Fiscally Unfit
This one definitely falls in the “What Were They Thinking?” category. Last night, the Vestavia Hills City Council voted to give away a 13-acre tract of land valued at $2 million for $10. Yep, that’s TEN DOLLARS. The land will be “purchased” by Life Time Fitness, which proposes to build a $25 million fitness center that will anchor a mixed-use development at Patchwork Farms off Cahaba River Road. The Council estimates the facility will generate nearly $450,000 a year in revenue for the city.
I wonder if any of the city councilors read this article before the vote:
Life Time has grown rapidly in the past few years. Both sales and earnings per share more than doubled since 2004. Membership growth has slowed substantially, and in part Life Time has been a victim of its own success. Some of its clubs had become so crowded, the company raised prices and reduced marketing expenditures to cull its membership.
However, this growth has come at a price. Although the company has generated $376 million in cash flow from operating activities over the past three years, it has spent $868 million on capital projects. The difference has been made up primarily from borrowing against a revolving credit facility, but Life Time also raised $92.5 million last year by issuing new shares at $55.40.
It would be one thing if the investments were reaping a huge payoff. But the opposite appears to be happening. On a trailing 12-month basis, the return on invested capital was 8.7% in December 2005. It has been falling ever since, and in the December 2007 quarter was down to 7.2%.
Returns like that make it difficult to justify the company’s use of debt, as the interest rate on a recent financing was 8.25%. It is also puzzling that returns continue to decline when the price increases and reduced marketing ought to be having a positive impact.
Judging from the current capital spending plan, I expect further declines whether the economic slowdown affects it or not. For 2008, Life Time expects to spend another $440 million to $460 million on capital expenditures, which will far outstrip the $160 million to $170 million I expect it can generate from operations.
…Will Life Time be able to raise more debt to cover its liquidity needs? In this environment, it wouldn’t come cheaply. Instead, it may have to issue new shares, no matter how cheap they may appear to be. At any rate, they’d likely cost far less than the $55.40-per-share price generated in last year’s offering and cause even more dilution as a result.
…Long story short, Life Time just doesn’t appear fiscally fit. [emphasis added]
Oh. I guess it’s a good thing Life Time won’t have to shell out $2 million for the land. But will it be able to find $25 million to build the facility?
Perhaps the City Council should consider raising the price. And getting the money up front.
h/t to Blues reader Sansou
May 20th, 2008 at 12:29 pm
I’m disappointed that they didn’t hold out for an equestrian center.
May 20th, 2008 at 12:31 pm
Ironically, the land was a horse farm before the former owners sold it to the city.
May 20th, 2008 at 6:01 pm
I’m not sure that elected officials do ANY research before they vote. Neither do most reporters, either. I did a simple Google search dealing with this billboard company in Mobile and found all kinds of stuff that, when I was working press, would have been golden for a story. Now it seems they just rip & print.
The info. you found, Kathy, is just what an enterprising reporter ought to be covering and a half-sentient elected official ought to be investigating.
May 20th, 2008 at 6:31 pm
I can’t take credit for finding the information; a kind and enterprising source sent it to me. I’ve been assured by a friend who’s in the know in the Vestavia political scene that someone with expertise did the background work, but then again wasn’t that supposed to be the case with the sewer debacle and the bond debacle?
I have two concerns about this deal. First, will the company be able to fund the project (and if not, will the land sit empty for years)? Second, does it really merit this kind of giveaway (and will other business owners get similar terms)?
May 20th, 2008 at 9:49 pm
I’d like to see a cost:benefit analysis that includes the issues of flooding, traffic, and the question of whether this business will be recession-proof.
If gasoline hits $4 a gallon, will a yuppie work-out company be able to weather the down-turn in travel costs to and from its facility? Also, with the economy in such flux and for who knows how long, I see this kind of nonessential business as risky. If the economy doesn’t support this kind of business in the short term, what will be the fall-out of the city’s support/subsidy for it?
I’d really like to think that Vestavia and other area municipalities have good intentions and have well-thought-out plans, but I just don’t see evidence of that. I’d love to be proven wrong, though.