Great Wolf Resorts Q3 2008 Earnings Call Transcript

Great Wolf Resorts (WOLF)

Q3 2008 Earnings Call

November 5, 2008 9:00 am ET

Executives

Randall L. Churchey - Interim Chief Executive Officer, Director

Kimberly K. Schaefer - President, Chief Operating Officer

James A. Calder - Chief Financial Officer

Jerry Daly - Daly Gray Communications

Analysts

William Crow - Raymond James

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Jeffrey Thomison - Hilliard Lyons

William Marks - JMP Securities

Hayley Wolff - Rochdale Securities

Presentation

Operator

Welcome to the Great Wolf Resorts Third Quarter 2008 Earnings Conference Call. (Operator Instructions). I would now like to turn the conference over to Jerry Daly of Daly Gray Communications.

Jerry Daly

Good morning everyone and welcome to Great Wolf Resorts third quarter 2008 earnings conference call. This morning, Great Wolf released their third quarter 2008 results, and I hope you've had a chance to review the press release. Please call our office at [phone] if you did not receive the press release and we'll be happy to email you a copy. You also may view a copy of the release at the company's website, www.greatwolf.com by clicking on Corporate Site at the bottom left of the page and then clicking on the News Release button. A replay of this conference call will be available later today at the company's website and at www.streetevents.com for 30 days. Recording of the call will be available by telephone until midnight on Wednesday, November 12, 2008, by dialing [phone] with a reference number of 11121213. A replay of the conference call will be posted on the company's website through December 5, 2008. The conference call is the property of Great Wolf Resorts and any redistribution and retransmission or rebroadcast of this call in any form without the expressed written consent of Great Wolf is prohibited.

Management has asked me to inform you that in compliance with the SEC's Safe Harbor guidelines, certain statements that might be made during today's conference call could be considered forward-looking and subject to certain risks that could cause results to differ materially from those projected. Those statements may include, but are not limited to, estimates of the company's future, revenues, earnings, and development activities. I refer you to the company's SEC filings for further information on the factors that could cause actual results to differ from any estimates.

Now I'd like to introduce Randy Churchey, Interim Chief Executive Officer, Kim Schaefer, President and Chief Operating Officer, and Jim Calder, Chief Financial Officer who will provide you with some insights into the company’s third quarter 2008 financial and operating results. Now let me turn the session over to Randy Churchey.

Randall L. Churchey

Good morning everyone and thank you for joining us today. I hope you had an opportunity to review our earnings release that we issued last night. Since our last call in early August, obviously the economic climate has changed dramatically. For this call we had hoped to discuss meaningful progress on the Mason Resort loan extension and on the various domestic and international new resort development deals in the pipeline. Unfortunately, with the ongoing turmoil in the capital markets, we did not make much progress in obtaining commitments from third parties in these areas.

The good news however is our third quarter results of operations were excellent. Our revPAR results continued to exceed the lodging industry averages and our various development deals in the pipeline continue to move forward albeit slowly.

My remarks will focus on four general areas, one, business results and economic data, two, leverage, three, the impact of a possible downside scenario, and four, CEO transition. Then, Kim and Jim will provide more information about these matters and others.

First, our business results and economic data. As Kim will discuss in further detail, our third quarter year-to-date operating results were very encouraging in light of the recent disappointing economic news. Furthermore, our third quarter results were at the high end of our previously communicated range and our same-store revPAR performance continues to outpace the lodging industry by 2 to 3 percentage points. Also, our management team did a very nice job of controlling expenses and maintaining operating margins and bringing that increased revenue to the bottomline.

However, our October results and November bookings are not as robust. Most notably, group bookings have declined. In essence, this economic forecast for the remainder of the year is for a slight reduction in GDP, increases in job losses, and an overall decrease in consumer spending. Moreover, consumer confidence plunged into the low 30%, a historic low. So far our business has been resistant to these macroeconomic factors which traditionally had a great effect on consumer discretionary spending, but we do not believe we are immune. In the contraction group bookings and the limited visibility due to an extremely short booking window, we’ve reduced the top end of our previously community full-year adjusted EBITDA guidance from $70 million to $67 million. Therefore, our current full-year 2008 adjusted EBITDA guidance is in the range of $63 million to $67 million.

