Part 2 of Ski, Esq.'s Interview with Steve Rice

Picking up where we left off, here is the rest of Ski, Esq.'s interview with CNL Lifestyle Properties' top ski executive, Steve Rice.

Ski, Esq. To follow up on a comment you made earlier, a lot of people enjoy the amenities, the infrastructure improvements, the snow-making, the new lifts that you put in place, but don’t necessarily appreciate how long it takes to get from point A to point B.  Maybe you can very briefly just sort of walk us through your steps from when you acquire a mountain that you think has some potential but may be under-utilized or underdeveloped.  What are the steps you go through, from a 30,000 foot level, in turning that resort into a destination resort?

Steve Rice:       Right.  Well, let me rephrase your question slightly. I’ll go through steps we go through to turn it into a more profitable and successful resort because we like the day resort category very much and own several day resorts.  

First, through the acquisition process we look very deeply into the financial history of the resort and compare it to similar resorts operating in that region, as well as our own body of information that comes from our own large group of resorts. This produces clarity in terms of their operating performance.  We can see areas in the annual profit/loss statements that point to opportunities and also point to strengths.  If there weren’t a lot of strengths, we probably wouldn’t be acquiring the resort and we wouldn’t be acquiring the resort if we didn’t see opportunities for growth.  And that growth is looking at the way the resort compares to its peers and then adding what I would call our “street smarts” that come from just being experienced in the ski industry.  Our team has a lot of years in the industry collectively.  We spend considerable time at the resort analyzing it, and getting to know its culture and place in the community.  We add our financial review and identify ways that the resort can grow. 

We then look at the state of the master plan that the resort operates under.  Does it need updating?  Are there some projects that are ready to go or have already been conceived that make sense?  What we’ll do is put those projects through a return on investment model that we developed, one which incidentally we put all our capital investments through. Once we’re satisfied that incremental business will more than offset the investment costs, then we will seek approval through our own investment committee and internal process. We’ll develop a project priority list for the resort, which would be multi-year with the highest priorities generally tackled in year one or two.   

We like to implement a key expansion on to demonstrate to everyone - the employees, the community, the skiers in general - that there’s more gas in the tank at this resort now and that we’re going forward and going to grow.  That’s always a positive statement to help improve the business. So, that’s basically the process, which obviously works quite well for us generally.  One more thing - we view the resort staff that are at the resort already as a “partner.”  We see them as a resource and we draw on their experience.  We do a lot of listening and ask a lot of questions.

Ski, Esq.:          That’s great.  I think it certainly makes sense to use the assets you have in place on the ground and as you said, listening may be something we’re less accustomed to doing nowadays than we should be.

Steve Rice:       Yeah.  Great point.  To be from out of town with a briefcase is to be an expert all too often. No matter how well one might think he or she knows the industry, there are nuances that are specific to an individual resort. A resort that may be only 50 miles or less from a neighbor can have a quite different business model. If you don’t understand those neighbors, you run the risk of making some very costly errors in your new management and ownership role.

Ski, Esq.:          Recently we’ve seen a lot of mergers and acquisitions and even strategic partnerships within the industry.  Vail continues to gobble up mountains, CNL Lifestyle Properties obviously continues to look to acquire properties, but the trend continues even on a smaller scale with individual mountains. For instance Jay Peak purchased nearby Burke Mountain, or even Mad River Glen and Sugarbush are now offering combined season pass deals.  Many resorts are partnering with even far flung resorts. For example, Mammoth and Val Nevado offering combined season pass deals.  Do you see this sort of partnership and heightened merger and acquisition activities continuing within the industry, consolidating the sort of bigger resorts in the hands of a few operators or do you see it as a trend that was brought on by the bad economic times?

Steve Rice:       Well, I think there will be more of this activity but I’d make a distinction.  First, many of these partnerships are separate resorts under unique ownership groups or individual ownership binding together voluntarily to offer products that help to maintain a competitive edge in that particular resort group.  I think you have to give Vail credit for writing the next chapter in a multi-resort pass.  It’s been a game changer for Vail and its resorts, and I think it’s forced resorts to take a look at that. The appeal of a pass that works as the Epic Pass does to offer similar products and the  resort linkages that Vail has put together has heightened the interest in owning groups of resorts that balance experience and offer greater diversity to passholders. These passes increase the value proposition that a skier or snowboarder has in looking at what set of resorts that he or she wants to visit and will be loyal to.

