Great Wolf Resorts Q2 2008 Earnings Call Transcript

Great Wolf Resorts (WOLF)

Q2 2008 Earnings Call

August 5, 2008 9:00 am ET

Executives

Randy Churchey – Chief Executive Officer

Kimberly K. Schaefer – Chief Operating Officer

James A. Calder – Chief Financial Officer

Analysts

Jerry Daily

Steve Bachinsky

Bill Craft – Raymond James

David Loop – Robert W. Bradstreet

Hailey Wolf – Western Security

Jeff Randall – Black Creek

Will Marks – J&P Securities

Jeffrey Thomason – Hilliard & Lyons

Tyler Self – Vision Research

Presentation

Operator

Presentation or participants will be in a listen only mode. Ladies and gentlemen, thank you for standing by. Welcome to the Great Wolf Resorts Second Quarter 2008 Earnings Conference Call on the 5th of August, 2008. Throughout today’s call presentation, all participants will be in a listen only mode. After the presentation, there will be an opportunity to ask questions. If anybody has difficulty in hearing the presentation, please press the star followed by the zero on your telephone for operator assistance. I will now hand the conference over to Mr. Jerry Daily. Please go ahead sir.

Jerry Daily

Thank you Joanna. Good Morning everyone and welcome to Great Wolf Resorts Second Quarter 2008 Earnings Conference Call. This morning Great Wolf released their Second 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 Great Wolf Resorts icon 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 Tuesday, August 12, 2008 by dialing [phone] with a reference number of 11117479. A replay of the conference call will be posted on the company's website through September 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 express written consent of Great Wolf is prohibited.

Management has asked me to inform you that in compliance with the SCE'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 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 Randy Churchey, Chief Executive Officer, Kim Schaefer, Chief Operating Officer, and Jim Calder, Chief Financial Officer who will provide you with some insights into the company’s Second Quarter 2008 Financial and Operating results. Let me turn the session over to you Randy.

Randy Churchey

Thanks Jerry. Good morning everyone. I hope you’ve had a chance to review our earnings release. My remarks will focus on four general areas and then Kim and Jim will talk about operations and financial items in more detail. The four areas I’m going to talk about are business results and economic data, increasing our brand distribution, capital markets and leverage, and then development.

So first on business results and economic data. And again, Kim will discuss some further detail in a few minutes. But our second quarter and year-to-date operating results were truly outstanding. Furthermore, our second quarter results are at the high end of our previously communicated range. These results on contrary to the majority of companies in the leisure and hospitality sectors. In many instances, these companies have announced either disappointing earnings or a reduced future outlook. Also, these results were generated during a time of anemic GDP growth, which GDP, which ranged from a small contraction in the fourth quarter of ’07, to insignificant growth in the first half of ’08. Our year-to-date, same store rev gained a 4.2 percent exceeds comparable hotel industry rev poor performance.

For instance, Smith Travel, US Industry RevPAR increased one and a half percent during this time frame, and submitted a resort RevPAR as they defined it, it declined a little bit under one percent year-to-date. Moreover, after normalizing for the Easter holiday between quarters, our first and second quarters 2008 the same store RevPAR each increased about four percent. Therefore we saw no appreciable decline in our resorts performances from the first quarter to the second quarter. Our July results and our advanced bookings for August have continued this encouraging trend.

However, visibility for the remainder of the year is limited. Medium economic forecast for the remainder of the year, before range of insignificant growth to small contraction GDP. So far our business has been resistant to these macro economic factors. But we do not believe we are immune. Additionally, job offers continue to increase with the jobless rate now at 5.7 percent. And consumer spending, which makes up 70 percent of the economy is projected to decrease. Given our encouraging trend so far, in the third quarter, and that we exceeded the mid-point of our guidance in the first and second quarters by an aggregate of $1.4 million, we have increased the bottom end of our previously released full year guidance by $1 million. Our current, full year, Adjusted EBITDA guidance is for a range $63 to $70 million.

Increasing our brand distribution, as we mentioned on prior earnings calls, we’re pursuing licensing our Great Wolf Resorts brand internationally. We’ve also decided to pursue licensing arrangements in North America as well. We believe that increasing brand distribution with qualified third party owners, will enhance the company’s value, and we believe we can be successful in this effort due to the compelling unleveraged returns that our generation two resorts have produced.

In aggregate, based on the results today for our generation two resorts, we continue to expect that our unleveraged stabilized yields will be in the mid to high teens. We also believe that now with 11 Great Wolf Resorts spread across the U.S., we have recognizable brand and the infrastructure to accommodate this effort. To assist in this process, we will consider selling current resorts, of course at appropriate prices. Simultaneously we will pursue building new resorts in joint ventures, in straight licensing agreements or for our own account. As all of you know, the current construction of financing markets are challenging. We hope to gain some traction in this brand effort over the near to medium term.

Next, the capital markets and leverage. Overall our performa EBITDA, we subtract debt associated with the construction process and add EBITDA associated with properties currently wrapping, is 5.1 times and we’ve added a schedule our earnings release showing you how we computed that, which I think is reasonable. However, our trailing 12 months debt to EBITDA is higher, reflecting the significance of our construction efforts related to the portfolio resorts as a whole.