Second to leverage, overall, our pro forma debt EBITDA which subtracts debt associated with construction process and adds EBITDA associated with properties ramping up is 4.9 times, which I think is reasonable. However, our actual trailing 12 months debt EBITDA is higher reflecting the significance of our construction efforts related to the portfolio of resorts as a whole.

As Jim will discuss in further detail in a little bit, we continue to be engaged in discussions with our lenders our only near-term debt maturity $76 million non-recourse loan secured by our Mason Ohio resort which matures at the end of November 2008. Frankly, we’re very disappointed with the lack of progress in these discussions. If we’re not able to reach an agreement for an extension in this loan’s maturity and the lenders assume the asset, we do not believe that the result will be materially detrimental to the company’s balance sheet or cash flow. Again, Jim will discuss this in a little more detail in a few minutes.

Third, downside scenario. Today, the consensus view of the lodging industry is that 2009 revPAR will range from a slight increase to a 5% decline, fairly wide range. Remember that throughout 2008 our change in same-store revPAR has been better than the industry as a whole, about 2 to 3 percentage points. We believe that in this environment where people are reducing their spending, our unique family experience, our value proposition, and our easy drive to locations will continue to yield same-store revPAR performance better than the lodging industry as a whole.

In this volatile climate, many investors want to know the impact of the decline in 2009 revPAR to the company. As a point of reference, according to Smith Travel Research, lodging industry revPAR has only declined two times in history, a 7% decline in 2001 and a nearly 3% decline in 2002. As you might expect, we routinely conduct risk sensitivity analysis on our various financial forecasts in order to estimate the effect of various scenarios. While we’ve not completed our 2009 budgeting process, we have conducted some preliminary analysis. Of course these are management projections only and are subject to substantial uncertainty including all of the risk factors outlined in our SEC filings.

With that said, we believe that a 5% same-store revPAR decline in 2009, which we think is very conservative, plus a conservative unlevered return on our two new additions for the year, the $43 million Grapevine expansion and the $130 million Concord new resort opening, with all else being equal, should approximate an adjusted EBITDA in 2009 of approximately $65 million, coincidentally the same as our midpoint of range for 2008. All that math assumes an extension of the Mason loan.

Under this scenario we expect that our trailing 12 months 2009 debt EBITDA would be 7.7 times, our interest coverage ratio would be 2.1 times, and our fixed charge coverage ratio, assuming we spent the entire 4% maintenance CapEx, would be 1.7 times. These leverage ratios would be greater than we would like, but acceptable and sustainable in our view.

And lastly, the CEO transition. Yesterday we announced that Kim will leave the company effective January 1, 2009, as its CEO. Kim has been instrumental in the growth of the company and the evolution of its brand since the company’s inception. She and her management team I have a great deal of confidence in and they will do an outstanding job.

Now, Kim will discuss the results of operations and development in more detail.

Kimberly K. Schaefer

We are pleased with the operating performance for the third quarter and year-to-date. Our third quarter and year-to-date same-store revPAR gain of just less than 1% and 3% respectively exceeds comparable hotel industry revPAR performance. According to Smith Travel, the US industry revPAR decreased 1% for the third quarter and then increased 1% year-to-date. For the quarter, our same-store occupancy was up a percent and ADR was down just under $4, and we attribute most of this primarily to the increasing group business which we have talked about before. Our room spend per occupied room decreased approximately 2%, again due to the increasing mix of group business.

