Simeon Siegel: That’s great. Thank you. And then just last one, you spoke, you spoke to this in different ways, but just maybe understanding that some of the growth of the Center OpEx expenses is tied to the ramping centers. Is there any way to just help maybe simplify what the – what you think the underlying change in existing Center OpEx expenses would be if we were to strip out the new?
Bahram Akradi: Yes. So, look, at all times, if anybody tells you they’re running everything perfectly, I would have to believe they’re lying. I would be lying if I told you everything’s running perfectly. There’s always opportunities to improve. We have had a bit of a cost creep that has been already corrected, number one. Number two, there is some that is unavoidable, but it was all planned in our strategy to change our business model. So just wages alone are 4% or 5% higher on the wage side. And then we have more increased swipes and then hourly wages that go to service those swipes correctly are also up higher. So the clubs, we’re spending no money on sales and marketing, and we are spending a lot more money teaching classes that provides the best engagement in our clubs.
So, I don’t know how else to explain this. I think the overall, we expected the cost to go up. That’s why we guided to what we guided. We expected the cost to be up higher. We expected our revenues will be higher. We expected our engagement be higher. And we expected our retention to be better. So all of these things are coming right in line with our expectation, slightly better or right in line with our expectation. Wages aren’t going to go back down, Simeon. Anybody sitting there thinking wages are going to go down, I don’t know what they’re thinking. The wages are going to go up. They’re going to keep going up. And in order to employ happy team members who can afford to pay their bills, you’ve got to pay them enough to have the best employees in your company.
So that’s just something. Everybody needs to plan for, and then you need to see if you have the ability to deliver the revenues to deliver your margins. And we’ve been able to do that. So I’m grateful that the team has been able to execute such a great plan.
Simeon Siegel: Sounds great. Best of luck for the rest of the year.
Bahram Akradi: Thank you so much.
Operator: Our next question is from Chris Woronka with Deutsche Bank. Please proceed with your question.
Chris Woronka: Hi, good morning, guys, and very nice quarter. Thank you so much. Sure. The first question is really about, as Bahram, you’ve talked about outperforming all your expectations, and it’s kind of existing clubs, new clubs. Does that change the economics of when you look at new centers, whether it’s conversion or ground up? I mean, does it basically enable you to kind of raise the underwriting budgets on stuff you look at, and maybe things fall into a bucket? Is penciling out better than they did, a couple quarters ago? Is there any of that to think about?
Bahram Akradi: Yes, everything’s in line. Let me emphasize this. Our clubs are costing significantly more on any measure. Real estate costs more. Interest rates are higher. Construction is significantly higher. Payroll is higher. And our revenues are higher. So when we look at the real estate market, we’re looking at the real estate market. We look at the business plan, which we approve, with those targeted net invested capital returns, which I told you, 30%, 35%. But we consistently see when we come back three years, four years later, and look at that class of clubs and see how did they perform the business plan. It’s the same pattern. We have spent more, and we have delivered more. And the rate of return has remained constant.
Where we are seeing right now is our new clubs opening the last year, year and a half, and now opening today, they will have a higher revenue per square foot. They’ll also cost more to build, but they also have more revenue per square foot, more margin than the old facilities because of the legacy memberships that are inside of those memberships. In those clubs, older clubs, that will take time. You give it 5 to 10 years, my expectation is the legacy clubs will catch up with the new clubs. It’s going to take a long time because we’ve told you we’re going to raise those dues extremely methodically and slowly so the customer remains loyal to lifetime. The beauty of that, from a modeling standpoint, is that we, again, we’ve been consistent about this.
Four percent, four and a half percent, same as stores, for years to come, is really a function of the fact that 140 clubs have the ability to keep going up to catch up with the revenues and the margins of the new clubs. So it’s really all working for us. We’re thrilled about what this outlook looks like for 2024, 2025, 2026, 2027. And, again, I am just so thrilled with the fact that we made all the adjustments that we made because our business model today is enduring. All those things I mentioned to you, higher interest rates, more wages, and more construction costs, more supply costs, our business model is paying for all of those and then fixing. So, I just can’t be more grateful to see where we’re at right now.