Two of our resorts, Great Find and Grand Mound are still in the warp up period given that they opened in December ’07 and March of ’08 respectively. And two of our projects, the Grapevine, 203 room expansion, and the Concord new 204 room resort have $78 million debt associated with them. These projects will be completed in early 2009 and Spring 2009 respectively. Jim will go in to further detail about the two loans that we closed in the first half of the year, one on the construction project, and one on the stabilized resort.

We are currently engaged in discussions with our lenders on the only other 2008 debt maturity. A $76 million non-recourse loan secured by our Mason Ohio Resort, which is due at the end of November 2008. We believe that we will reach a resolution to this debt maturity without materially impacting the liquidity of the company. As you would expect, I really can’t comment further about these discussions.

We do not expect to have any other debt maturities until mid-2011, mid-2011. Additionally, we do not have any commitments that if we failed would cause, or any covenants, excuse me, that if we failed would cause acceleration of debt maturities or materially increase in interest rates. Similarly, we do not have any material deposits or future of capital commitments outside the Grapevine expansion, the Concord resort that I just mentioned, which we would have to forfeit or fund. And we will not make any new significant capital commitments until the credit market stabilized. Assuming the extension of the Mason loan, we are confident that we will have sufficient liquidity to operate our business absent any significant downturns in our expected operating results.

And lastly to development. Our development pipeline continues to progress at a nice pace. We continue to work on finalizing deals for the three letters intent that we previously disclosed, Foxwoods, Mall of America and Lake Lanier, Georgia. We’re also working on a number of other domestic and international sites. We continue to believe that having sites ready for construction without significant capital commitments, is a good way to build shareholder’s value, shareholder value. We continue to see in this marketplace that there’s not many people competing with use for parcels of land, etc., and we’ve been able to move forward our development pipeline on a number of other sites.

As you know, we don’t discuss sites until we get it under LNI, and therefore we’re not going to provide a lot of other detail. But I expect that we’ll have some announcements before the end of the year. Now Kim will discuss the results of our operations in more detail.

Kimberly K. Schaefer

Thanks Randy. As Randy mentioned, we are very pleased with the operating performance for the second quarter and year-to-date, as well as third quarter thus far. For the brand as a whole, same store RevPAR increased 1.4 percent in the second quarter, and 4.2 percent when you normalize the early Easter holiday and look at year-to-date. Occupancy was up five percent, and ADR was down just under $4. And that’s really attributed to us primarily seen an increase in group business which we’ve talked about before. So we’re filling the non-peak dates, but at a lower rate than our leisure business. Additionally, same store, in resort spending per occupied room has increased two percent for the quarter.

In the earnings release, we did attempt to provide more data for which our company can be analyzed. But without disclosing individual resort results. We believe it’s necessary to separate out our resorts from the Generation I which is really our 300 room resort, from Generation II which are the 400 room resorts that have been built since the IPO. And really for two reasons. First, revenue, GOP margins for comparison are sort of different for the 300 and 400 rooms that we felt it just provided a better understanding for our business to separate them. And then secondly, the Generation II resorts are the current resorts being constructed and are planned to be constructed in the future, so it gives a little better guidance for our future earnings.

The current challenge for reporting our Generation I resorts is that all these resorts are in the Midwest, and most are impacted by the micro economics that we’ve seen for some times, especially in Michigan for both Traverse City and Sandusky are affected. Total same store RevPAR for these Generation I resorts decreased five percent in the second quarter, and four percent year-to-date. Although in resorts spend while down two percent for second quarter, is up two percent year-to-date. Now while we still believe we have competitive resorts in these areas, they may eventually produce same store results, we really don’t see that turning until economic conditions improve here. And with 48 percent repeat and referral, it still shows strong brand recognition and loyalty to these Midwest properties.

Our Generation II results are the newer 400 room resorts with the full range of branded amenities including conference centers. They’re located across the U.S. Total same store RevPAR increased four percent in the second quarter, and eight percent year-to-date. Additionally, total in resort spending increased two percent for the quarter, and three percent year-to-date. Particularly F&B, which is up eight percent year-to-date with banquet driving about six percent of that growth from the increase in group business.

We’ve see growth in all of our outlets, but the continued success of spending in our Magic Quest and (inaudible), tells us our that our guests are willing to spend money on these unique amenities that Great Wolf lodge is offering them. We’ve been asked over the summer about this vacation trend, where families are staying closer to home for vacation. And our results seem to validate the national surveys with us being close to home. Our business has held up very well. We’ve generally seen more spending at our resorts and we believe people have substituted a longer more expensive vacation for a Great Wolf vacation. And while we’ve always been a value proposition for families, we’re finding that with 80 percent of our families driving within three hours of home, it’s definitely a trip on a tank, so the gas is really not a factor when they’re making this now their vacation stay.

Our positive revenue performance has continued in July as well. Our total brand same store RevPAR increase 7.2 percent. August advance bookings are up over prior year and ADR is positive. The rooms on the books today for August represent approximately 60 percent of the total rooms we expect to sell in August. We’ve seen a nice increase in call volume as parents who haven’t enjoyed a vacation with their kids in the last couple, we’ve, this summer now are trying to fit in a few days together. We continue to see our web bookings increase with overall brand awareness as well. 59 percent of our reservations for 2008 have come direction from GreatWolf.com.