We would like to note that our consolidated resorts produced the same-store revPAR improvement of 5.4% in the third quarter, which is what led to the adjusted EBITDA results being at the top end of our range. Our Generation One Resorts which are in the Midwest and had been impacted by the macroeconomic environment in that region for some time. Total same-store revPAR for those resorts decreased 5% in the third quarter and 4% year-to-date. We do still believe we have competitive resorts in these areas and they will eventually produce better same-store results as the economic conditions improve. With 58% repeating referral business, it continues to show strong brand recognition and loyalty to these Midwest properties.

Our Generation Two Resorts are the newer 400-room resorts with the full range of branded amenities including conference centers located across the US. Total same-store revPAR increased 4% in the third quarter and 6% year-to-date. These resorts contribute approximately 90% of our year-to-date adjusted EBITDA. The Generation Two Resorts are the current resorts being constructed and the ones planned to be constructed in the future.

We believe that our industry leading revPAR is due to a variety of factors including families staying closer to home for vacations, Great Wolf Lodge offering a unique family experience for them, and we’re providing families a value proposition so they can substitute a longer, more expensive vacation for a quality Great Wolf stay.

However, consistent with the lodging industry, we’ve seen a slowing of booking activity during the fourth quarter. According to Smith Travel Research, lodging industry revPAR in October declined by approximately 9%, our revPAR declined by 7% in the same period. Our leisure business has held fairly steady, but it’s our group business which has declined. November’s and December’s booking pace is very close to prior year, and so we are hopeful that our revPAR for those periods will be better than October. Please note however that our booking window is short and consequently projections for November and December based on today’s booking case are potentially subject to wide variances.

We have already reduced expenses at the resorts due to the decreased demand and we are constantly evaluating new ways to eliminate cost. Additionally, we have decreased expenses at the corporate office, mainly in the development area in response to the slowing transaction environment.

Year-to-date overall company adjusted EBITDA was 36% of total revenues in 2008 versus 35% in 2007. Our guest service scores continue to be high with a healthy margin and are now at the expense of the family experience which becomes even more critical when families are making a tough decision on how to spend their discretionary dollars. We want to continue to give our families service for a great experience. We are happy to see the continued improvement in operating margin and guest satisfaction scores. As always, a thank you to the 5000 tech members who concentrate on this every single day.

A quick update on development. The Grapevine expansion which opens in December 2008 and the new Concord North Carolina Resort which opens in Spring of 2009 are on time and on budget with an estimated percentage of completion of 75% and 60% respectively. There was not much progress in our development pipelines during the quarter, but as Randy mentioned, no potential development deals have left. We continue to work on finalizing deals with three letters of intent we previously disclosed, Foxwoods, Mall of America, and Lake Lanier, Georgia.

We’re also working on a number of a domestic and international sites. We continue to believe that having these sites ready for construction without significant capital commitment is a good way to build shareholder value.

Now, I’ll turn over to Jim to discuss capital structure and liquidity.

James A. Calder

As Randy mentioned, we’re currently engaged in discussions with our lenders to extend a maturity on our non-recourse loan for our Mason Ohio Resort, and that loan is due at the end of November 2008. Although Mason Resort’s performance has increased significantly in 2008 versus 2007, we do not expect it to meet the operating threshold for the loan’s automatic one-year extension. I think it is important to note that we’re seeking an extension of this loan and that it is a performing loan where we are not seeking additional proceeds. The loan is currently covering its debt service and is forecasted to do so in the future as well. For competitive reasons we generally do not disclose individual resort information, however, given the Mason refinancing discussions, we though it’s important for investors to include the impact of the Mason Resort’s operation to the company as a whole, we’ve included that data in the earnings release today.

On a trailing 12-month basis through the third quarter of 2008, Mason Resort produced $6.3 million of adjusted EBITDA and incurred $4.8 million of debt service payments, for a net cash flow before maintenance CapEx, and maintenance CapEx would be about $1.3 million. Obviously our alternatives for resolving this near-term loan maturity are similar to any non-recourse debt situation. We can reach an acceptable extension or the lender can assume the asset. We hope to be able to announce the resolution to this loan maturity during this month.

