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Great Wolf Resorts, Inc (WOLF)

Q1 2010 Earnings Call

May 4, 2010 9:00 am ET

Executives

Kimberley K. Schaefer - Chief Executive Officer

James A. Calder - Chief Financial Officer

Nikki Sacks - ICR

Analysts

William Marks – JMP Securities

Jeffrey Thomison – Hilliard Lyons

Hayley Wolff - Rochdale Securities

William Crow - Raymond James

Jeff [Cowl] – Sterne Agee

Howard Goldberg – Credit Agricole

James Calder – Bank of America

Operator

Greetings and welcome to the Great Wolf Resorts Incorporated first quarter 2010 earnings conference call. (Operator instructions) It is now my pleasure to introduce your host, Nikki Sacks with ICR. Thank you, Ms. Sacks, you may begin.

Nikki Sacks

Thank you. Welcome to the Great Wolf Resorts first quarter 2010 earnings conference call. Great Wolf Resorts released the first quarter 2010 results and I hope you had a chance to review the press release. If you did not receive a copy call Great Wolf’s office at 608-661-4791. We will be happy to fax or email you a copy.

You also may view a copy of the release on 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 releases button.

In compliance with the SEC safe harbor guidelines, certain statements that might be made during today’s conference call should 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 of the factors that could cause actual results to differ from any estimates.

Now I would like to introduce Kim Schaefer, Chief Executive Officer; and Jim Calder, Chief Financial Officer who will provide you with some insights into the company’s first quarter 2010 financial and operating results, and outlook for the second quarter and the remainder of the year. I will now turn the session over to you, Kim.

Kim Schaefer

Thanks, Nikki. Good morning everyone. In the first quarter of 2010, we delivered another quarter of solid results as we outperformed our prior expectations and the broader lodging industry. We produced adjusted EBITDA earnings results higher than the quarterly range we provided on our year-end call, primarily due to better than expected REVPAR performance.

Over our 13 years in operation, and particularly during the recent challenging economic period, it has become abundantly clear to us that people do value their close to home vacation experiences with their families. The ongoing relative strength of our results comes down to the business model of quality destination resorts that we have built. We are a great option for regional drive-to destination resorts and families value the amenities, experience and quality that we offer.

Our steady progress is evident in our results, where we showed slight improvement in each of our key metrics: occupancy, rate, revenue per available room and revenue per occupied room. I am particularly pleased that once again we outperformed the lodging sector with our 4.3% positive REVPAR growth compared to the approximately 3% industry decline.

Our growth was driven by a 1% increase in occupancy and a 2.1% increase in rate. Additionally, the ancillary spend which includes non-room spend such as food and beverage, gift shop and other non-water park activities at our resort was up 4.1% from last year’s first quarter.

The first quarter included a week of spring break in March which was a period like most school holiday periods, a strong demand generator for us. Our peak weekend and holiday times have remained robust throughout this economic cycle. Our opportunity to really drive organic growth is in the weekdays segment and we are continuing to deploy resources to capture the demand as the group meeting business returns.

Another positive attribute of our business is its stability. Our booking window and length of stay have remained fairly consistent throughout the years, which gives us predictability to our business and allows us to more effectively develop our marketing and operational strategies.

With respect to marketing, during the first quarter we continued our ongoing efforts to reach guests, both new and repeats through in integrative approach utilizing TV, online, social media and direct response. Repeat guests are clearly one of our key target audiences as guests who experience a Great Wolf vacation do become loyal wolves. Approximately 30% of our guests have already visited one of our resorts and this percentage continues to grow.

In the first quarter, same-store repeat occupancy was up 8.3 percentage points across all of our properties and up 13.2 percentage points in our generation two resorts.

Turning to spend outside of the room sales, the proprietary amenities that we offer is another Great Wolf differentiator as well as a key source of revenue accounting for approximately 35% of our property revenues. Consistent with behavior over the past few quarters, guests continue to spend at the lodge, they just seem to be prioritizing their spending. Total same-store ancillary spend per occupied room increased 4.1% year over year and 3.2% in our generation two properties. We have seen a shift from our sit-down restaurants to our more economic choices such as the snack bar. The primary beneficiary of this spend is children, with higher usage of Magic Quest and Scoops kids spa, somewhat offset by a year-over-year decline in our overall spa spend. Additionally, banquet revenues were up 23% year over year, illustrating the potential in our non-room revenues from the group business as the economic recovery progresses.

We are proud of our one-of-a-kind offerings. It really is a great sight to see kids and adults running around the resort with their Magic Quest wand in hand, looking for the next clue. For many kids, these attractions are as much a draw as the water park, and we intend to continue to enhance our offerings and seek ways to further monetize what we have established.

As I said earlier, our other key opportunity for organic growth is in the group segment, with 87% of our rooms sold coming from leisure guests in the first quarter, we undoubtedly have a considerable runway to complement our peak holiday and weekend business with weekday groups. We are beginning to see some pick up in the group business, which has been more impacted by the economy than our transient business. Group rooms accounted for approximately 13% of total rooms in the first quarter of this year, compared to 11% in the 2009 quarter.