Year-to-date overall company adjusted EBITDA was 28 percent of total revenues versus 25 percent in 2007. Year-to-day same store operating margins were 28 percent in 2008 versus 26 percent in 2007. And our guest service scores are high. So the efficiencies that we’re gaining in the margins, are not at the expense of the family experience. Which is really important to us because it becomes even more critical when families are making tough decisions on how to spend their discretionary dollars. We want to make sure that we’re giving them a great experience. We’re happy to see these margins improving every quarter. And it’s really because of the 5,000 pak members and the management at these resorts who concentrate on this every single day. So I know I’d like to personally thank them.

We’re happy with the two new openings, which gives us a national brand presence with our Grapevine in Texas and Grand Mound, Washington resorts. We look forward to expanding those brand, the brand across the additional U.S. and international cites. Now Jim will discuss capital structure and liquidity.

James A. Calder

Thanks Kim. As we stated last night, we closed a $65 million non-recourse new three year loan that’s secured by our Williamsburg resort. That loan bears interest at LIBOR plus 350 basis points with a core of 6.25 percent. We used about $55 million of the proceeds to retire a bridge loan on the Williamsburg property that we had put in place last February. That was just a one year loan, so we’re happy to extend that maturity date out a couple years effectively.

While we’re pleased to have completed this new loan obviously, we’re a little bit disappointed that the total loan amount was only approximately 50 percent of the apprised value of the property. I really think this is a function of the continuing dislocation in the credit markets from what we consider to be more normal “historical” conditions. We haven’t seen a meaningful improvement in the credit markets in our sector of the industry since the last quarter when we reported to you. But even though the proceeds on the new loan were a bit lower than we would have liked perhaps, we’re really happy to say that we’ve completed $130 million of new loans over the past three months. Our Concord Construction loan closed at the end of April. And then the Williamsburg loan that we closed last night. I, that’s really a strong statement of support for our company and what’s really, truly a turbulent credit market out there today.

Now, fortunately as we discussed in the release, excluding the Mason loan which I’ll discuss in a minute, we don’t expect to have any significant debt maturities until mid-2011. As Randy mentioned, we’re currently engaged in discussions with our lenders on the Mason loan and that’s a $76.8 million non-recourse loan secured by our Great Wolf Lodge in Mason, Ohio. That loan is due on November 30 of this year. The loan has a one year extension option available at our option. But that’s assuming that the property meets an operating performance threshold. And although Mason has increased is performance significantly here in 2008 over 2007, and we’re encouraged by the trends going forward, we don’t expect it to meet that operating threshold for the automatic one year extension in November.

So, as a result, we’re in discussions with the lender. We expect to be able to announce something in the coming months. We’re not sure of timing, but we’ll certainly announce something as soon as we have it available. I do think it’s important to note thought that we’re not going, looking for new cash on Mason. And I think that is the most difficult thing to do in today’s ill-liquid credit environment. We’re looking for lenders to roll this over and give us an extension for a year. So I’m hopeful that that is a much more achievable goal than if we had to go out and totally replace the loan at its current date.

We don’t have any other current debt issues that we expect are going to cause any near term maturities or accelerations of debt, or material interest rate increases. And similarly, as Randy mentioned, we don’t have any material deposits of future capital commitments outside of the Grapevine expansion, that’s currently underway, and the Concord Resort construction, that’s currently about 50 percent completed. And as we state in the release we will not be making any new significant capital commitments until we get a little more clarity on where the debt markets are going and on the availability of capital and the timing of that availability of capital.

As Randy mentioned, we are pursuing a number of alternatives to increase our liquidity, including obtaining additional financing on some of our global leveraged assets or possible sales of parts or entire assets under our licensing and joint venture programs that we’re talking about going forward. Let’s talk about our cash balances and our projections there a little bit. We expect our year end cash balance to be in about a $15 to $20 million range, which roughly corresponds with our $63 to $70 million adjusted EBITDA range that we’ve put out for the full year. And that Adjusted EBITDA range obviously incorporates a downside if there would be some slowing in the economy over what we presently see. So that’s why we have the range out there.

Our 2008 cash is, and honestly, significantly affected by heavy cash outflows for the Grapevine expansion project and for the our equity part of the Concord construction project. And those commitments are primarily done here by the end of 2008 as I’ll explain in a second. In 2009, we expect to be cash flow positive overall based on our current construction. Let me walk you through that.

Our capital expenditures in 2009 should be much lower than 2008. At the beginning of 2009 and forward, we expect that we’ll have about $15 million of commitments still to fund on the Grapevine expansion and on our equity portion of the Concord construction. So about $15 million to complete those projects of equity that we have to fund. It would also be maintenance capital expenditures that we normally would have on our properties on-going. Assuming that we spend about four percent of revenues which would be rather at the high end for a maintenance CapEX. That’d be about an $8 million additional capital commitment in 2009.

And given our current debt expectations, where we’re at today, where we expect rates to go, that type of thing, we took our total debt service, and again a rough number, would be around $40 to $42 million of total debt service payments in 2009. So those numbers together, the $12 or so million, $12 or $15 million to complete Grapevine and Concord, $8 of maintenance CapEX maximum, and roughly $40 million of debt service payments comes to about, call it $60 million of cash outflows. Our Adjusted EBITDA range of for 2009, we’ve not put out anything yet. But obviously we have a mid-point of our range for 2008 near $66.5 million, which is higher than the $60 million I just mentioned. Plus in 2009 we’ll have the Grapevine expansion open, which is an additional 203 rooms, at 20,000 square feet of meeting space. We’ll have the Concord Resort opening in Spring of 2009. So that’ll be opening eight or nine months. And also, our initial Grapevine 400 room resort will be in its second year, ramping up and we would expect under normal conditions to be providing even stronger results in 2009. So given all that, we expect to be cash flow positive in 2009 pending any future capital commitments that we enter into.