Based on our current forecast we do not expect to have any other debt maturities until mid 2011. Also, we don’t have any material deposits or future capital commitments outside of the Grapevine expansion and the Concord Resort construction that Kim spoke about. So, we’ve very little cash, we’ve no cash essentially at risk on future development projects other than those two items, and as we send a release and continue to stay here, we will not make any new significant capital commitments until the credit markets stabilize.

We continue to pursue a variety of alternatives to increase liquidity. These include obtaining additional financing on certain under-leveraged assets, possible sales, or partial sales of resorts under our licensing or joint venture program.

Given the current state of the credit markets, however, we do not currently have anything to show for our efforts, but those efforts do continue. Looking forward we expect to be cash flow positive in 2009 after capital expenditures, debt service, and items like that since the company’s expected cash construction commitments in 2009 will be substantially less than 2008.

Now, let me just kind of walk through a high-level example to illustrate that. Using Randy’s example of 5% decline in same-store revPAR for 2009, and again, using his hypothetical, that came up with an estimated 2009 adjusted EBITDA amount of $65 million, and again, let me reiterate what Randy said, this is not our formal guidance for 2009, but it’s just using a hypothetical with a $65 million estimated number.

Now let me provide you with some additional 2009 information that we’re using for planning purposes. Our aggregate capital expenditures in 2009 are expected to be approximately $23 million, and that’s comprised of the amounts to complete the Grapevine expansion and the Concord Resort, and that’s about $16 million of our cash equity for those two items, and maintenance CapEx for all the other resorts of about $7 million to $8 million, so about $23 million in total. Aggregate debt service, both principle and interest, we currently estimate to be approximately $38 million or $40 million. Other cash flow items are relatively insignificant. So under this 5% revPAR decline scenario, which resulted again in a $65 million estimated adjusted EBITDA number, and assuming no liquidity enhancing events, that is no additional borrowings other than what we have today, no sales of assets, or any other type of event, and assuming that we don’t reduce our maintenance CapEx expenditures which we have some control over, we would be modestly net cash flow positive in 2009 even with a 5% decline in revPAR.

I hope this information is helpful in understanding our company. We will be issuing formal 2009 guidance after our budgeting process is complete, and that should be in conjunction with our fourth quarter 2008 earnings release which would be February/March of 2009. Assuming the successful extension of the Mason, we believe that we will have sufficient liquidity to operate our business absent any significant downturn in our expected operating results.

One last thing, we’re asked by many investors about the book value of the company. Using GAAP numbers at September 30, 2008, the GAAP net book value of our company is right around $10 per share. This includes about $40 million of intangible assets and also includes all of our consolidated resorts which are on our balance sheet and have all been constructed within the past 5 years, so it’s relatively new assets there.

Operator, that concludes our remarks. So, we’re ready to take questions at this time.

Question-And-Answer Session

Operator

(Operator Instructions). Our first question comes from Bill Crow with Raymond James.

William Crow - Raymond James

Randy, a couple of questions for you. Have you guys discussed the potential of finding a joint-venture partner or some other investor for the Mason property, specifically CNL, whether they have any interest?

Randall L. Churchey

Bill, as Jim said in his comments, we continue to reach out to a variety of different, or call it, market participants for joint ventures. Before the most recent credit climate turmoil, we were gaining reasonable amount of traction with a variety of parties on different resorts. Given the current state of the credit markets and really the state of any transactions market, there is really not a whole lot of appetite for any sort of deal today, and I am not speaking specifically of Mason, I am just speaking generically to all joint ventures. So, if CNL is a partner of ours in two resorts, we continue to have dialogue with them about expanding that partnership, and in this day and time, no one’s making any real commitments. So, I don’t think anything is imminent.

William Crow - Raymond James

And then could you just take us inside the CEO search a little bit, how big an effort did you make to look outside, did you guys hire a search firm just to remind us, you may have covered that in prior quarters, I just don’t recall.