Chris Woronka: Yes, thanks, Bahram. Thank you so much. Very helpful and great, great perspective. Just a follow-up, and then it kind of goes back to the sale-leaseback outlook and, understanding that there’s the general view that rates maybe stay higher for longer, but we’ve also heard, the largest player in private credit say, hey, they’re not waiting for rates to come down. They’re going to invest now. Do you guys sense any change in your potential buyers and wanting to, kind of move forward on looking at some SLBs?
Bahram Akradi: Yes. So, we are under LOIs at this point on some deals, and we will announce them when it’s appropriate, when we have full commitment on some deals. Ultimately, what I have said repeatedly, consistently, these deals are 25-year, 20-25-year leases with another 30 years of options with fixed bumps in those. So, the way we look at – the way you look at our rent is based on gap rent. The number we give you is a gap rent. When you look at the gap rent, it’s a straight lining, all of that. When you look at the difference between what the rates would have been a couple years, two, three years ago, and what they will be, now, on a gap basis, they may be up 50 basis points. We are generating so much more margin at the club level that it’s almost non-event.
We can endure that extra 50 basis points, extra 50 on a GAAP basis, and it won’t change the outcome, and the business will produce the margins that we are committing to you guys going forward. So we are in a really, really good place and looking forward to see what we can demonstrate over the next several months.
Chris Woronka: Okay. Thanks, Bahram.
Operator: Thank you. Our next question is from Owen Rickert with Northland Securities. Please proceed with your question.
Owen Rickert: Hi, Bahram. Congrats on the great quarter. Just quickly, what’s the current market value of your unencumbered facilities and assets and how many of these could be subject to a sale-leaseback if needed or desired?
Bahram Akradi: Yes, this is a brilliant question. So we have probably $3.5 billion today. If I took our assets and tried to sell them for replacement costs, it would be probably $3.5 billion, to be realistic, about $2.5 billion from one reason or the other, it’s almost punitive to make a sale-leaseback. But roughly $1 billion of it, that’s what we could get into some sort of the formula that would actually work. And that would be some sale-leasebacks of the older clubs, which we would have substantial tax gain, but some sale-leaseback of new clubs, where we keep $20 million to $25 million of our costs, right, to build that facility, as the net invested capital. But if we sell them early on before we have depreciated them, then that $20 million to $25 million can show up as a loss to offset the tax gains on the older assets.
So this is a unique opportunity over the next couple of years, and I think it’s going to be a of years where we can mix old and new throughout the year on sell-leasebacks to sort of mute out the impact of the gains or losses from a sell-leaseback. And then – because I really want the market to see the natural potential growth of this company. And so that also, we don’t have any tax leakage. So we have some, we’re still enjoying some loss carryover from the COVID period. And we forecast, such an increased amount of EBITDA and net income growth that we want to make sure we protect as much of it as we can. So we want to use those loss carryovers not for sale of older assets. We want to use that to offset and maintain our cash flow to pay for our growth.
So balancing all those things, to answer your question, I think, out of the $3.5 billion, I think we could do in the right environment as much as a billion. I’m not telling you we’re going to do a billion. I want to be clear. Well, you’re asking and I’m giving you a pure answer. We could do as much as a billion of it. But we have to mix and match it. And I don’t, I emphasize, emphasize, emphasize, we’re not saying we will do that much. We won’t do that much. There is no comment on that. I’m just purely answering your question that about $2.5 billion of the $3.5 billion is almost like punitive and the rest of it, we could find a path for it.
Owen Rickert: Thank you. That was – that was very helpful. And then secondly, in terms of the recent April, club launches, are there any early performance metrics to call out? Or how well have these launches gone in the first few weeks?
Bahram Akradi: Yes. So far, what we have is record breaking numbers. We, that’s all I can tell you. We, we have been, club after club, we’ve seen record breaking numbers. And these clubs are achieving, contribution margin positive much faster than I’ve seen in the history of the company. So we’re absolutely thrilled. But what we’re seeing in those results.
Owen Rickert: Great. Thanks for taking my questions.
Bahram Akradi: Thank you so much.
