you want to add anything to that?

Michael R. Robinson

No. You had a couple of other points there, Brent?

Brent R. Rystrom - Feltl and Company, Inc., Research Division

Yes, just the follow-on to that would be does that imply -- as you work through that natural attrition and it drives comes a little bit higher as the year progresses, I would assume that gives you some margin flexibility in the back half of the year.

Michael R. Robinson

That's -- I don't want anybody to walk away saying that they're going -- we're going to see significant increase. We got to get out, we got to deliver it and that type of thing but there should be -- as you see leverage in the -- in that dues flow-through you should see some margin.

Bahram Akradi

And I'd like to go to the old cliché of there is no free lunch. If we want to remain the best destination for people, the best programs, we will continually have to invest. And we have to dissect those parts of our programs that they are not having the clear distinct differentiation in being by far the best and we have to invest more in them. So we're targeting that customer base now that appreciates the best product and they're not going to be mercenaries about the price. They're looking for getting what they want. To get that customer in, we actually do have to deliver the best product and that's what we're driving here every day. So as we will grow the revenues, I think we will also have some demand on expense to deliver better programs but net-net we expect the margins to grow.

Operator

Your next question will come from the line of Greg McKinley with Dougherty.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

Real quickly, can you talk about -- membership in January and February is probably the most important one of the year because you can earn dues off that for the full year. Can you give us a sense for how you've perceived the customer reacting to bringing new members in the club thus far here in 2012? And then in terms of the acquisition of the Lifestyle centers, you said those are about 50% of normal dues per membership. After you remodel those, will those be meaningfully raised, and are you taking on a little different type of a concept here than what we're used to seeing you operate with Life Time? It may be more -- a little more value-oriented. How do you compare and contrast those?

Michael R. Robinson

Sure. I'm going to start with your membership question. We got off to a good start. Our January membership we sold over 40,000 memberships. The net increase on a year-over-year basis was around 20,000 memberships. That's good. We got off to a good start. As Bahram talked about -- and we're very, very encouraged by that. As Bahram talked about, you got to work. You got to work hard for it. We still need to watch the enrollment fee, the joining fee, the administrative fee very, very closely. We've not seen any significant improvement in that, so -- but net-net, the drive here is to get the memberships in, get that annuity stream in and we are off to a good start in 2012 regarding that. Bahram, you want to talk about the LFF acquisition?

Bahram Akradi

Yes. So these clubs -- we had a great relationship with the seller. We basically were able to pick the location we really wanted to operate in those markets. These facilities, as Mike said, they were in a decent shape to begin with but they really didn't look exactly like the look and feel of Life Time, so we are taking everyone through a remodel so that they would look like a Life Time facility when you step in. We do have, as you guys know, 30,000 and 40,000 square feet facilities that are in field between our big clubs, so these facilities will serve exactly the same need. The dues in these clubs were significantly lower than what they should be. The past operator priced all clubs nearly the same in all the markets and because of them -- the clubs that we actually did not take in each of those markets, they were running lower prices. So as we redo the clubs over the next 5 or 6 months and remodel them, we go back and we get them closer to our bronze pricing, which is our lowest level pricing, but they will still be closer to that number and then we gradually get them to the bronze and gold member pricing. So their average dues will increase. The other factor about clubs -- smaller clubs like that but they're not designed as a big, large family type of facility, they have more single members. So even though the prices may be close in terms of the way you price them to the other clubs, the average dues will remain lower just simply because you'll have more single and couple memberships other than family memberships. But we think there is a significant opportunity by 2013 and '14 for the average dues and the dues revenue for each of those clubs to significantly improve.

Gregory J. McKinley - Dougherty & Company LLC, Research Division

And then Mike, just real quick on the W.P. Carey. Can you share with us how much lease expense is going away, and then maybe how much interest and depreciation is coming in and how we should think about that on a net basis?

Michael R. Robinson

I'm not going to share exactly. What I said in the prepared remarks is that the lease payments that were going away are in excess of $8 million. And obviously you can back into some of the lease cost by looking at a 5.75% interest rate against that $72 million mortgage. Clearly depreciation will go up because we've now brought on the building itself, the core building itself. But net-net it will be a small -- albeit small but a positive transaction for us.

Operator

Your next question will come from the line of Sharon Zackfia with William Blair.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

I guess I had kind of a bigger picture question and I appreciate some of the color on it. It is still difficult to drive members into the club and you guys have been doing really well in what sounds like a relatively challenging environment throughout the fitness club industry still. And I guess -- and that kind of gets to my point. I'm a little surprised, and maybe you're not, Bahram, as we see some of the spending come back in the upper-middle-class segment that the fitness industry seems to be lagging. And I guess I'd appreciate your perspective on whether you think it's still a macro issue or whether there's something else secularly happening within the fitness space.

Bahram Akradi

Sharon, are you talking specifically about our company, or are you talking about the industry?