Randall L. Churchey

Our board, I think, is a very good board when you look at the backgrounds of the people. We have folks both in finance, in real estate, so forth. So, the board itself had a great deal of experience and knowledge of candidates out there. We did not do a formal external search. Obviously whenever a position is open, you receive lots of resumes, lots of phone calls, etc., but it became pre-apparent to our board and to myself very quickly that Kim was the right person. So we did not do an extensive search where we did not hire a search firm at all. We did obviously look at resumes, few phone calls, and so forth, but it was a pretty easy decision on our part that Kim was the right person for the company going forward.

William Crow - Raymond James

Your downside scenario for next year of minus 5% revPAR, does that imply for the industry a 7% decline or you are confident you can beat it by a couple of hundred basis points, is that what I heard?

Randall L. Churchey

Yes, I think so. The reason why we chose 5% was that was truly the largest, call it consensus estimate revPAR would decline next year, and even though we’ve been ahead by 2 or 3 points for the entire of ’08, we decided to go ahead and use 5% anyways. So, if history holds true over the last 10 months, you would think that we could continue to exceed the industry average.

William Crow - Raymond James

What sort of margin decline are you anticipating in that downside scenario?

Randall L. Churchey

I don’t have that math in front of me, Bill. The way we thought it through generically was that a revPAR decline of 5% yielded an EBITDA decline of 10%.

William Crow - Raymond James

And then finally, you talked about adding back the debt associated with development projects including the ramp-up as far as your debt to EBITDA, how much of that debt are you adding back, just so we can do a similar calculation?

James A. Calder

That’s the last table in our earnings release today, a general pro forma net debt to adjusted EBITDA, and it’s got the calculation there.

Operator

Our next question comes from Steven Wieczynski from Stifel Nicolaus & Company, Inc.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Jim, did you say $30 million to $40 million next year in interest expense? Is that the right number?

James A. Calder

In total debt service, Steve, that’s principle and interest, we’re saying about $38 million to $40 million, yes.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Okay. And then in terms of the Ohio loan, what has been the pushback from the lender, can you give us some dialogue in terms of what they’re telling you?

James A. Calder

I don’t think we could on this call really characterize our discussion. We have been in discussions for several months and those discussions continue where we’re not in agreement obviously or else we would be announcing something. I think I’d just prefer to leave it at that. We don’t yet have an agreement. We hope to have an agreement and obviously there are a couple of different items in any financial transaction that it can relate to, whether it’s term, fees, all those types of things, we just don’t have agreement yet. So, I’d rather not characterize too specifically because we are still in discussion on the loan.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Looks like the revPAR is actually hanging in there okay at this point, but it looks like once people get to the properties, are they spending less, that is what it looks like to me at this point?

Kimberly K. Schaefer

It depends on the mix of what you are looking at. I mean, the decline has really contributed to the continued increase of group bookings, and we’re seeing our highest number of group rooms ever at our resorts, and so, that’s a good thing for revPAR, but with that the amounts that they spend inhouse does shift a little bit. So, we don’t have a way to track what is group and what is leisure from a pure spend, but we do see at the resorts that don’t have as much group that the increase in per occupied room spending is still increasing. So, we believe that’s more of a shift in the mix.

Steven Wieczynski - Stifel Nicolaus & Company, Inc.

Okay. Last question, just in terms of advertising at this point, are you looking at spending more on advertising just to get the word out there in terms of drive-in vacation and that kind of stuff at this point?

Kimberly K. Schaefer

We’re continuing to execute our plan on the way that we market, but we are always constantly monitoring this in looking at this environment, I mean, our goal is set towards Thanksgiving and then the holiday season in December. So, those plans have not necessarily been adjusted up or down for the economic times. We believe we’ve got a very good plan to get the number of rooms we need inhouse.

Operator

Our next question comes from Jeffrey Thomison with Hilliard Lyons.

