Investing.com -- Life Time Inc., a fitness company, has seen its outlook revised to positive from stable at S&P Global due to better than expected 2024 results and a supportive financial policy. S&P Global Ratings has affirmed all its ratings, including the ’B+’ issuer credit rating.

Life Time’s 2024 results outperformed S&P Global Ratings’ base-case forecast. The company’s debt to EBITDA was in the low 4x area, lower than the previously forecasted mid- to high-4x range. This year, the company is expected to continue benefiting from positive trends and increase its revenue by 12%-15%, which aligns with management’s guidance for 2025.

The positive outlook is also due to an expectation that Life Time will be able to maintain S&P Global Ratings lease-adjusted leverage of below 4.5x. This is supported by its publicly stated net leverage target of 2.25x or below. The company ended 2024 with a net leverage of about 2.28x, down from 3.6x in 2023, thanks to an 18% expansion in both its revenue and S&P Global Ratings-adjusted EBITDA, and a $110 million debt prepayment through an equity offering.

Life Time is anticipated to continue increasing its membership numbers by the mid-single-digit percent area in 2025 and onward as it opens additional new locations. The company is also expected to increase its average monthly per member spending this year while improving its revenue from personal training and other amenities by the double-digit percent area. This is expected to lead to a 12%-15% expansion in its total revenue in 2025.

Despite its financial-sponsor ownership, Life Time is increasingly expected to adhere to its publicly stated financial policy to achieve and maintain net leverage of 2.25x or below. This will likely provide it with a good cushion relative to the 4.5x S&P Global Ratings gross lease-adjusted debt to EBITDA upgrade threshold.

Life Time is projected to spend $650 million-$700 million annually on capital expenditure (capex) in 2025 to develop approximately 10-12 clubs. The company is expected to continue opening new clubs at this pace as part of its asset-light growth strategy. Life Time is expected to finance this capex with internally generated cash flows, as well as the proceeds from sale-leaseback transactions.

There are potential risks to this positive outlook. A worse-than-anticipated macroeconomic environment in the U.S. and elevated competitive pressure could cause Life Time to generate weaker-than-expected revenue and margins. Additionally, continued inflationary pressure could weaken Life Time’s EBITDA margin and reduce its cash flow if it is unable to offset the cost increases by expanding its membership base or raising its membership prices.

However, Life Time’s focus on enhancing its clubs and providing additional value to its members through ancillary offerings could help mitigate these risks. The company’s stated financial target is net leverage of 2.25x. It is expected to further reduce its leverage in 2025, potentially below 2.25x, which would translate to S&P Global Ratings gross lease-adjusted leverage below the 4.5x upgrade threshold.

The positive outlook on Life Time indicates expectations for revenue and EBITDA growth, with a forecast for S&P Global Ratings lease-adjusted leverage to decrease to potentially below 4x over the next 12 months. If Life Time fails to sustain S&P Global Ratings-adjusted leverage of below 4.5x, the outlook could be revised to stable. Conversely, Life Time could be upgraded if it maintains its solid growth trajectory and achieves and sustains its net leverage target of 2.25x for multiple quarters.

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