Sharon Zackfia - William Blair & Company L.L.C., Research Division

More the industry, because you're outperforming the industry but my perspective is it's still not a cakewalk for you either.

Bahram Akradi

Right. So I think that for our particular space, to your point, we see the results are bittersweet. They are not showing up -- myself and the executive team and the entire team, the club staff, the GMs -- my team is putting in long, long hours and very, very focused, intense, both on the quality and the programming strategy as well as the marketing and sales and defensive strategy around retention. Rest of our teams of cafés, the spas, personal training, they are all working on developing new programs and services. And we feel strong about the ability to continue to grow our business in what we've always said we feel like will be a slight headwind kind of a market. We haven't seen kind of customers just pouring in, opening up their wallet wanting to just buy. And whether or not that's the nature of our particular business, Sharon, the fitness industry,, or it might be across other businesses as well, that's just what we see. And we're committed to win, as we have told you guys before last 2 or 3 years, in this condition and we don't expect this to -- in a macro level, we don't expect it to improve over the next 2, 3 years as well. Should it happen will be a nice, pleasant tailwind but we're not making any assumptions for that.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

I guess a follow-up question. So when -- the new member sign-ups, as we see them are -- is it really a matter of the traffic of the new members coming in or is it conversion? And then secondarily, are you seeing any change in kind of new member traffic anywhere across the country that would give you any sense that lower unemployment is starting to help the business?

Bahram Akradi

Well I don't -- when you say lower unemployment I think you're listening to the media a little too much. It's maybe what 0.2%, 0.5%. We don't see that. We feel that in order for us to get the memberships we're getting, we have to fight for every single 1. So every day, there is a fight to get the memberships we are bringing in and keep the ones we're keeping. I'm just -- I don't see it -- obviously you have one-off clubs where they happen to be in a market where it's so difficult from a real estate standpoint to get in and once somebody gets in, it just -- it rolls in. But even if you do have a club or 2 like that, it's not important. You have to look at it in a macro level, and in a macro level, we really have to work hard. That's all I can say to you. We have to work hard. I'm not seeing any sort of a macro-ease on how the business come into our space.

Michael R. Robinson

I want to put this in a bit of perspective. We're working hard but we're also winning and the results really show that. I mean, in an -- in this environment revenue per membership is growing at a 5% clip. That is a very good clip especially when you step back and you look at it. This is an annuity stream business and that really drives a powerful element in this business, and the in-center revenue is growing at almost a 10% clip. So we're winning in this environment.

Sharon Zackfia - William Blair & Company L.L.C., Research Division

And I'm sorry, the conversion -- is the conversion still good of members that are coming in, or prospective members?

Bahram Akradi

That's totally the same, Sharon. I -- if I look at the closing percentage of leads to memberships, they're within few percent of what they have ever been. It's just a margin of error in terms of the measurement.

Operator

Your next question will come from the line of Michael Lasser with UBS.

Chris Weng - UBS Investment Bank, Research Division

This is Chris Weng filling in for Michael Lasser. With the recent big step up in such a little margins, how comfortable are you guys with the sustainability of this margin level and how high do you think you can go? And also how are you viewing raising prices in 2012? How are you comfortable with that?

Michael R. Robinson

Let's start with the center operating margins. We clearly see more expansion opportunity in our center operating margins. Obviously as in any business you've got things going both directions but we're seeing dues leverage come through the bottom line. We've got some changes in the center operating costs, the occupancy costs that will -- that should improve them. Your question about how big can it go. It really is driven by the factors of how strong is our in-center revenue going to continue to grow. I mean, that's been growing at a rate that almost double the dues growth rate. And as you recall, that's coming in at a lower margin. So you got that counterbalance, and obviously we want that growth. That growth drives the essence of this business, the connectivity and the growth ultimately in the annuity stream. So predicting where this can go. Can it go up on another 100 basis points? Absolutely. Can it go up another couple of hundred basis points over the next 2, 3 years? It can, but it -- we may not -- we don't necessarily want to see that if we've got -- continue to have this powerful in-center business coming in at a little bit lower revenue stream than that. You're second -- the second point of your question?

Chris Weng - UBS Investment Bank, Research Division

Just how you view the ability to raise prices this year.

Michael R. Robinson

We have taken some small price in December. We're going to continue to look at this on an opportunistic basis, both the mix and the price things that we continue to feel that we've got, as Bahram said, some price elasticity. But we're going to be careful and do it in ways that make sense for the overall business.

Operator

And that does conclude today's question-and-answer session. I would now like to turn the call back over to Mr. John Heller for closing comments.

John Heller

Thank you for joining our call today. We look forward to reporting to you our first quarter 2012 results which is tentatively has been scheduled for Thursday, April 19, 2012, at 10 a.m. Eastern. Until then, we appreciate your continued interest in Life Time Fitness. Thank you, and have a good day.

Operator

Thank you very much. This concludes today's conference. Thank you for your participation. You may now disconnect. Have a great day.

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