Fitness International LLC

For comparability across the fitness and broader leisure sector, we measure adjusted debt to EBITDA based on GAAP EBITDA, which is meaningfully higher than the company's measure of its modified cash basis EBITDA because its cash rent expense is meaningfully higher than GAAP rent expense. As a result, our measure of lease-adjusted debt to GAAP EBITDA is lower than it would otherwise be if we measured it based on the company's modified cash basis EBITDA. Consequently, we are supplementing our analysis of leverage with our free cash flow to debt measure, which benefits from eliminating the impact of accounting accruals. The stable outlook on Irvine, Calif.-based fitness club operator LA Fitness reflects our expectation for good operating performance through 2020

...The company has a sizable operating cash flow base and can internally fund its growth capex plan and also achieve its financial policy of prepaying debt over time to reduce leverage. Fitness International LLC (LA Fitness) generates sufficient cash flow from operations, which includes landlord reimbursements for certain leasehold improvements that the company finances upfront, to cover growth capital spending, distributions to cover owner tax obligations, and prepay debt over time in line with its financial policy of reducing leverage. As a result, LA Fitness compares favorably with many of its fitness peers that typically need external financing to achieve their growth capex plans. We forecast LA Fitness will reduce our measure of lease-adjusted debt to EBITDA to the mid- to high-4x area and reported free cash flow to debt above 15% in 2020, mostly through debt prepayments. The forecasted free cash flow to debt measure is good for the current rating, and the forecasted lease adjusted debt...

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