I think the other thing that will drive continued acquisition activity and merger activity in the industry is the point I made earlier which relates to capital.  You must invest in this industry to keep pace, and it’s expensive to maintain and replace existing lifts. There’s going to be significant impact in the industry because the first generation of detachable ski lifts that were built in the 1980s early ‘90s are aging. 

While to a degree a lift is similar to aircraft in that you can replace moving parts and surface wearing parts and operate a lift for decades.  At some point, however, a manufacturer stops servicing a lift.  It’s harder to find parts and it’s simply time to replace the lift.  So there’s going to be a bill coming due around the industry and those lift replacements don’t necessarily increase business volume.  It can simply be a one-for-one replacement.  And if the resort has not been a careful steward of its capital and looked around the corner to understand when those bills will come due, it could prompt a search for capital. 

Killington's former Devil's Fiddle Quad - an aged lift
removed but not replaced by Killington in the late 2000's

That could mean a decision that “gee, we ought to merge with another entity, build our economic base and seek investment in the process in order to take keep pace with these reinvestment requirements and grow. So, I think those trends are aligned well, and I also think they’re good for the industry.  I think that the value that a skier or snowboarder has before them today is enormous.  To be able to ski a group of resorts in Colorado or Tahoe for $500 versus a single resort ten years ago for $1200 for a season pass demonstrates the power of more sophisticated pricing and group offerings when it comes to the pass products that are available today.

Ski, Esq.:          Absolutely.  I think that it certainly was a game changer.  There’s no question about it. What the effects are you seeing the recently-enacted Ski Area Recreational Opportunity Enhancement Act having on the industry and on CNL Lifestyle Properties’ summer offerings?

Steve Rice:       Well, specifically we own more resorts that operate under a Special Use Permit on a national forest than any other company — seven resorts.  Each one of them has the potential to offer summer activities.  Summer activities are the fastest growing portion of the ski resort’s business model if you look at it from a national perspective.  The Denver Post ran an article just a couple of weeks ago, I believe, in early December, that noted that summer spending is growing faster than winter spending at Colorado resort towns as they measure tax revenue that helps track that spending.

And that’s just a measure of all the spending.  It’s not just what happens at the resort, but it’s the restaurants and retailers located in mountain resort communities.  But what’s happening at the resorts are that, you know, people have woken up to the fact that resorts are great spots to get away to in the summer. They’re cooler and they offer tremendous scenery.  They’re in the forest and the water and the beauty of the forested mountainous natural surrounding appeals to people. 

Increasingly, they touch down at a resort for some of the soft adventure opportunities that we can provide.  Everything from the zip lines and canopy tours to mountain coasters. Downhill mountain biking, of course, remains popular and a growing number of activities that you can pursue from a ski resort that also happens to have the uphill capacity, the parking, the bathrooms, the food and beverage facilities, the infrastructure to support increased levels of activity.  So the national legislation, which directs the Forest Service to work with the ski industry and local communities to identify these opportunities and to support them, I think is great for the industry.  It’ll make resorts more resilient and hopefully more profitable.  It’ll allow resorts to keep talented staff on an increasingly year-round basis.  There’s always a core group of staff that are year-round, but this will offer a chance to keep that important human resource talent I was emphasizing earlier. Any employee at that resort now has greater opportunities for employment.

So, we’re excited about the trend.  We think it makes a lot of sense.  The summer activities lay very lightly on the landscape.  We’re utilizing in most cases, just existing assets, and we’re excited about it.  We’re definitely heavily in it, particularly in New England.

Ski, Esq.:          Fantastic.  I think there’s a lot of opportunity there and people certainly enjoy being in the mountains in the summer just as much if not more sometimes than they enjoy being in the winter.  It certainly appeals to a broader audience and you’ve got, as you put it, you’ve got the infrastructure in place and it seems like it makes sense, you got unused capacity.  Why not use it?  So.

