The folks at Vail Resorts were in the news over the holidays for all the wrong reasons – ski patroller strikes in Park City meant that the only extreme experience most skiers got were the lift lines. I’m not here to opine on labor dynamics, beyond stating my opinion that no one left looking good, between the guests, corporate, and the patrollers. It did put the business of skiing in the news a bit, which got my wheels turning. And since TikTok is (maybe?) banned right now, I figured everyone might have a bit more free time for reading. So here it goes.

I’m not doing the history of Vail Resorts here, but turning the business of skiing from a primarily walk-up business to a subscription season’s pass business through strategic pricing and M&A is one of the great business model transformations in recent years, but it may also just be delaying the inevitable decline of the ski industry. Which for the pure-play ski resort companies, is an obvious problem.

Overall US participation in skiing has grown less than 1% per year for the last couple decades, and the total number of resorts has been declining slightly, as mom and pops have been unable to invest in snowmaking equipment, hospitality upgrades, and new lifts. And basically every resort in the US is operating on a long-term lease of public US Forest Service lands, which has limited the development of new terrain to a trickle (maybe our incoming real estate Developer-in-Chief will change this up a bit). In a market where supply is relatively fixed and people are already paying a premium price for a premium service, driving up prices to keep volumes relatively flat and maintain as consistent of an experience as possible is a pretty logical strategy.

On top of all of this, global warming is making resorts more reliant on artificial snow (which requires expensive capex as well as increased operating costs). Vail’s portfolio of Midwest and Northeast feeder resorts are likely more exposed to weather disruption than some of the crown jewel mountains of Colorado, and their historical M&A strategy of buying smaller local mountains in less favorable geographies and converting those customers to Epic Pass is reliant on those local mountains staying viable.

If a family in Philadelphia is used to skiing locally on their Epic Pass at Roundtop a few weekends a year and takes one big ski vacation to the Colorado Rockies per year, they’re probably going to Breckenridge, Vail, or Crested Butte, not Steamboat or Winter Park (because those mountains are owned by Alterra and therefore on the Ikon Pass). But if Roundtop’s conditions suck so much that the kids no longer have fun there, maybe that Epic Pass isn’t such a smart buy, and that family just skis a few days per year on that family vacation, which may be at an Epic Pass mountain or an Ikon Pass mountain. Or worse for the ski industry broadly, they just go to the beach over Christmas.

Simply put – skiing is a tough sector, with limited organic volume growth, high capital intensity, huge seasonality and uncontrollable weather risks. Yikes. Absent a subscription providing some revenue visibility, it’s easy to see why investors would run away. But that move has largely played out – 75% of skier visits at Vail come from passes, not lift tickets. Vail needs to keep those consumers who don’t live in prime ski territory loyal to the Epic Pass. But how?

If I’m Vail CEO Kirsten Lynch, instead of trying to conquer a flat market globally, I’m looking for opportunities that leverage what I know well – creating a unique consumer experience in a destination setting, particularly in my primary US market. Enter – the humble (indoor) waterpark. This can leverage existing lodging infrastructure, is water-intensive (like skiing, so a risk they own already), but is either counter-cyclical to skiing (if outdoor) or even better, much less seasonal if indoor. It also has ancillary food and beverage operations, which ski resorts also know how to run. And lifeguards are probably easier to find than ski patrollers.

Great Wolf Lodge is the best example of “what could be” when executing this strategy. For those of you who haven’t been, imagine a massive indoor water park with a suite-heavy hotel and a bunch of restaurants attached. Kind of like a casino, for nine-year-old kids. And it turns out the next-to-open lodge is adjacent to Foxwoods Casino. I can only imagine the family fights when dad dips out from the waterpark to play slots without telling mom.

In 2019, Blackstone acquired a 65% stake in the company from Centerbridge, valuing Great Wolf at $2.9 billion, for a mere 18 resorts. Fast forward to about a year ago, and reporting around a refinancing of 14 of the resorts noted $244 million of operating income for those resorts in the trailing 12 month period ending September 2023, versus $196m in the prior 12 month period and $151 million pre-pandemic for the same resorts. There may be some maturation of recently opened parks in there, but that’s pretty impressive organic growth. Grossing up the ~$17.5 million in operating income per site to the 23 parks that Great Wolf currently operates, and that’s a nearly $400 million operating income business.

Compare that to Vail, which is forecasting $532-610 million of operating income (I’m defining as reported EBITDA – depreciation and amortization) for the upcoming fiscal year that ends in July. So Great Wolf is probably too big for Vail to buy outright, especially because Vail is already levered at 3x EBITDA, which for a capital-intensive, publicly traded business is healthy but probably doesn’t leave a lot of debt capacity.