Jeffrey Thomison - Hilliard Lyons

I have two questions. First of all, looking at the Generation Two Resorts figures for third quarter, the improvement in occupancy and revPAR were encouraging, I believe, given the macro environment. I just wondered if you could elaborate as to the moving parts behind those gains, I mean, what’s working particularly well operationally or demographically? And then the second question has to do with Mason, your business neighbor there, Cedar Fair, has allocated the largest percentage of its ’09 capital spending budget to its Kings Island Park in the form of a world class coaster. Now, those types of moves historically a result of a nice attendance increases, and I was wondering if you would expect any benefit to your Mason business if indeed Kings Island Park sees a significant attendance gain next year?

Kimberly K. Schaefer

To answer your first question on the Generation Two, I mean, there is a combination that is increasing, again, these Generation Two markets being larger resorts, a little bit closer to metropolitan markets, have performed well, good awareness, great service. It is really being driven by both occupancy and rate. The group market continues to be a nice seller for us. So it really is an overall combination of all the marketing parts that go into that. We will continue on those Generation Two Resorts to continue to analyse on the yield management for the group versus leisure, but we do believe that is what led to a very strong third quarter there. As far as the Mason, with Cedar Fair, that is one of the draws to the area of course, is the Kings Island Resort. So we are very excited about the new roller coaster coming in, and we do have a marketing plan with Kings Island. So we will be executing against that and then we do our marketing plans in the summer due aligned very nicely with Kings Island advertising. So, we’re very excited about that.

Jeffrey Thomison - Hilliard Lyons

And then just finally, looking at the most recent Generation Two Resorts, do you have any regrets as to the commitment that you made on the size of those properties in hindsight?

Kimberly K. Schaefer

On the Generation Two Resorts?

Jeffrey Thomison - Hilliard Lyons

Right, the most recent resorts that you have? The ones that are in development even?

Randall L. Churchey

No, I don’t think we have regrets due to that. The financial results of both Grand Mound and Grapevine today are right along with what we underwrote those facilities to produce. So we’re happy with the size. Frankly, I think the Grapevine expansion is going to do very well, but given the current economic environment, I probably would have preferred that came online two years from now, but again, that’s not the underlying results of the resort, but just given the economic environment we’re in today, two years later would probably be more preferable.

Operator

Our next question comes from William Marks with JMP Securities.

William Marks - JMP Securities

I had a few question, one on Mason, the cash flow that you mentioned, you gave $6.3 million to EBITDA and $4.3 million of debt service, so the difference, is there a little bit of CapEx in there that you will require to reserve?

James A. Calder

Yes. CapEx at 4% will be, call it, $1.2 million or $1.3 million, something like that.

William Marks - JMP Securities

I’ll leave Mason alone for now. You mentioned, the next year, the scenario you gave, I don’t believe you quantified the returns on the developments, can you give us a little more information there?

Randall L. Churchey

Will, that was an omission and that was by design. I will let you decide what the unlevered yields are for those two properties given macroeconomic environment. As we’ve stated before, we underwrite all of our new transactions or new bills, for a stabilized 13% on levered yield, that is our underwriting. Obviously, first year, for a new resort will be less. For an expansion, I am not so sure it would be less just because we already have the awareness of the product and an ongoing business, but I’ll let you slot in what unlevered returns you think will reach.

William Marks - JMP Securities

Okay great. And the last question I have is regarding the difference between revPAR and total revPAR. Can you give me an idea of what that 5% decline scenario would imply in total revPAR, is it a similar number?

Randall L. Churchey

Yes. It should be. I don’t have that on the top of my head either, but it should be.

William Marks - JMP Securities

Okay. And for the fourth quarter, you did mention a figure for October and that November was challenging as well. Did that 7% number also coincide about with the total revPAR number?

Randall L. Churchey

For October, I haven’t seen the final numbers for October. My expectation is that it should be in the same relative range. But realizing we said November, in November we said that our booking pace was slightly behind. So I don’t want you to take away from this call that we’re saying November is going to be minus 7% and same with December, that’s not what we said.