On a same-store basis in our generation two properties, which are our properties that have dedicated conference centers, group rooms were up almost 50% from the prior year. The corporate group market segment increased approximately 5% and non-corporate social groups increased 5%. On a revenue basis, same-store generation two group revenue increased 42%, with particular strength in our Grapevine Texas, Washington, and Mason Ohio resorts. We don’t expect this pace of growth to necessarily continue as the size of the business segment increases, but we are certainly encouraged by the early trend we are experiencing and will continue to be aggressive in pursuing group business to fill the weekday vacancies.

With respect to our new and expanded resorts, we are pleased with the performance, particularly in light of the environment. Our Concord North Carolina resort had a strong first quarter with occupancy and room revenue up 10% and 8% respectively, compared to where our Williamsburg resort was at the same point in its cycle. As a reminder, Williamsburg opened in 2006, around the same time as Concord did in 2009. Furthermore, this performance was delivered while the economy in general, and particularly in Charlotte, continues to struggle. We do remain excited about this resort with the drive-to opportunity from more thriving areas such as Raleigh, and with the long-term prospective of recovery for Charlotte, we believe this is a great market.

Our operations are more than self-funding. We have no development exposure as we are continuing to pursue growth opportunities with partners. Additionally, we are seeking to further monetize the efficient model and fantastic brand amenities that we have developed. The development in Pittsburgh which we announced earlier this year is progressing well and we still expect that the owners will break ground in 2010. This development is important as it is representative of the type of growth we will be pursuing going forward under a license and management model.

Under this model, we secure long-term contracts receiving license and management fees to operate the resort, and potentially an equity interest for development related services with us contributing little to no cash.

The need for affordable, quality family getaways has never been stronger, and we believe that this trend will continue. Our core business has demonstrated stability through the up and down cycle over our 13 year history, and I am confident that steady organic growth will persist.

I am equally excited about the opportunities that lie ahead. We have a strong, well recognized family destination brand, and a concept that appeals to families and we can market in any environment. With an improved balance sheet, a strong operating model and a capital light growth strategy we will continue to innovate, grow and generate cash.

Before turning the call over to Jim, I would like to invite you to view our annual report that will be online later today. We believe that this format does an exceptional job of conveying who we are and where we are going, above and beyond our financial statements. We are definitely a very visual product. To view the video, please visit the investor relations section of our website at greatwolf.com then click on the corporate link, and investor relations. Jim.

James A. Calder

Thanks, Kim. I will briefly discuss our operational performance in the first quarter, our debt and liquidity position, and conclude with some comments on our guidance for the second quarter and full year 2010.

Our first quarter total revenues increased 13.4% to $70.7 million from $62.3 million in the first quarter of 2009. Same store revenue per available room, or REVPAR, for all of our Great Wolf Lodge brand properties in the first quarter was $160, a 4.3% increase from the prior year.

Over the past two years, during the economic downturn, our business model has proven much more stable than the broader lodging industry and we are pleased with the improving trends. We are particularly pleased to deliver year over year REVPAR growth in the first quarter. This growth was driven by 110 basis point growth in same-store occupancy to 61.3%, and a 2.5% increase in same store average daily rate of $261.

Same store total revenue per occupied room which includes revenue for items like food and beverages and other amenities that we have at our resorts was $404, a 3% increase from the 2009 first quarter.

For our generation two properties, which are our larger properties that better represent our current resort development model and contribute more than 80% of our adjusted EBITDA, same-store REVPAR was $183, a 5% increase from the prior year, and same store total REVPOR was $433, a 2.2% increase from the 2009 first quarter.

Increases for gen two properties were driven by a 220 basis point increase in occupancy, a 1.5% increase in average daily rate, and a 3.4% increase in same store per occupied room spend on food, beverage, and other non-room amenities at the resorts.

On the cost side, as a percentage of revenues, our resorts departmental expenses, SG&A and property operating costs combined increased to 71.7% from 67.9% in the prior year. While we continue to maintain a tight focus on cost, the increase was primarily from a year over year increase in SG&A due to the effects of the first year ramp up of our Concord North Carolina resort that opened in late March 2009 and the major expansion of our Grapevine Texas resort that opened in early 2009.

Turning now to the balance sheet and liquidity, we have discussed frequently that improving our balance sheet and liquidity position has been a key focus of our management team over the past two years and we continue to make marked progress. As Kim mentioned, we have no construction-related payments due, and no long-term capital commitments for construction or development of new properties, and much lower capital spending needs going forward.

With no construction or development capex commitments, we currently anticipate 2010 total capital expenditures will be $8 million to $10 million as compared to much larger amounts in previous years.