Operator: Thank you. Our next question is from Dan Politzer with Wells Fargo. Please proceed with your question.
Michael Hirsh: Hi, this is Michael Hirsh on for Dan today. Could you talk about CapEx going forward this year? And if anything has changed from last quarter’s commentary, and maybe how we should think about growth versus maintenance going forward?
Erik Weaver: Yes, this is Erik. I can take that one. No, relative to last quarter, nothing’s really changed there. CapEx, especially our growth CapEx is coming in at where we expect. For us, we’re kind of looking at maintenance CapEx at, roughly, roughly $10 per square foot. And so that’s kind of how we’re modeling out. And –
Bahram Akradi: And the way we’re looking at that maintenance CapEx, to be clear. So you look at the last year’s square footage at the end of the year, about a billion, about 17 million square feet. We applied for modeling purposes, you apply $10 a foot, that’s about $170 million. Now, the way that $170 million is broken down to, I would say it’s about half and half, about half of it, $5 of it would be what would require to spend to maintain your current EBITDA, maybe plus 2% or 3%, just to sort of cover the inflation on that EBITDA. And the other half, the other $5 we spend in the clubs is for re-modernization, reinvention, and technology, basically investments, which we expect to get additional return from on top of that. So but I we to make it easy for people to model, you could just take the last year’s deployed square footage.
Apply $10 to that. So this year would say, okay, $170 million, $175 million. And then we will take the remainder of it, if we do equivalents of 10 LFEs. After net, net and after sale lease back or all of that net investment of call it $25 million apiece is 250, you add it up, we’re generating enough free cash flow from our business to actually execute that. And that’s the way we’re looking to go forward, be able to continue to deliver the 10 LFEs per year, and, and free cash flow positive.
Michael Hirsh: Thank you.
Bahram Akradi: Thank you so much.
Operator: Thank you. Our next question is from John Baumgartner with Mizuho Securities. Please proceed with your question.
John Baumgartner: Good morning. Thanks for the question. Bahram, I’d like to ask about the Miura program. I recognize it’s early days. I’m curious as to any initial takeaways you have at this point as the program rolls out. I think, bigger picture, do you see anything that would suggest an opportunity to bridge Miura with Aurora, and maybe enhance the offerings for active adults as an incremental source of in-center revenue? I think, especially when you’re talking about sleep or joint health, and maybe even the opportunity to gain some traction with the Medicare Plus or, other insurers for preventative health, where it’s a win-win. Just curious how broadly you think about, a concierge-type service across your member base.
Bahram Akradi: So, I, first, to your first part of your question, we committed that we’re not going to try to have numbers associated with Miura to deliver the, to deliver the business model that we want. And we’re working on that. We’re very pleased with the demand that we see for that. And we are working on, casting more doctors and physician assistants to be able to handle the traffic that is coming our way. So, I would consider that business one that we will develop to a successful model and roll out. Will you see a number that would be material impact this year? The answer is no. Will it have the opportunity to start having a small impact in 2025 and then growing to the 2026, 2027? Absolutely. Is there a crossover between the Aurora customer and the Miura?
Yes, but it’s not the bulk of it. The bulk of the Miura customer is the person who is going to look for vanity. They want to look – they want to look great. They want to have, vibrant enthusiasm towards things they want to do in life. And so, they’re looking for ways to enhance look or performance, right? And the science is going to allow people to do this. And our approach is to caution people to make sure they will only engage on those things that have been scientifically proven to be safe and effective. And not just jump on every sort of a snake oil sales pitch that is taking place. Unfortunately, with these things, when they get going and there is some good, some truth to some of these things, there is also a significant amount of hype and, misuse of that information.
And we are always going to do the right thing by the customer. And I just don’t want to guide the financial system. I want to guide the financial community to trying to get numbers put into this. It’s not necessary. Our growth is pretty fantastic without it. And when we roll out Miura on a national level, they’ll just add to the something that’s already good.
John Baumgartner: Understood. Thanks, Bahram.
Bahram Akradi: Thank you.
Operator: Thank you. There are no further questions at this time. I’d like to hand the floor back over to Bahram Akradi, Founder and CEO, for any closing comments.