William Marks - JMP Securities

Okay. Just last question, on holiday. I realize given the short booking window, the Christmas period which maybe be uncertain at this point, but is there any indication now since that is a holiday that is definitely booked far ahead?

Kimberly K. Schaefer

It’s still in the typical booking pattern. We do have the pace for our peak days for both Thanksgiving and the Christmas season, are 90% to 92% on average for the resorts. So those are booking as we would expect. October, you really don’t have a lot of peak days that you have a Generation demand in there. So, we saw Columbus Day, which was a long holiday weekend, which did great, our Generation Two properties actually did better last year, but that’s the one week in October that was really at a peak. So, we do expect when we look at the pace for November and December, I know those vacations, but if it follows, the numbers that we gave out would hold true. So, we’re slightly behind but those peak periods are where we’re seeing our strongest pick-up.

William Marks - JMP Securities

Okay, I just want to make sure I am clear on this. The numbers you gave, did you say approximately 92% of normal, in terms of the booking pace for Thanksgiving and Christmas?

Kimberly K. Schaefer

Correct, 92% is our average right now on that booking pace.

Operator

Our next question comes from Hayley Wolff with Rochdale Securities.

Hayley Wolff - Rochdale Securities

First, just following up on Will’s last question, you are at 92% of prior levels or your occupancies are 92% for the holiday?

Randall L. Churchey

Let me clarify, I think, what we’re trying to say is that at this standpoint we’re at 92% of prior year booking pace, but let me make sure you realize. Because of the move of Thanksgiving back a week, it’s not exactly apples on apples, I don’t know what the 92% turns into with the additional week with the shift, but I think you’re much closer, and that’s why in the press release we said we were slightly behind.

Hayley Wolff - Rochdale Securities

Can you just talk about your pricing strategy, going into the holiday period, vis-à-vis your bookings rate?

Kimberly K. Schaefer

Pricing strategy for us has always been consistent where a value proposition and what we’re offering the families with the water park passes included in their stay has always been very consistent for the holiday period. So, we’ve not engaged in any type of discounting. What we typically do is offer best rates to those who are willing to book the earliest. So, our pricing strategy has been consistent, and we think that that is the best strategy to have.

Hayley Wolff - Rochdale Securities

The tax issue in Grand Mound, can you go through the financial implications of that?

James A. Calder

As it has been reported in the press, there is a dispute with regard to the property taxes suspense on the resort that we own 49% of in Grand Mound, Washington. This resort is majority, 51%, owned by the Confederate Tribes of the Chehalis Reservation of Washington State. So, they are the majority partner on this. There is a fair amount of law or a precedent, let me say, that governs trade actions of this type which the tribe and we strongly feel vindicates the fact that this should not be subject to a taxation by the county for real and personal property tax purposes. The county clearly disagrees with our assessment of this. I don’t think it would be good for me to prejudice this as this is a legal matter at this point. It’s being pursued through the Federal Court System in the State of Washington. We think that’ll take a while to play out. The assessment number that, I believe, are public and in some of the articles the assessment number for the property would be in the neighborhood of several hundred thousand dollars for 2008. We strongly, adamantly, and completely believe that this is not an appropriate assessment, and our partners in this joint venture, or the majority partners adamantly and completely agree with that as well. So we believe we will be successful litigating this and my guess is it’ll just take some time to play out.

Hayley Wolff - Rochdale Securities

Okay. And what would be the financial statement impact of Mason being put back, is this something that November 30^th if nothing is done, or will you just negotiate through that deadline?

Randall L. Churchey

We gave some operating financial data here and in our 10Q we will be filing today or tomorrow, we’ll give some additional financial information, but let me just get you in the ballpark on that. The net book value of the Mason assets, that property and equipment, is about $106 million at September 30, 2008. If we got to the end of November and nothing had been decided or accomplished with regard to extension of loan, I frankly don’t know what would happen. December 1^st is a Monday, we’ll be there Monday morning running the property until someone tells us something should be done differently, if we get to that point. Obviously, we hope not to be at that point, but if that happens we will deal with that scenario when it happens.