Shortly after the end of the first quarter, we further improved our overall balance sheet by eliminating all of our 2011 debt maturities. We accomplished this by issuing $230 million aggregate principal amount of first mortgage notes. These notes have a coupon of 10 7/8% and mature on April 1, 2017 and are secured by first mortgages on our Williamsburg Virginia, Mason Ohio and Great Vine Texas properties. They are also guaranteed by our subsidiary that offers management and license services to all of our properties.

We used the net proceeds from the notes offering to repay the outstanding mortgage debt on the Mason, Williamsburg and Great Vine properties. With the payoffs of those three loans we now have no debt maturities until April 2012. Also, as a further demonstration of our liquidity strength, as of March 31st, we had $27.2 million of unrestricted cash available.

With the issuance of the new first mortgage notes in April, we expect our go forward annualized total interest payments to be about $46 million and total annualized debt services, that is interest plus principle amortization to total about $51 million. This total annualized debt service after issuing the new first mortgage notes is not significantly different than our total annual debt service prior to issuing those notes because the new notes have no required principle amortization while the loans that we repaid had substantial quarterly principle amortization so it is roughly cash flow neutral to us. We do intend to continue to substantially use all of our free cash flow to reduce leverage overall over time and to further improve our capital liquidity position going forward.

Turning now to guidance; we are certainly pleased with our results in Q1 and our outperformance relative to our expectations for the quarter. Indicators with respect to the economy and consumer behaviors seem to be improving but our advanced booking window remains relatively short giving us limited long range visibility. Therefore, we are optimistic and confident that the value and quality that the Great Wolf Lodge vacation offers will continue to resonate with consumers but we remain cautious until we see more evidence of a sustained wide spread economic recovery and improvement in consumer spending.

Based on our first quarter results and our outlook for the remainder of the year, we are increasing our expectations for full year 2010 results. We now expect adjusted EBITDA in a range of $64.5 to $69.5 million compared to our prior range of $63.5 to $68.5 million and we are assuming same store RevPAR changes in a range approximately a 2% decline to a 2% growth for the year. For the second quarter of 2010 we anticipate adjusted EBITDA in a range of $14.8 million to $16.8 million assuming same store RevPAR changes in a range of approximately -4% to 1%.

With that operator, our prepared comments are concluded and we will take questions at this time.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from William Marks – JMP Securities.

William Marks – JMP Securities

Let’s start with the debt deal that you did. Can you just discuss what other options you looked at in terms of financing?

James A. Calder

We had three major maturities coming up in 2011 which were the three mortgages I mentioned on Mason, Williamsburg and Great Vine. We spent a lot of management time over the past year and a half to two years in the midst of the capital and liquidity crisis that the country is facing working on strategies to address those. We addressed some of them temporarily over the past year and a half with extensions on our Great Vine and Mason loans and we weighed the value or possibility of continuing to negotiate extensions and spending that time and energy, that was one avenue we looked at.

We looked at whether a pure refinance on an individual asset basis was possible so we weighed those options. Then, we also weighed the public markets option, the high yield bond issuance which was the route we ended up going. Really, it seemed to us that the tenure we could gain through the transaction was a great benefit. Getting seven years on this debt with no principle amortization, no property level covenants or anything like that, no escrows, obviously it’s a pretty clean package of debt.

We thought there was great value to us going out for the first time in the public markets and being an issuer there. We think that helps to pave the road for potential future issuances or transactions we might want to do in the public markets so we viewed value there. Really, we just thought that overall it takes away the risk of having to negotiate and spend a lot of time and energy and frankly a lot of fees and cash on rather short term extensions. This was a way to address more holistically a big portion of maturities and more importantly all of the maturities that are coming up here in the next 23 months. That’s sort of the thought process we went through as management in terms of deciding that was a good route to go down.

William Marks – JMP Securities

Along the lines of I guess capitalization, are you considering any asset sales at this point? Anything with the Poconos going on?

James A. Calder

As you we talked about I think in 2009, during 2009 we did list the Poconos property for sale, it is no longer listed for sale, just to make that clear. We had listed it just as more of a back stop measure for potential liquidity needs but we have solved those more internally with some of our other strategies and with better operations frankly than a lot of people had forecast for. So, we have removed that property for sale.

Having said that, we’ve always been very open that we think the long term strategy of the company is going to be focused as much or more on brand and licensing than it is on real estate ownership frankly. So, I think in that context we would view any of our real estate as potentially up for sale at any time given a reasonable offer obviously. We’re willing to consider that, we’re not whetted to any piece of real estate that we have. We want to use our real estate strategically, as I said to grow the brand and if that means monetizing a piece of real estate to be able to grow the brand in some other part of the country or expand our geographic reach of the brand, that would be something we’d certainly consider. We are considering listing our Sheboygan, Wisconsin property for sale but that’s a very minor piece of our operations as we’ve spoken about in the past. So that’s sort of the answer.

