(Bloomberg) — Budget gym company Planet Fitness is boosting its debt load to buy more gyms, in a bet that consumers will keep returning to health clubs as the pandemic shows signs of easing.
It’s the flip side of the pain that companies like Peloton Interactive Inc. are experiencing as customers increasingly stop working out in their basements and return to prepandemic life. Peloton, a maker of high-end home exercise bikes, saw its shares drop 24% on Thursday on reports it was cutting back production.
Planet Fitness meanwhile plans next week to sell $975 million of bonds backed by almost all its U.S. assets that generate revenue. A third of that money will help pay for more than 100 gyms its buying by taking over its oldest franchisee, Sunshine Fitness Growth Holdings. The rest of the funds it raises will refinance debt.
By effectively mortgaging its business, it can sell investment-grade notes instead of a junk debt. The bonds its selling are known as whole-business securitizations and are backed by assets including its franchise payments and corporate-owned locations. Investors are clamoring for these kinds of securities as they look for relatively high yields during a time of high inflation.
Companies ranging from fast food restaurants to housecleaners have sold whole-business securitizations recently, which helped bring total sales of asset-backed securities last year to a post-crisis record.
Read more: From Fried Food to Gym Fees, It’s All Securitized in Yield Grab
It’s not clear how much Planet Fitness’s securities will yield, but similarly rated five-year bonds from Self Esteem Brands, owner of the Anytime Fitness chain of 24-hour gyms, were sold at yields around 5% in November. Yields on corporate notes maturing in three to five years averaged about 1.66% at the time, according to Bloomberg index data.
Sunshine is one of the “best-performing franchisees in our system,” said Chris Rondeau, CEO of Planet Fitness, in a presentation last week. Once its $800 million purchase of Sunshine closes, Planet Fitness will own 10% of the gyms under its brand, with the rest continuing to be operated as franchises. Planet Fitness has sold whole-business securitizations at least three times since 2018, and the one scheduled for next week is its biggest ever.
Guggenheim Securities is arranging the deal. Kroll Bond Rating Agency has given the issuance a preliminary BBB credit rating, the second-lowest investment-grade rating, while S&P assigned it a BBB- rating, one step lower. The notes will be sold in three parts, the biggest of which have average lives of 4.7 years and 9.4 years.
Back to the Gym?
Like most gym providers, Planet Fitness suffered during the early stages of the pandemic as people worked out at home. The company saw system-wide sales fall by $835 million in 2020 from the year before. Many other fitness companies had it worse, with Gold’s Gym International Inc.; Town Sports International LLC, owner of New York Sports Clubs; 24 Hour Fitness Worldwide Inc. and In-Shape Health Clubs all filing for bankruptcy in 2020.
Now Planet Fitness’s revenue is regaining lost ground. For the 12 months ended Sept. 30, 2021, sales were about $3.25 billion. That compares with $3.13 billion for the 12 months ended Sept. 30, 2019, according to a Jan. 19 report from Kroll led by analyst Xilun Chen.
New Covid-19 variants, such as the most recent omicron, could weigh on results. For gyms broadly in the U.S., visits dropped by 11.9% in the week of Dec. 27 from the same week in 2019, according to data from Placer.ai, an analytics firm that tracks retail foot traffic. The drop was more significant the following two weeks, with attendance down by roughly 20% during the first week of January and 15.5% during the second, compared with 2019.
Still, Kroll’s report points out that Planet Fitness is well positioned in the market thanks to its low fees. The fitness firm charges just $10 a month, Chen said in a phone interview. The company said it added 1.7 million net new members in 2021.
“They are targeting a customer base that does not go to the gym very often, so the universe may be much larger,” Chen said.
(Updates with Peloton share drop from second paragraph)
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