So, if Vail can’t buy Great Wolf Lodge, what can they do? Well, Vail’s pretty good at large hospitality construction projects with specialized equipment. How different can a lift and a waterslide really be? Time to put the hard hats on and build.

But what are the unit economics of building? Honestly, I don’t fully know. The company hasn’t been public for over a decade, so numbers are scarce. But I wouldn’t be an ex-consultant without doing some patented “proprietary analysis” aka mashing a few numbers together and making an educated guess.

I was going to build a bottoms-up model, but the consultant in me was just interrupted by the banker in me, who decided to pull the comps. Roughly a decade ago, Great Wolf spent $90 million to buy a 311 room half-finished hotel in Colorado Springs and build out its park. Over the last decade, construction costs in Denver (an hour north) have grown by about 70%, so it would probably cost about $153 million to build the Colorado Springs site today. More recently, the 550 room, 92,000 square foot site in Naples Florida that opened last year cost $250 million to build.

Using the capital intensity of Six Flags and Vail Resorts (where roughly 30% of EBITDA is depreciation and amortization) as proxies, we can gross up the reported Great Wolf operating income per site of $17.5m to $25 million of EBITDA per site. This gets to a similar drawback of waterparks and ski resorts – they’re capital intensive for the amount of profit they generate. We’re talking about yielding $25 million in EBITDA on a $200m average construction costs – that’s only 12.5%. But – now, for the magic of leverage. Specifically, leverage backed by lots and lots of hard assets. In May 2024, Great Wolf raised $1.55 billion in debt on nine properties (bonus points for some interesting rate and occupancy stats in the release!) and as we noted before, the financing on the other 14 sites noted above totaled $1.7 billion.

So now, the numbers are starting to come together for both Great Wolf and for a de novo waterpark builder like Vail. Assuming these are the only two financings, Great Wolf has about $3.25 billion in combined debt, roughly $400 million of operating income and nearly $600 million of EBITDA (using that 30% gross-up estimate from before). It’s levered at about 5.5x debt / EBITDA, with roughly $140 million in debt per site. If the average site costs $200 million to build today, then 70% of the capital can be debt-financed. We’ll have to capture the interest cost on the debt but assuming an 8% CMBS interest rate, we’ve probably taken that equity yield from 12.5% up to 20%. Not a bad day’s work for the capital markets team.

The folks at Vail will be making a pretty big bet on a site if they decide to do this alone, but they’re spending $200 million a year on capex in the normal course, so it’s within the realm they could do this solo. Or they could find a joint venture partner. But building a fleet of new parks can’t happen quickly for Vail – just look at the pace of roughly one new park per year that Great Wolf is moving at, and they have Blackstone money.

One other potentially obvious constraint – land availability at a reasonable price. The average site appears to have 300-600 hotel rooms and a 40,000 – 100,000 indoor water park and entertainment area. That probably doesn’t fit everywhere there’s a Vail ski mountain. But the lodging may not need to be fully incremental, and there’s probably a big parking lot somewhere that can be turned into a garage.

Skeptics might point to Vail as a high-status brand, too good for the humble waterpark. I would posit that as balderdash – by acquiring a bunch of small-time mountains across the country, Vail has shown a willingness to slap that elevated brand on a host of consumer experiences of varying quality and accessibility. Heck – they’re not even headquartered in Denver, they’re in an office park in Broomfield, home of…Crocs and Partners Group, not exactly luxury brands.

Other reasons why Vail might not want to do this would be a view that this isn’t core to Vail’s skiing operations and is a distraction. To which I’d reply a) it’s complementary – you’re now extending family vacations, creating a massive new source of value for Epic Passholders and a massive new source of potential Epic Pass members, with similar real estate footprints and operating needs, and b) the fact that it isn’t skiing is kind of the point, bozo.  

I will admit – this isn’t a totally novel idea. A few resorts have married the waterpark with the ski mountain – Jay Peak in Vermont, Boyne Mountain in Michigan, and Camelback in the Poconos (owned by KSL, who also happens to own Vail competitor Alterra Mountain Co in a separate vehicle) all come to mind. But to my knowledge, a Vail-owned Mountain hasn’t tried this approach.

So, Vail – if you’re listening, call me. I’m not a great skier, I don’t like your namesake town at all, and I’ve never built a waterpark before, but otherwise, I’m clearly the man for the job.