William Marks – JMP Securities

One final question on operations, if we look at the summer we’re coming up on clearly the most important part of your year. How do you think about pricing strategy and how does that tie in to your guidance? In other words, are you raising prices for this summer or is it all about filling rooms?

Kimberley K. Schaefer

For third quarter, it’s a great question and it’s one that we have had a lot of conversation on and I think that the answer is yes, we do expect that we will see rates start to increase in the third quarter where we are in our heaviest peak leisure season. We saw a nice response in March. We started to kind of play with the rates a little bit. Being as we focus so much of our marketing opportunities on that repeat guest, they always get the best available rates first but what we’re doing is kind of tightening up that window on when we’re offering that and making sure that if they want those rates they’re taking them early. That way, we have an opportunity to really yield the summer going forward.

So, I would say that we’re really happy with the leisure business that we have on the books. We have a big 48 hours sale coming up and I think that will really give us a push that we need going in to summer to go ahead and yield that the way we want to.

Operator

Your next question comes from Jeffrey Thomison – Hilliard Lyons.

Jeffrey Thomison – Hilliard Lyons

Jim, you mentioned the second quarter outlook in terms of EBTIDA, if the midpoint seems to be $15.8 I guess that implies down about 9% year-over-year if I’m looking at 2Q 2009 EBITDA numbers?

James Calder

The algebra is correct. I should point out it is not exactly comparable. Last year Easter was about 10 days later than it was this year and that shifted a significant amount of the peak, call it January through April business, the spring break season much more of that was in April last year than this year in 2010. So that really sort of inflates or increases your 2009 numbers. So it is not exactly an apples-to-apples comparison. The algebra is correct but I would point out that as sort of the difference between the two years.

Jeffrey Thomison – Hilliard Lyons

Maybe that is the major factor there?

James Calder

Yes.

Jeffrey Thomison – Hilliard Lyons

I know the Gen I properties are a small part of the EBITDA contribution but with occupancy down about 160 basis points I guess they don’t benefit from group business rebound the way your Gen II properties do but what is the best approach to seeing improvement in occupancy with the Gen I properties?

Kimberly Schaefer

I think when you think about the Gen I properties they have actually had a good year. It is just you don’t see it in the overall numbers. I think if you think about just a normal increase for them I think that is probably the way to see it. They actually have when you look at the in-property spend they had a significant increase in the first quarter because we had added some amenities, some of our proprietary amenities to the properties so they saw a nice rebound. I think there you think about the 4-5% growth for them is how I would think about them.

James Calder

You will notice even with the occupancy decline the ADR actually had a pretty healthy increase. So they actually had positive RevPAR even at the Generation I properties for Q1. We think that is a good indicator as for the overall rebound on those properties.

Operator

The next question comes from the line of Hayley Wolff - Rochdale Securities.

Hayley Wolff - Rochdale Securities

First, the guidance for this quarter and then a year, the lower end seems to have negative RevPAR. Given the trends you are seeing now and the overall trends in the industry and the experiences you are having moving pricing why should we expect to see negative RevPAR?

James Calder

The lower end of the RevPAR you are right. It is nominally negative by a percentage point or two in the range we have given there. It is really just to be cautious. As we mentioned I think in response to some of the prior questions Q3 is obviously a big chunk of our business. It is not like 90% of the business but it is much more than 25% of the business coming in Q3. Until we get through Q3 it is hard to be 100% certain. It is really just a cautious viewpoint I think on our part at this time. We are very confident on the midpoint of our range but we do want to be cautious moving forward.

Hayley Wolff - Rochdale Securities

Then in terms of the shift in the calendar and the timing of Easter vacation was it that significant of a piece that shifted to the first quarter with Easter? I got the impression that the holiday was fairly spread out in terms of school vacation schedules.

Kimberly Schaefer

I think that what happened from last year is it was all in second quarter last year. It was the 2-3 weeks that most of the properties enjoyed last year were all in April. We had one week shift into March this year and then the Poconos properties still had three weeks but most of the properties like Grapevine only had the first week in April and they were done. I think that is the biggest thing is when you combine it overall with the properties we had one week in March and in general we had one week in April. So that was the big shift was you lost 1-2 weeks in April from last year.

Hayley Wolff - Rochdale Securities

Can you run through the group booking stats you gave in the prepared remarks please?

Kimberly Schaefer

In my remarks?

Hayley Wolff - Rochdale Securities

Yes.

Kimberly Schaefer

I can. For first quarter 13% of our total rooms sold were group rooms compared to 11% last year. In generation 2 properties the group rooms were up almost 50%. That is a large base and as I said that is not necessarily a trend we expect but first quarter last year we did 5,000 rooms so to do 10,000 this year is a nice increase but it is off a small base. We are excited about that because it is a good start for these properties and typically in a quarter that is not as strong for group business. So that was that stat on the 50% for the Generation II properties.