I hope this information is a little bit helpful in giving you sort of a macro look at how we’re looking at cash flows overall. We obviously have not given out specific items for 2009 on earnings, or Adjusted EBITDA, and we would expect to do that once we finish our budgeting process here in the fourth quarter of this year. And as we stated in the release, and just to reiterate clearly what Randy noted, assuming the successful extension of the Mason loan, we’re confident that we have sufficient liquidity to operate our business absent any significant unexpected down turn in our operating results. And given that, Operator, we’re now ready to take questions.

Question-and-Answer Session

Operator

Thank you sir. If anybody’s on would like to ask a question, please press the star followed by the one on your telephone. If you wish to cancel this request, please press star followed by the two. Your questions will be polled in the order they are received. The first question comes from Mr. Steve Bachinsky from (inaudible), please go ahead.

Steve Bachinsky

Hey good morning guys.

James A. Calder

Good morning Steve.

Steve Bachinsky

First question on the SG&A front, it looked like it was, you know a little high during the quarter. Was part of that the separation payment in there? And what can we look, you know, going forward.

James A. Calder

Yes, I mean just on the pure SG&A, Steve, yeah, part is due to the separation payment. Part is due to the fact that, obviously here in 2009, if you’re looking at 2009 versus 2008, we have an additional resort open, our Grapevine Resort. Each of our resorts has SG&A expense associated with it. So, so part of it’s due to that as well.

Steve Bachinsky

And then I don’t know if I’m looking too much into this, but the RevPAR was, you know, was pretty strong across all the properties. The RevPOR was, you know, I don’t want to say was, was weak, but it was, you know, up only two percent. So it’s that, you know, is that saying that people are still coming but, you know, once they get there they’re spending less?

Kimberly K. Schaefer

Hi Steve, this is Kim. The RevPOR really is more a function of a little bit of the shift with the group room. So we’re getting higher occupancy, but those groups are not spending the same traditional manner that the leisure guests do, so it throws that statistic off just a little bit.

Steve Bachinsky

And then last question. In terms of, you mentioned international development, can you give a little more insight in terms of which, you know, which markets you’re looking at right now?

Randy Churchey

Steve, I really wouldn’t want to do that at this day and point. But I do believe that before the end of the year we will have a few things to announce on the international front.

Steve Bachinsky

Okay, got you. Thanks guys, good quarter.

James A. Calder

Thank you.

Operator

The next question comes from Bill Craft from Raymond James, please go ahead.

Bill Craft – Raymond James

Hey good morning everybody.

Randy Churchey

Good morning Bill.

Bill Craft – Raymond James

You have now talked about announcements before the end of the year, international as well as it sounds like domestic. How many of those do you anticipate, or what percentage do you anticipate being management or licensed deals? Is it all of them, or is that…?

Randy Churchey

When I speak of the international deals, I think, I think for the most, well no not for the most… All of the international deals that we are discussing of both license and management deals…

Bill Craft – Raymond James

Right.

Randy Churchey

The, actually on the domestic side also, the ones that are in process are all licensed and management deals as well. So I, I’m sure there may be an opportunity in the future to have just a license without management, but right now that’s not what we’re discussing with anyone.

Bill Craft – Raymond James

But nothing wholly owned or on balance sheet at this point, is contemplated? That…?

Randy Churchey

That, yeah, we are not going to make any capital commitments anytime until the market’s clear.

Bill Craft – Raymond James

And you know these, you talked about the difficulty of getting financing, and if you’re not public it must be more difficult. So could you kind of talk about where these potential licensees are, you know, how they’re achieving their capital needs?

Randy Churchey

Well as you can imagine, everybody is struggling with the same types of issues. Quite honestly I have really seen a real benefit yet of being a public company from the standpoint of accessing capital. You know, we’ve not enjoyed that benefit for a while. But you know, we’re talking to a variety of folks that, you know, some have been, well we have talked to a variety of folks that either have gaps in their capital program to fund potential assets, or they say they don’t. You know, I think Foxwood is a decent example of somebody who may not be impacted by the same macro economic factors as others. So it’s, it’s really one-offs Bill, it’s not any, any group of folks that I could put into one homogeneous group.

Bill Craft – Raymond James

Okay. A couple of housekeeping questions. What is the total debt on the balance sheet related to the Concord, Concord development today?

Randy Churchey

At June 30th, Bill this June, we haven’t drawn yet on any of the Concord debt. We started drawing that as a matter of fact, this week was the first draw on the Concord loan.

Bill Craft – Raymond James

And what about the expansion in the Grapevine?

Randy Churchey

Well the expansion in the Grapevine is being funded all from balance sheets is there’s no debt per se specifically associated with the Grapevine expansion.

Bill Craft – Raymond James

How much do you have invested in the expansion thus far, is another way of asking that I think?

Randy Churchey

Well I think for the two combined, I don’t have the break out Bill. The two combined are essentially all of the construction progress of about $77.7 million that’s on our balance sheet as of June 30th. A rough number at June 30th, that’s probably $50 to $55 million on Concord, and you know the remainder is the Grapevine expansion. Again, rough numbers at June 30th.