Steve Rice:       Exactly.

Ski, Esq.:          Just one last question – I wanted to ask what role you see the revolution in snowmaking technology playing in how the industry operates.  When we spoke briefly before the interview you were talking a little about the advance of low-e guns and how people think of them as “green” but really should look at them as white.  If you would, please talk just very briefly about how you see this as a game changer.

Steve Rice:       Yes, absolutely.  Recent advances in snowmaking are nothing short of profound as it relates to the future of the industry.  Snowmaking has been around for forty years.  Over that period it has achieved several plateaus of efficiency and performance as the engineering that supports the design of snowmaking equipment has advanced. But what has occurred in the last several years truly is game-changing for resorts. What I’m referring to is the ability to make snow using advanced nozzle technology with snow guns that utilize far less compressed air than former designs.  Compressed air is the most expensive portion of snowmaking aside from labor itself, due to the heavy power demands industrial air compressors require to run snowmaking systems.  For example, as of early December, 2012, one of our resorts in Maine, Sunday River, has pumped five times the water over the previous year for only two times the power cost-- that’s after a large investment in these low-energy, high-efficiency snow guns we made this past last year.    That’s an enormous cost-savings and increase in efficiency.

Ski, Esq.:          Wow.

Steve Rice:       Now, from a cost point of view that’s very, very significant, as you can imagine, but there’s a bigger story here. That story is that the arrival of low energy guns with high efficiency nozzles allows resorts to make more snow than ever before because these new guns  are efficient at higher temperatures.  You can now justify making at 27, 28 degrees wet bulb .  Wet-bulb is a measure of ambient air temperature and humidity wet-bulb temperature of 28 degrees is a window of snowmaking opportunity you now want to grab, you want to take full advantage of it in the early season.  Whereas, with the older gun technology you’d sit on the sidelines.  And so you’re making snow in warmer windows of opportunity which are representative of what resorts often encounter the early part of the season as the winter is arriving. Because you are able to use this efficient approach, you’re able to pump more water.   

At the end of the day, it’s all about the physics of converting water to snow, so it’s all about gallons pumped, and that’s what’s exciting.

Sugarloaf, another of our resorts in Maine which has also made major snowmaking investments in recent years, had fourteen trails open by December 5th, 2012—the most by this date in its history.  And the snowmaking windows prior to that point were good but not great.  They were fairly normal, and yet it had way more terrain open than ever before.  And when it was pumping all this water, over 8,000 gallons per minute, it was shutting off a couple of compressors.  So there’s game-changing illustration.

Ski, Esq.:          Do you foresee more western resorts installing snowmaking as a hedge against snowless winters like we saw last winter?

Steve Rice:       In the west, resorts have been able to rely on the promise of greater average snowfall and have not made the investments by and large that the east has made, but that is rapidly changing.  One of our Tahoe resorts, Northstar, has the largest snowmaking plant in the Tahoe region, thanks to our many million dollars of investment.  Last year, the Tahoe region did not have any natural snowfall until just after Martin Luther King Jr. Day.  Northstar had by far the most terrain open, and certainly it was effective.  It wasn’t a motivating environment to get skiers up out of the Bay Area to go skiing when all they saw on the news was brown slopes, but Northstar stood out as an exception and was able to grab market share and skier visits. They were able to be open prior to Christmas and offer a very credible product that allowed them to stand out.  That example was not lost on the competitors nearby nor in other regions  of the industry.  We’re investing in snowmaking at Brighton in Utah, which is arguably the cradle of some of the best snow in the United States in the Wasatch range.

Well, we made a snowmaking investment there last summer, and the year before as well.  And while we don’t plan to cover the whole mountain, that’s not necessary in a wonderful location like that, but you want to be open early in the season so you do have a product by Thanksgiving. Then you offer locals a reason to come up and buy a season pass and it helps to get momentum going for the all important Christmas season.

Ski, Esq.:          Absolutely.  Well, great.  I really appreciate you taking the time to talk with me today.  I’m not sure if there’s anything that we didn’t cover that maybe you’d like to add as well, but I think we did a did a, sort of a whirlwind tour of the industry!