Then the corporate group market which is just that peer business coming for meetings was about 5% of that growth. Then the social groups were about 9%. The biggest increase we had in first quarter which is probably not a surprise is military. The government is one place that has money. They are definitely spending so we saw a nice increase over time. I don’t have the stats in front of me but it was over 10% was actually military.

Hayley Wolff - Rochdale Securities

Is that in the Williamsburg property or others?

Kimberly Schaefer

There are others as well. We have some nice military business that we get out of our Washington property as well as out of our Grapevine property out of Texas. Those are the three strongest military.

Hayley Wolff - Rochdale Securities

Group initiatives going forward, given the long lead times on that business how does it look?

Kimberly Schaefer

It looks good. We have double digit pace on the books already for the second quarter and third quarter over last year. We have just a fantastic group that really focuses on our Great Wolf meetings and that is what we go out and sell. Each individual property does have a team with a Director of Sales and the full litany of the material, the things that we need to do to get people into our properties for a site visit. I think that is the biggest challenge, or maybe not challenge but at least the biggest opportunities we have is if we can get them in the door they can see the quality of assets. They can see they are brand new. They see the function space and what we can offer them. We can get the sale. We just have to be able to get the folks over there to be able to see the facilities.

So that is really what we are working on from the corporate initiatives. We have done a couple of national trade shows. We are focused on regional trade shows. We do share in some of our markets Charlotte and Williamsburg, they do a lot of cross-promotion between their two facilities to make sure that people in general are understanding of Great Wolf Resorts as a meeting facilities place.

Hayley Wolff - Rochdale Securities

How do I think about ADR and flow through and ancillary spend for that customer?

Kimberly Schaefer

ADR you are going to be competitive with what is going on in the region. It is definitely a lower base than what we have for our leisure customers who are coming. But because we have the facilities and we have a lot of the staff that is available we need to have a good core of full-time people that are there for our weekends, holidays and peak periods. We do have a little bit better flow through or at least as strong of flow through because we do have a little bit more labor and stuff that is already built into that.

I think from a flow through standpoint you get that. The opportunity is how much they are going to spend when they are in-house. So we certainly get the banquet dollars but they are not spending as much. They are not using the [Magic Bus] or maybe they are and I don’t know that. I don’t know that I want to know that. They are not using as many of the facilities. So we are definitely focusing on building a group package that would make sure we are promoting the spa, promoting Starbucks and promoting the Bar and Grill so there are certainly facilities within there that are perfect for just the meeting planners.

We are kind of working on making sure that besides just the banquet revenue we can also drive additional revenue. The biggest opportunity is for them to come back again with their families.

Hayley Wolff - Rochdale Securities

Is there a food per diem that you typically get with that customer? Is it if I am doing a dinner it is going to be $65 a head? How does that factor into the group business?

Kimberly Schaefer

It depends on each of the individual groups. Our banquet menu does allow for different buffet-type options where they can have a per diem and a lot of people do come in especially with your military groups they definitely have a maximum amount they can spend. Then also the fun for us is being able to customize what people want whether it is for a wedding or a corporate banquet to be able to customize if they do have an unlimited budget. Typically it is your breakfast, lunch and dinner and they try to stay within a budget.

Hayley Wolff - Rochdale Securities

How does their ancillary spend compare with your traditional leisure gift?

Kimberley K. Schaefer

Once they’re outside the banquet, we don’t really have a tracking system for a group guest versus a non, but we do know on days when they are the only people in house. It’s definitely down. A lot of times they’ll have breakfast in the restaurant. Lunch is almost always at the facility.

As I said, what we’re trying to do is offer maybe a 10% discount for them to come into the gift shop and give them some incentive to at least walk around the resort and see the things that they’re doing.

Hayley Wolff - Rochdale Securities

In terms of Poconos, I know the question came up about whether it was for sale still. What about in terms of expansion potential and where that would be?

Kimberley K. Schaefer

We’d love to expand Poconos. The biggest thing that we have there Haley is we need city sewer to come up. We do not have any capacity with the facilities that we’ve built on site to be able to handle any additional. So what we’re trying to do is really wait until we get the final word on when the sewer is going to come up to us and back into potentially expansion then.

It would be a great opportunity for us but that is our biggest holdup right now. We just don’t have the ability to do that.

Hayley Wolff - Rochdale Securities

The timing of that is predicated on --

Kimberley K. Schaefer

The city.

Hayley Wolff - Rochdale Securities

Is it something that’s in negotiation? Where is it with the city?

Kimberley K. Schaefer

It was supposed to be done in 2008 so we’re waiting. Right now the last word that we have was 2012. We believe that’s going to be 2013.

Operator

Your next question comes from William Crow - Raymond James.

William Crow - Raymond James

Do you have any data, I know the number of repeat guests is fairly high. How many of those guests come back a third time or a fourth time? Do you track that? I’m wondering whether a drop off would indicate that you need to put more capital back into the entertainment part of the property.