Bill Craft – Raymond James

Yeah. Energy costs, obviously people are focused on what’s going on there. When you’re a big user of electricity, that often times lags what we see in the oil and gas markets. What are you anticipating next year? Have you hedged your, hedged your needs at all?

James A. Calder

Hey, Bill, this is Jim. We take a, yeah, we take a pretty cautious approach to energy. We have outside consultants, I think as most companies do in this day and age. And internal people that will also, that are also focused specifically as part of their job duties on monitoring and trying to come up with energy efficiencies. In terms of managing the price, option, I’ll let Kim talk to maybe some of our usage aside. But in terms of the price side, we don’t hedge at all, we do take some forward commitments on, on usually roughly about half of our expected or historical usage of natural gas at some of our facilities that you can kind of lock in the prices a little bit in advance. Again, never knowing where prices are going, and the volatility of the market. We are hesitant to do more than half, and that seems to have worked reasonably well for us overall. I’ll let Kim talk a little bit about some of our on-going programs, or what we’re seeing out of the lodges.

Kimberly K. Schaefer

Yeah, I think that, obviously, the biggest opportunity that we have is in the conservation of going green. Part of our project green world, Bill, is really take a look at the programs that are out there. And switching everything over as best as we can to maximize the utilities. So, in general this year, we have not seen that being a big increase in our costs of expenses. We’ve been minimizing the impact of that. So year over year, we’re pretty happy with the, the results that we have for energy.

Bill Craft – Raymond James

Okay. Great. And one final question. The pick up in group business in the quarter, is that anyone hotel in particular, or resort, in particular?

Kimberly K. Schaefer

Well we’ve seen a nice increase in Mason, and obviously Mason is seeing some nice double digit growth this year so we’re very excited to see that conference business come around. But in general, we added our conference facility in Traverse City, they’ve seen a nice pick up in conference business as well. So it is spread out a little bit, but those would be the two primary facilities that are contributing to that.

Bill Craft – Raymond James

Okay. Thank you guys.

James A. Calder

Thanks Bill.

Kimberly K. Schaefer

Thanks Bill.

Operator

The next question comes from David Loop from Robert W. Bradstreet, go ahead.

David Loop – Robert W. Bradstreet

Randy, Bills’ questions, you answered those questions, touched on this briefly. But how important is it for you to maintain management control of new resorts that may be developed by others in other markets? And does that, and does that vary with geography? So in other words, is it important to take advantage in the U.S. versus letting others manage out of the U.S.?

Randy Churchey

No David. I don’t think I look at the two markets separately. You know, we obviously would prefer to retain management. We think we do a great job of providing customer experience. But, you know we do have a decent, a good infrastructure in place where if somebody insists on being a manager and we believe that they’re qualified, etc., that we’d be willing to not have a long term management agreement. But, we obviously believe that the long term management agreement with us will generate better returns for potential investors.

David Loop – Robert W. Bradstreet

Okay. And Jim, can you just elaborate a little bit more on the Mason loan. What the alternatives, what it’s likely to cost you to get that extension. It sounds like, given the growth in that property, that meeting the return threshold’s is something you’re going to come close to but not quite make. Does that mean that the bank is going to require a quick pro quo?

James A. Calder

David, it’s really hard to say. It’s probably premature. And I wouldn’t want to detain our discussions with the bank in terms of what my expectations might be versus what their expectations might be. There could be some gap there. We, you know, I think Randy and I both said, we expect to reach a reasonable accommodation from the bank. Again, we’re not asking for additional capital from the bank, we’re asking for a little more time on what is essentially a performing loan on a property that’s still ramping up with improving operations. I, I’m hopeful that that, in their portfolio, out of any ones that they have maturing and have issues with, that’s at the far end of the spectrum toward the good end frankly, given the current environment the banks are dealing with today. So I really can’t say more than that David at this point in time. We hope to have some more news where actually meeting with the banks, the lenders next week to continue those discussions. So, you know, we’re hopeful that here in the next quarter or so we’ll have some additional news to report.

David Loop – Robert W. Bradstreet

Great, thank you.

Randy Churchery

Thanks David.

Operator

The next question comes from Hailey Wolf from Western Security. Please go ahead.

Hailey Wolf – Western Security

Hi guys.

Randy Churchery

Morning.

Kimberly K. Schaefer

Morning Hailey.

Hailey Wolf – Western Security

Hey I have a couple questions. First, can you give us a little additional color on the group bookings going out through 2008? You know, what kind of room rates you’re seeing versus last year?

Kimberly K. Schaefer

Yeah, hi Hailey, this is Kim. Group bookings right now for September and October that are on the books were positive over prior year. Really for November and December, our group bookings are not that far out. So really two to three months is about all we get on that. But looking at September and October, we’re very happy with what we see over last year.

Hailey Wolf – Western Security

Okay, and second, no this Mason loan, can we get a sense of the, you know, EBITDA, approximate EBITDA that Mason’s generating to get an idea of the coverage we’re looking at there?

James A. Calder

Yeah we don’t, we don’t generally… Hailey this is Jim… Give out individual property, EPITDA numbers. But, I think it’s reasonable to tell you that on a trailing twelve basis, it’s out about one times coverage right now. That’s service coverage. Now that trailing twelve basis includes what I would characterize as a weak second half of 2007. We’re talking trailing twelve through June 30th of 2008. So we think this property is performing well and is continuing to improve its performance and that’s obviously what we’re trying to demonstrate to the lender in our discussions with them.

