Wall Street is banking on gym chains getting back in shape

For the same reason, gym chains are popular again on Wall Street. Peloton Interactive Inc.

is on the rise: Americans are tired of working out at home.

Budget operator Planet Fitness Inc.

and its franchises have attracted hundreds of millions of dollars from private fund managers in recent months, according to people familiar with the deals. High-end clubs like Life Time Group Holdings LTH 2.21%

and Bay Club Co. have also seen renewed investor interest in their stocks and debt, respectively.

Oaktree Capital Management LP, MidOcean Partners and Soroban Capital Partners LP are among the investors buying debt and equity from the gyms that have weathered the worst of the pandemic. They’re betting that the survivors, many of whom underperformed the broader markets last year, are poised to grow. Several chains’ share and loan prices have rallied over the past nine months.

“The smart money is figuring out how to take advantage of the shift,” said Milwood Hobbs, Oaktree’s head of North American sourcing and procurement. “The high-end urban gym still struggles, but the … mainstream chains are doing pretty well.”

Oaktree in December loaned about $120 million to a major Planet Fitness franchisee with 70 locations primarily in New York and California, Oaktree executives said in a conference call with Wall Street analysts. The Carlyle Group

along with Goldman Sachs Asset Management, made a similar loan in November that supported the purchase of another 42-location Planet Fitness franchisee by private equity firm HGGC LLC.

Oaktree’s loan will help the franchisee pay for its recovery and growth, Oaktree executives said. According to data from LevFin Insights, Oaktree negotiated an interest rate of around 7.5% on the financing, well above the 6% average for most middle-market loans at the time.

Peloton was on a wild ride, announcing that its CEO would step down and thousands of jobs would be axed despite a surge in sales early in the pandemic. Here’s why Peloton became a viral hit and why it’s now spreading. Photo illustration: Jacob Reynolds

The coronavirus pandemic prompted companies like 24 Hour Fitness Worldwide Inc., Gold’s Gym International Inc., and Town Sports International Holdings Inc. to file for bankruptcy court protection. Consumers turned to home workout companies like Peloton, with investors sending shares of the stationary bike maker more than 500% higher at their peak.

Last year, as home workouts became tiring and the rollout of Covid-19 vaccines reduced the risk of infection, more consumers signed up for gyms. Planet Fitness customers rejoined at a rate of 30% in 2021, compared to 20% before the pandemic, chief executive Christopher Rondeau told analysts on a conference call in February.

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Sam Rimland, a 30-year-old television advertising director in Brooklyn, NY, left Planet Fitness in March 2020. He returned about seven months ago after receiving a second dose of the vaccine.

“I was just doing exercises in my living room to make sure I maintained some shape and muscle mass, but I didn’t have the satisfaction that you get in the gym,” said Mr. Rimland. “It was nice to get back to that routine.”

Planet Fitness Inc., the public holding company for about 2,200 gyms under its brand, weathered the pandemic in part because most of its locations are franchised, which keeps costs low. Membership also recovered quickly thanks to low fees starting at $10 per month. The company added more than 100 new locations over the past year and upgraded its earnings guidance.

Hedge fund managers like Soroban and Artemis Investment Management started buying more Planet Fitness stocks last summer, according to data from S&P Global Market Intelligence. The stock has gained around 12% since the end of June. Peloton stock is down about 77% over the same period; Earlier this year, the company replaced its chief executive and cut 2,800 jobs. Soroban and Artemis declined to comment.

Treadmill maker Peloton recently replaced its CEO and cut 2,800 jobs as demand for its equipment has slowed.


Photo:

Michael Loccisano/Getty Images

Some fund managers are looking at luxury chains that operate primarily in the suburbs and target affluent families with country-club-style amenities like golf courses, tennis courts, pools and restaurants. The outdoor options and purchasing power of the clientele helped such businesses to make ends meet.

Last summer, alternative wealth manager MidOcean began buying the debt of Bay Club, a West Coast company that caters to the media and tech elite residing in Los Angeles and San Francisco. Some of Bay Club’s approximately $700 million in loans were trading at just 90 cents on the dollar at the time, while MidOcean believes the value of the company’s properties alone exceeds $800 million, said Dana Carey, chief investment officer of MidOcean’s $7 billion lending division. The loans are now trading sporadically around 95 cents on the dollar, he said.

Some luxury gym owners have taken advantage of investors’ appetites to take money off the table. Private equity firms Leonard Green & Partners and TPG bought Life Time Fitness Inc. in 2015 for more than $2.8 billion and listed it on the New York Stock Exchange last October. The partial stock offering raised approximately $700 million. The company’s shares are down about 25% since then.

Write to Matt Wirz at matthieu.wirz@wsj.com

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