Kimberley K. Schaefer

You set that one up perfectly. Actually it was something we were just kind of talking about. I don’t have the actual stats but I know that our Vice President of Marketing is sitting there going, “I know the number” but I can actually get that for you. I think you are correct. We do kind of challenge ourselves to say, not necessarily they’re aware of factor, but I think that you do have the opportunity, where kids just age out and luckily there’s new kids aging in.

One of the things that we’re able to do is that it’s different than the theme park model. We don’t have to add a $20 million ride to keep people coming back but we have the opportunities through our proprietary amenities, the things like Magi Quest and [scoops] that we’ve continued to add to say, “Hey, here’s another good reason to come back to have those family experiences.” So they’re kind of those lower levels from a cost standpoint, huge return to the guest.

One of the things that we did this year to kind of, if people hadn’t been back, hadn’t thought about Great Wolf Lodge, maybe hadn’t spent the money, is we did a Guinness Book of World Records in March and it was the world’s largest slide-a-thon. So we now hold the Guinness Book of World Records for the longest distance water sliding in 24 hours in multiple locations. But it was a great wave for us.

We put a small amount of capital within our $8 million to $10 million overall Cap Ex that we said and we put a new slide in the Poconos, in Mason, Ohio, and in Kansas City, Kansas, and it gave us a chance from a public relations to go out and for about 8 weeks we had publicity every single day with TV stations and radio stations coming out and talking about the new slide, but it was all done in conjunction with this Guinness Book of World Records that also happened to be a fundraiser for our corporate charity partner, Big Brothers Big Sisters.

So I think that’s exactly the things that we’re thinking about, how do we keep people interested in coming back. The experience is certainly enough to bring them back 2 or 3 times if we want them there, for 3 and 4 years, doing some of the things like a ride here or there or a new amenity like MagiQuest. We just added CompassQuest which is an add on to MagiQuest this year.

That’s why you’re seeing the 4% increases in ancillary. We believe things like the new slides are going to continue to bring people back. Maybe not in the first or second year but in the third and fourth year. Definitely keeps them engaged in our brand.

William Crow - Raymond James

Any information you can provide to us about potential joint venture partners or investors that would help you to develop either on or off balance sheet?

Kimberley K. Schaefer

It’s a great question. We’ve actually had some really good conversations and as we’ve talked to people, especially over the last year, we do believe that for the most part, if somebody wants to build an indoor water park resort going forward, they should at least be having the conversation with us. It may not end up being a Great Wolf, but we do believe that all roads should at least lead into Great Wolf to have the conversation because we are the only national brand. We are the only brand that has that infrastructure to be able to build this asset on the platform that we are on that national basis.

I think from having that recognition and being the only brand doing this, it does give us an opportunity to have a lot of great conversations. We’re really excited about some of the conversations that we’re having. We’re very focused on our top 20 markets, particularly in our top 10 right now.

I think all of that is going to be with JV partners, it’s going to be with sole owners who just want us to license and manage. So I think a lot like that Pittsburgh project that we announced. Those are the kinds of conversations that we’re having. As we get more certainty around the contracts and the potential for financing, we’ll be able to announce those projects.

Operator

Your next question comes from Jeff [Cowl] – Sterne Agee.

Jeff [Cowl] – Sterne Agee

I was wondering if you could talk about any potential opportunities for margin improvement on the cost side? Maybe your fixed risk variable costs or maybe on the labor side?

James A. Calder

As we had talked about, we spent a lot of effort over the past year really re-analyzing our entire cost model. This was a big focus for us in 2009 so we would expect we’ll see some margin improvement here in the second half of 2010. Those efforts really didn’t kick into fruition here until starting in 2010 fully. Having said that, there’s always going to be outside considerations that we have to take into account over which we don’t have a lot of control, things like the state unemployment rates and healthcare costs and things like that.

But we are extremely aspects of all aspects of the things we can control, primarily labor and procurement, all the supplies, all the food, all the retail we buy, all those types of things.

It ‘s hard to exactly guesstimate or quantify what that’s going to be. All I can tell you is we’re going to be extremely focused on each one of those components. I do expect we’re going to see margin improvement here in 2010 versus 2009 as a result of those efforts. It’s a little bit difficult to exactly quantify exactly what our expectations are.

Jeff [Cowl] – Sterne Agee

In line with the last question about repeat customers, I was wondering if you could describe I guess maybe the length of stay for your repeat customers? Is there increases or decreases on number of days?

Kimberley K. Schaefer

That’s a great question. In general, our overall length of stay does depend on the season. Length of stay outside of summer is about 1.8 days, so it’s just a little less than 2 days and when you think about it, it makes sense. It’s a typical weekend. Some people are just coming Friday, some Saturday, but more than 50% are coming then for both days.

The [inaudible] is outside of that in the summer. Length of stay there is about 2.5 days. We do have the ability to drive that with our specials. We do, especially last year, not really knowing what was going on with people’s vacations and how much they were going to spend. We did go ahead and add in some specials where the longer you stayed the bigger the discount.