Hailey Wolf – Western Security

And do you have a bookings base to support that for the rest of the year?

James A. Calder

Yeah, actually their summer is looking much better the last year. Their July, it was significantly above last year. Their August is looking better over last year. And I think it’s fair to say that their group bookings for the second half or the fall of this year are also up from last year. So, yeah, we’re very encouraged by the trends overall there. It’s just, it’s just taken longer than we expected on that asset. But we’re very encouraged by what we’re seeing.

Hailey Wolf – Western Security

Okay great. And can we get a sense on shifts in the booking curve, because of, you know, a more cautious consumer? What you’re seeing.

Kimberly K. Schaefer

Hailey, you know the interesting thing is, is that we have not seen a shift in booking. Now it’s always been a short booking window, three to four weeks. But as we said, for August, all the properties already have a least 60 percent of their business on the books. So we’re encouraged by that. But looking out at September and October for, for leisure, we just don’t have that right now. But we have nothing to ship this summer in the booking pattern.

Hailey Wolf – Western Security

Okay great. And last question. Can we get an idea of what the hold up is with the Connecticut property and I guess there’s been some discussion that you might, that there’s interest in your doing a Catskills property. Would that be in lieu of Foxwoods?

Randy Churchey

Hailey, as you could imagine, I really don’t want to comment about continuing negotiations. I, too, saw the article that you’re referring to about Catskills. Just from a macro economic look, we do not believe that a Catskills and Foxwoods resort would cannibalize each other. So those could both be done. But I’m not going to comment about where we are on negotiations. I hope that we have things to announce in the relatively near term.

Hailey Wolf – Western Security

Okay. I appreciate that. Thanks a lot guys.

Randy Churchey

Thanks Hailey.

James A. Calder

Thanks.

Operator

The next question comes from Jeff Randal from Black Creek, please go ahead.

Jeff Randall – Black Creek

Hey good morning.

Randy Churchey

Hey.

Jeff Randall – Black Creek

Hey all of your reported RevPAR stats have excluded Blue Harbor for some time. And I’m just wondering what the same store Gen I RevPAR results would look like if you included that asset.

James A. Calder

Jeff, this is Jim. I actually don’t have those calculations here in front of me. Blue Harbor, I think we’ve been pretty open about the fact that it’s, it’s under performed, frankly versus what we had hoped it would do when we first built it. Having said that, it’s trending well this year. It’s actually improved its performance this year. But I would certainly characterize as probably being closer to Gen I type of results, rather than Gen II.

Jeff Randall – Black Creek

Okay, and I guess on that subject, can you give us a sense for what the, the unlevered returns on a, are for the wholly owned Gen I and Gen II assets are based on, I guess historical cause not net PP&E has had, as has been used in the past?

James A. Calder

We actually, I, we have not run those calculations Jeff. I think that year end of ’07 we ran some sort of similar calculations to that of sort of like what you’re describing. But, we haven’t done those calculations to be honest with you here as June 30th by the way.

Jeff Randall – Black Creek

Can you give us a sense for just generally where those lie for Gen 1 and Gen II?

James A. Calder

I would expect that, I would expect that Gen II they’re in the mid to upper teens, without, again this is without any hard data in front of me, but sort of just based on expectations. On the Gen I, I would expect those are in the kind of mid, single digits, mid, upper single digits in terms of unlevereagd returns.

Jeff Randall – Black Creek

Okay. And then on the SG&A line items, you guys have $16, roughly $17 million there. How much of that is resort level, and I guess why not break this out in the financials on a go forward basis so investors can determine both the property level results and the corporate overhead there?

James A. Calder

Yeah Jeff, just to break it out there, our corporate overhead, and I think we’ve given out this number several times before so I don’t, there’s no big secret about it. On an annual basis is about $12 million. And that includes our corporate office here. Our central reservation facility also located here in Madison, Wisconsin. So that’s roughly $3 million a quarter. So that’s basically the math there, the other items. Now, again, in this quarter we had some additional items, the separation payments that we broke out separately in out Adjusted EPITDA and adjusted net income calculations. Those affected our corporate G&A, our corporate G&A would have been a little higher here in Q2. But on a recurrent basis, you know it’s roughly in $3 million range per quarter.

Jeff Randall – Black Creek

And that’s been static over, over the last 12 months?

James A. Calder

Yes.

Jeff Randall – Black Creek

Okay.

Randy Churchery

If anything, I would say it’s probably come down a little bit here in, in ’08 and going forward. Slightly. I mean we’ve had some reductions of personnel obviously. And things like that. And we’re looking to be very (inaudible) with our use of internal capital when it comes to, to hiring as well. And being very stringent on that front and very selective on that front as well. So, but I’m talking material change, but it certainly hasn’t increased significantly, if at all over the last 12 months.

Jeff Randall – Black Creek

Okay. Do, what, follow up on Hailey’s question on the debt, on the Mason asset. You said the resort’s currently doing about one act debt service. I guess I just wondered what specifically is the hurdle needed at that asset for the loan extension.

Randy Churchery

I don’t have the loan agreement here, but, it’s basically to get to, is a multiple that is not achievable by us here in 2008, I think it’s reasonable to say that. I mean we’re talking something like a close to two times.