Hayley Wolff - Rochdale Securities

Okay. So, the property is basically cash flow neutral and you’ve got the debt and the interest expense, so I guess we can work it through from there?

Randall L. Churchey

That’s correct and the point we’re trying to get across really is that total cash flow impact from a free cash flow standpoint is not material to the company at this time based on trailing 12 numbers.

Hayley Wolff - Rochdale Securities

And just the Hovde swap, of Eric just going off the board and Steven, what transpired there?

Randall L. Churchey

Eric, as I think you’ve probably read in the proxy, Eric has a wide variety of business interests and he has just found that the time commitment that was required just wasn’t one that he could provide. Steve Hovde is his brother who was President and CEO of Hovde Financial and that company is both an investment bank and also does M&A transactions in the financial services sector. Steve is also President of a broker dealer called Hovde Securities. So that was in accordance with our agreement that we signed back in May, and Steve has already attended two board meetings.

Hayley Wolff - Rochdale Securities

Okay. And last question is, can we just go through specifically some of the cost saving opportunities whether it is in the developing group or other areas and maybe get some numbers assigned to those?

Randall L. Churchey

I think we’ve talked about before that already from a corporate standpoint we have reduced our development department expenses by about 30%. We’ve also reduced our headcount at the corporate level around 15% and when I look at that headcount if you will and translate that to dollars, I think that’s around the same dollars too or probably in the 15% range. The impact on the run rate, I’ll let Jim speak to in a second. From a resort level standpoint, as you can see our margins are still very good, so the exact dollars and so forth from that, I don’t have in front of me, but obviously we’ve maintained our margins fairly well.

James A. Calder

I’ll just follow up on that. As a corporate side, we’re still a little bit in influx. We have Randy in his interim position. We’re in the budgeting process for ’09, but off the top of my head I would estimate that we probably trimmed our annual corporate run rate by $1 million to $2 million, and that’s probably a $12ish million annual rate on corporate overhead. Again, we are closely looking at every element as I think every company is in America, corporate overhead, whether it is personnel, whether it is office space cost, whatever. We’re looking at everything we can. In terms of trying to be prudent in this environment, trying to conserve cash and trying to reduce expenses. Again, we’re in the midst of our 2009 budgeting process, but that’s sort of a top of my head estimate at this point.

Hayley Wolff - Rochdale Securities

And the property level, I know you closed a water park in Dells mid-week, I mean, what other types of initiatives can we see?

Kimberly K. Schaefer

That’s one of the big ones that we’ve done from an outside looking in. We continue to evaluate labor which is a big part of our expenses, and giving people opportunities to take on more responsibility is a nice opportunity, but with the shutdowns, it is just unlike any sound business model, we’re always looking at ways to manage those expenses and we’re not compromising guest service, and that really is the most important thing we look at anything at the resorts, it cannot guest service.

Operator

And we have no further questions at this time. I would like to turn the conference back over to management for any closing statements.

Randall L. Churchey

Thank you for your time and attention to the company. In conclusion, our resort management teams continue to deliver outstanding operating results in this difficult economy. We have spent a great deal of time on the expense side over the last few months and will continue to look at them going forward. We are very cognizant of the challenging economic environment we are in and we’re hoping that it doesn’t last a very long time, but we’re trying to manage the business in case it does. We’re tightly focused on controlling our cost structure on any future commitments. Again, thank you for your interest in the company, and we look forward to updating you next quarter.

Operator

Ladies and gentlemen, this concludes the Great Wolf Resorts third quarter 2008 earnings conference call. If you would like to listen to a replay of today’s conference, please dial [phone] with the pass code 11121213. ACT would like to thank you for your participation and you may now disconnect.

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