We did see a larger increase in the length of stay. But typically when people come for one day, they realize that it’s not enough and we do see the increase from those previous guests then.

Jeff [Cowl] – Sterne Agee

Great, and just one final question, as you look at maturities coming up in 2010, just curious if you have looked at the Concord loan when you were doing your last refinancing or I guess how you think about that going forward.

James A. Calder

It’s a very relevant question, absolutely right, our next maturity is in April of 2012 and that’s on our Concord North Carolina property that just opened up a year ago. Clearly that resort is still in its ramp up stages. We expect as Kim mentioned the Charlotte market is going to be a terrific market to be in long-term.

Its going to take a little bit longer than we probably forecasted when we started building down there. But its going to be a great long-term asset. Since it hasn’t really ramped up a refinance at this point or including it with a high yield bond deal that we just did wasn’t really a practical solution. It just hasn’t ramped up sufficiently and had sort of the depth of operating experience that we really needed to include it in that type of transaction.

We still have plenty of time on it, almost two years. Having said that we’re proactively working on it and looking at alternatives. Those alternatives might be a refi; it might be a similar deal to what we just did. We may be packaging it with another property and doing a public markets bond deal or something like that.

We’re certainly going to look at all those alternatives. It might be an extension of our existing loan, that’s certainly a possible alternative. We intend to look at all of those. The good news is with clearing the decks on the 2011 maturities through the mortgage notes offering; we clearly gave ourselves plenty of runway here and plenty of focus on the 2012 and ability to focus more fully on those.

So, we don’t expect that to be any issue at all to deal with here. My best guess is we will deal with that some time during 2011 would be my best guess.

Operator

Your next question comes from the line of Howard Goldberg – Credit Agricole

Howard Goldberg – Credit Agricole

Thank you and good morning, I wanted to hone in on the SG&A line, I hope this isn’t redundant with the question that was asked a couple of minutes ago, but the information in the press release was a little light I thought, I hoped you could talk a bit about why the SG&A line increased the way it did and how we might be thinking about that expense line over the balance of the year.

James A. Calder

Sure I can speak a little bit more to that, in the release we talk about the increase in SG&A well part of it is just pure algebra. When you have a property that’s included in our consolidated results in 2010 in the first quarter that did not exist in 2009, that’s our Charlotte, North Carolina property.

So, a good part of the SG&A increase is just pure math adding the additional property into SG&A, that’s a couple million dollars in the quarter for the Concord property. The Concord property as it is still in its ramp up stage, is not, the relative SG&A percentage there is a percentage of total revenue for that revenue, is a little higher than some of our more seasoned or established operating properties.

So on a proportionate basis the SG&A we added there is a little bit higher rate. Also during the first quarter of 2009 we would have had certain costs at the corporate level that would have been capitalized dealing with the construction of the, the finishing of the construction of the Concord property. Those costs can no longer be capitalized in 2010. So that’s call it a million dollars or something like that there.

So those are really the major reasons for the increase in SG&A.

Howard Goldberg – Credit Agricole

That’s very helpful and how should we expect SG&A to trend over the balance of the year?

James A. Calder

I would expect it would be roughly, it should be more apples to apples in our quarters going forward here in 2010 compared to 2009 and I say that because now we will have the same number of properties open for the remaining three quarters here that we had for the last three quarters of 2009.

So that sort of noise will be out of the system so I think it should be very comparable going forward quarter-to-quarter 2010 versus 2009.

Howard Goldberg – Credit Agricole

Okay and can you let us know what the cash balance looks like with the high yield deal flows, hoping you can roll forward from quarter-end tell us what that number looks like.

James A. Calder

I don’t have that exact number in front of me; our net proceeds were a couple million dollars out of the high yield deal. Obviously there are a number of expenses that we paid related to the high yield deal since then, or we still have accrued so our cash balance today is roughly the same as where it was at the end of the quarter, within a million or $2 million.

Howard Goldberg – Credit Agricole

Okay, terrific, thank you.

Operator

Your final question comes from the line of James Calder – Bank of America

James Calder – Bank of America

Hey guys, how are you doing? Could you just give a little more color on Pittsburgh in terms of maybe when during the year you think that construction might start and if its fully financed are there any sort of other things on the timeline we need, we should be looking out for when that might proceed.

Kimberley K. Schaefer

Well the good news on a property like Pittsburgh is we don't have to put any cash into it and we get the license and management, the bad part is we don’t necessarily have control of the timeline so that’s something that we have to get used to on that.

We are working with the owners to get what they need to finalize their financing. I don’t have all the details on that. But from their perspective that what they do as a regional mall developer, they have their relationships with banks and what they’re going to use for their sources and I think they’re just trying to finalize that.

So I think that in general it would for us to have announced this project, I think a little bit more certainty around that timing would probably be good but for all indications there’s no reason for us to believe that they are not going to start construction and break ground this year.