Jeff Randall – Black Creek

Okay.

Randy Churchey

Given current rates on things right now. It’s close to two times I believe. So I don’t foresee that happening even with what we think is going to be better performance the second half of the year.

Jeff Randall – Black Creek

Okay. And any, I guess I wondered about the, the amount of discounting relative to last year on the same store basis for the quarter.

Kimberly K. Schaefer

No, we have not seen any discounting. As we reported our four per, our $4 ADR decrease was really attributed to the group room. And with the shift in Easter, you did give up a little bit of the leisure rare in April. But it is not because of discounting.

Jeff Randall – Black Creek

Okay. And then last question, Randy, any thoughts on how long you expect to remain the driver’s seat before a full time CEO is selected?

Randy Churchey

Sure, yeah. At this time the board is, has decided to evaluate internal candidates and not to hire an external search firm. I’m not a candidate for the current CEO position, but as I’ve told the board, I’ll stay on in this full time role as long as they think I’m effective. So I have a fairly open-ended horizon for the board to decide at their leisure.

Jeff Randall – Black Creek

Okay, great, thank you.

Randy Churchey

Thanks Jeff.

Operator

The next question comes from Will Marks from J&P Securities, please go ahead.

Will Marks – J&P Securities

Thank you. Good morning.

Randy Churchey

Good morning Will.

Will Marks – J&P Securities

Good morning Randy and Jim and Kim. I had a few questions. So on the SG&A, did you specifically state actually why it was up so much? I, maybe I missed that. But, and if you’d point out the severance amount.

James A. Calder

Yeah, two factors really affected SG&A year over year Will. One we have the separation payments, I think we break those out. It’s a $1,258 million. I think it’s broken out in second table that’s behind the press release. So that’s one factor. The other factor is we have an additional new resort open here, our Grapevine Resort, that’s consolidated and has SG&A associated with it. Those are the two largest factors I think year over year that are affecting SG&A.

Randy Churchey

But as Jim pointed out, I mean our corporate SG&A has stayed remarkably the same around $12 million for a full year.

Will Marks – J&P Securities

Okay. Secondly on your, I think you analysis is really helpful looking at 2009, outflows versus really the EBITDA. Shall we assume that there’s not going to be much tax paid in 2009.

James A. Calder

Yeah, Will, I think it’s reasonable to assume that barring some transaction that would create a large amount of taxable income which I don’t expect and we have a large amount of NOL’s available, both at the federal level and basically all the states in which we operate. So even if we did some sort of transaction to generate some gain, it would not certainly under any circumstances be totally taxable. So, well a long way of answering your question, I think our tax payments would be minimal. I mean I’m talking the million dollar range if that in 2009 based on everything I know today, total cash out for taxes.

Will Marks – J&P Securities

Okay. And then on the current development that you show add up to $77.7 million in construction in progress. Can you give us the number. You mentioned what number next year’s number would be of approximately $15 million associated with those. How about between now and then.

James A. Calder

Between, if next year is $15 million, and we have $77 million in, the, our total equity on Grapevine expansion and Concord together is probably in about the $110 million range. So $77 plus $15 is about $92, so I’d say it’s about $18 million to be spend out of our pocket in the second half of the year if I, if I did my math correctly in my head.

Will Marks – J&P Securities

Okay, so, so that’s you know, roughly $200 million for those two projects total. I’m sorry that’s the equity end debt?

James A. Calder

Yeah the equity and debt together on those two projects is probably about $170, roughly, in total.

Will Marks – J&P Securities

So equity and debt together is $170.

James A. Calder

Yes. Again, I’m not grounding a little bit Will, but yeah, rough numbers.

Will Marks – J&P Securities

Yeah, okay and so you’ve spent $77 to date, and I’m sorry there was $15 next year and then what was the $110 million?

James A. Calder

$110 million is the total equity part, cash out of our pockets to, the equity portion of the Grapevine expansion and the Concord construction. So you take that $110 million, Concord loan at a minimum is going to be around $63 million. So the $110 plus the $60 is just how I got to about $170 million for the two projects combined.

Will Marks - J&P Securities

Equity and debt.

James A. Calder

Yes.

Will Marks – J&P Securities

Okay, great. And that’s it for me. Thank you very much.

James A. Calder

Thanks Will.

Operator

The next question comes from Jeffrey Thomason from Hilliard Lyons.

Jeffrey Thomason – Hilliard & Lyons

Thank you and good morning.

Randy Churchey

Hey.

Jeffrey Thomason – Hilliard & Lyons

A follow up on Blue Harbor, the resort is as impressive as anything in your portfolio. But the regional travel, leisure market seems to represent a bit of a miss match in terms of that resort size and scope. So I’m curious to what you attribute the recent improvement there and have your goals for Blue Harbor changed, either short term or long term. And then second question, I’m curious as to your capital budgeting allows for smaller scale expansion projects at your existing properties, such as, a new water attraction, a new pool, etc. Again, at these existing resorts in order to keep the entertainment offering fresh to entice prior year visitors to return. You know something that can to the theme park industry but on a smaller scale.

Kimberly K. Schaefer

Right. Jeff, this is Kim. As far as your first question goes on Blue Harbor, you’re right, it is a naturally stunning resort and we’re very pleased with the asset itself. The problem they have there is in (inaudible) Wisconsin, you know, you don’t have enough natural destination market. You don’t have the Great Wolf brand that gives us marketing options to, to go to multiple locations and cross markets. So the issue there really is exposure. And our shift has really been to focus us on a group facility and we made that really a couple years ago and have been ramping that up. And I’m very pleased with that and I think that’s why you’re seeing the, the positive results on that as we’ve increased the group sales effort and really made that as, it’s a world class facility as far as group stays go.

On the capital side, you know, we have in the past with our four percent, we have used that to add unique amenities, small water features, things like that to the capital budgets that we do use those for improvements in ROI opportunities after we go through and make sure that any of the capital needs, your general maintenance expenses are taken care of. For the rest of this year, we don’t expect most of the money that we have spent is spent for the year. So we expect that capital is pretty much done for 2008.

Jeffrey Thomason – Hilliard & Lyons

So for a typical resort, how many years would elapse before you would want to add an attraction or an amenity or what have you?

Kimberly K. Schaefer

Well we’re a little bit different than a theme park. We don’t have to add the $20 million rides to, to bring people back. Really what we’ve always focused our business on is the quality get away family experience. So it’s been a lot of little things. We’ve built a very competitive water park. There’s been a lot of these other add ons like the Magic Quest and the (inaudible) Kids Spa that has really given us that opportunity for people to not only spend money, but to come back because we’re really become almost a two night stay. If you don’t stay two nights, it’s hard to do everything. So really working on our internal programming is, is what we’ve focused on. It allows us to keep our CapEx in close to a minimum.

Jeffrey Thomason – Hilliard & Lyons

Okay that’s it for now.

Kimberly K. Schaefer

Thanks.

Operator

The next question comes from Tyler Self from Vision Research, please go ahead.

Tyler Self – Vision Research

Hey guys, just a couple of housekeeping items. What was cash from OPS in the quarter?

James A. Calder

Excuse me Ty?

Tyler Self – Vision Research

Cash from operations in the quarter.

James A. Calder

I don’t have our 10Q here in front of me. But we’ll be filing that today, so that’ll be available later on today.

Tyler Self – Vision Research

Okay, we’ll wait for that then, thanks.

James A. Calder

Okay.

Kimberly K. Schaefer

Thanks.

Operator

A follow up question from Hailey Wolf, please go ahead.

Hailey Wolf – Western Security

Hi guys. A couple other questions. First, anything on the in parks spend, you know, additions that, you know, you’re evaluating, you know, along the lines of a Magic Quest, or a, you know, a Great Space, you know that can drive something incremental, you know, new spending?

Kimberly K. Schaefer

Well Hailey, this is Kim. We did have two percent increase in our Gen II properties, or overall we had a two percent increase in the end resort spending. So we’re very pleased with that. And you know, we’re really seeing the benefit of the Magic Quest, the Scoops, Great Space is only in a couple of our resorts. So we’re, we’re evaluating those for the future as well. So, I think that right now we’re pretty excited about what we have and we continue everyday to look at, you know, what’s out there in the market and what we should be bringing into Great Wolf. Or what we should be creating and customizing ourselves.

Hailey Wolf – Western Security

Okay, and then one of the things that you were working on on the development side of your business was coming up with more of a formulated process to the development. You know, where are you in that effort?

Randy Churchey

Hey Hailey, that’s a good question. You know, what we’ve found over time as we were building our various resorts is that we allow the resorts to increase in cost as we continued to add a variety of different attractions and amenities for our resorts. Over the past few months, we’ve really retrenched and started looking closely at what our prototype should be going forward with the idea of actually not harming the customer experience, but decreasing the cost of our resort and possibly decreasing the amount of land that’s required. We’ve made a great deal of progress so far. We’re not completely done yet. But, you know, it’s fair to said that we’re going to in the end squeeze out at least ten percent of the cost of our resorts through this effort and you know we’re doing things such as looking at room sizes, looking at different type of construction materials. Looking at the square footage of the common areas. So we’re very far along. I think we’ll have that accomplished before the end of the summer.

Hailey Wolf – Western Security

So would that, you’re resulting building costs would be off of a, using $325,000 per key as a base, or, you know, what’s your base?

Randy Churchey

Well as you know, it all depends on what, what particular part of the country that you’re building in. If you’re building in the Northeast, both the cost of land and the cost of labor is higher than if you’re building say in the Southeast. So I’d hate to give you just a generic amount per key. But I think, I think around $300,000 a key is a reasonable, general thought of what we think we can build these resorts for.

Hailey Wolf – Western Security

Thanks a lot.

Operator

Once again, if you would like to ask a question, please press the star followed by the one on your telephone. To cancel this request, you can press the star followed by the two. There appear to be no further questions, please continue with any further points you wish to raise.

Randy Churchey

Sure let me just close. I appreciate everybody’s time today. I know that there’s a variety of other calls and Will Marks I really appreciate you being on since it was six o’clock your time. In conclusion, our resort managers continue to deliver outstanding results in this difficult economy. And we’re excited about the prospect of increasing our brand distribution to more U.S. cities and to international locations. We will continue to move our development pipeline forward without committing material amounts of capital until the credit market’s stabilized. Thank you for your interest in the company. We look forward to updating you on our progress next quarter. Thank you.

Operator

This concludes the Great Wolf Resorts Second Quarter Earnings 2008 Conference Call. Thanks for participating. You may now disconnect.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!