James Calder – Bank of America

Okay, I guess just a bigger picture question, obviously you have consistently outperformed new other hotel operators in terms of RevPAR, I guess maybe can you just give us a little more color on sort of how and why that is and then also maybe talk about looking forward if you think that you can continue to outperform the general hotel market on the RevPAR and/or if there’s going to be a little bit of a lag effect.

Kimberley K. Schaefer

It’s a great question, I think first I think we’re very thrilled that our brand provided families where discretionary dollars were so tight and people were very thoughtful on how they spent their dollars in 2009 and into 2010. We feel very, very fortunate that our brand has offered people that type of an experience that they’re willing to spend their dollars.

So I think that we did well because we are a drive-to location. I think that families have become very accustomed to going on vacation, spending time with their children and so we were the benefactor of that because we could provide them something that they knew was quality that was guaranteed and that was going to given them the experience that they wanted, the value for their dollar.

So we think that our brand played in perfectly to this, as it does when times are good. When times are good people come for a secondary vacation and whether its time or money, there’s always a core of people who will always use us as their vacation destination.

So we think that that’s great. If you look at how we performed in late 2008 and through 2009 compared to the rest of the industry, in almost every case there was double-digit decline where we were having single-digit declines. So we do not expect that we’re going to be able to continue to outperform the broader lodging industry as the group segment comes back.

However we do believe that where our opportunity is that we have a lot of organic growth over the last five years, we’ve spent a lot of money building new resorts, putting in conference centers, there’s a lot of CapEx that has been spent that we now have the ability to give the full benefit to all consumers, not just the leisure consumers who were still spending during the tough economic times.

We now have an opportunity to ramp up some of these newer resorts and participate in the upside of the group segment. As I was explaining earlier just such a nice opportunity to take advantage of all these brand new conference centers that we really haven’t reaped the benefits of.

James Calder – Bank of America

Not to beat the SG&A issue to death, but in terms of Concord is there any guidance you can give us, maybe looking at prior openings, sort of an amount of time for the property to ramp up when you get to kind of more normalized EBITDA margins.

James A. Calder

In the past I think in sort of a normalized environment we’ve talked about for a new property, generally within about 18 months it gets to what we would call sort of a stabilized operating environment. Clearly what we’re in right now or what we’ve been in is not a normal operating environment, unfortunately over the past year we talked about the Charlotte market has been pretty sorely hurt although we do, as we said, continue to think its going to be a great market.

My best estimate would be we’re looking at closer to probably two years until Concord, from its opening date, until Concord gets to a normalized kind of stabilized environment. And again I don’t think that’s any issue at all with the asset itself on a long-term basis. I think that’s just the short-term end market realities of when we opened it, and the environment in which we opened it.

James Calder – Bank of America

Okay and then just on the group business can you talk about the sort of pricing differential between group business and leisure business and maybe the right way to talk about it is in RevPOR as opposed to just RevPAR but just trying to figure out some of the relative value of that group customer versus leisure customers.

Kimberley K. Schaefer

Well I think first I don’t have the stats on the RevPOR but it’s a good question, but I think that one of the things to think about is even before that, because on ADR we set the rates for our leisure customer because we’re really competing against ourselves. It’s a pure yield management supply and demand opportunity there.

But on the group side, you are in a competitive environment, you’re competing with because again we’re all drive to meetings are more regional, more local meeting that are coming to us. You are competing with other hotels in the area that have conference space. And so from there it is what somebody is offering down the street, where can you be, how can you be competitive. We do look for ways that we can stand out and ways that we can add value to the customer.

But there can be $100.00 rate difference between what we’re giving groups and what we’re giving leisure. I think the important thing is there is that we gave 100 some days out of the year, we have the availability so it is really 100% incremental business for us. We do have a core staff that we need full time to make sure that one, the lodge is open, and that two that we have the staff that we need for the 185 days a year that we know that we’re going to be in peak period.

So it really is a nice incremental business. It introduces people to our properties. It gives them a great experience. But its because we’ve got that availability mid-week I think that you look at it as almost truly all incremental.

James Calder – Bank of America

Okay and then just finally, can you remind us what maintenance CapEx is going to be for 2010.

James A. Calder

Yes sure, our total CapEx, which includes what we would call maintenance and routine CapEx, plus any new amenities and things like that we’re adding, all of that together we’re talking about an $8 million to $10 million range for our consolidated properties for 2010. So $8 to $10 million out of our cash flow.

James Calder – Bank of America

Great, thanks guys.

Operator

There are no further questions at this time. I would like to turn the floor back over to Ms. Schaefer for closing comments.

Kimberley K. Schaefer

Well thank you to everyone for your ongoing interest in Great Wolf Resort and thank you to the entire Great Wolf team for your ongoing hard work and dedication. If anyone has questions please feel free to reach out to us and we look forward to speaking to all of you on next quarter’s call.

Operator

This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.

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Source: Great Wolf Resorts, Inc Q1 2010 Earnings Call Transcript
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