Why I Bought Great Wolf Resorts (Nasdaq: WOLF) Indoor waterparks? Resort hotels where the watery attractions ARE the attraction? Unless you've been to the Wisconsin Dells odds are that this may seem like an odd investment. Great Wolf is the class of this nascent industry. The company has a half-dozen resort lodges whereas it's only real competitor, Kalahari Resort, is gearing up to open its second location in a few weeks. Let's flesh out what a Great Wolf resort lodge is all about. It costs between $65 million and $95 million to build one and that includes between 250 to 400 rooms as well as a 40,000 square foot entertainment center that features a state-of-the-art five story indoor waterpark complete with body slides, raft rides, lazy rivers, interactive play areas, wave pools and the occasional water coaster. You also have themed restaurants, ice cream parlors, arcades with virtual reality theaters and some have Wiley Woods -- an interactive softplay area (I experienced a near replica firsthand over at Stone Mountain in Georgia a couple of years ago -- it's a pretty lavish multi-floor setup where kids get electronic points for completing certain tasks). Guests pay an average of $200 a night for a room or suite that includes waterpark admission for the whole family. Because there is so much to do onsite there is no need to wander elsewhere. That's a bonus in these gas crunch times. And it creates significant value in Great Wolf because by acquiring the necessary acreage within driving distance of at least 5 million residents they create the value in their own destination. It also means that the average family will spend another $100 a night in all of the resort's diversions (which include a fitness center and spa for the grownups). The company went public in December of 2004 and the IPO proceeds went mostly into consolidating the entire chain under one ownership group and paying off some debt while retaining some expansion capital. The company is looking to turn a profit this year of at least $0.25 a share. Yes, it costs a whole lot to build these places but the company has been selling condos as part of the resort (another bonus in that it is creating value in its own resorts) and that allows it to offset a good deal of the construction costs upfront. A 2004 study of the various indoor waterpark hotels in the Dells found that they had substantially higher occupancy rates than its peers and charging more than $100 a night more. The indoor waterpark is clearly a drive-to attraction for area families and because admission is usually limited to overnight guests that means manageable crowds no matter what time of year it is. Yes, while most outdoor parks only have a few months of summer that are feasible to operate under Great Wolf can open 365 days of the year -- and stay open well past dusk (the waterpark closes at 10pm daily). Snowstorm. Rain. Great Wolf is weatherproof and you don't need to spend any money on sunscreen or worry that sunburn or afternoon thunderstorms will ruin the vacation. Great Wolf expects to add two new locations every year. It has also licensed a unit on the Canadian side of Niagra Falls to be financed by Ripley's Entertainment (Believe it or Not?) so there is also a future for the company to expand globally with minimal risk by licensing the concept to others and collecting royalties and/or managing the property. Why would I sell Great Wolf? Being the first mover in a niche that is still foreign to so many is exciting. While I don't see a Hilton or Marriott jumping into the fray they do have the resources to catch up in a hurry if they wanted to -- especially with existing properties. A lack of profits growing faster than sales as the chain expands would be worrisome. I am under the assumption that there are economies of scale here as there are redundancies like a central reservation system that will mean that every incremental property will produce even more profitability than the one before it (all things being equal). If the concept begins to wane in popularity (dramatic drop in occupancy accompanied by a drop in average revenue per occupied room) then it would really force me to rethink the investment. Yet the logic is sound and family entertainment (waterparks have been around for generations) transcends fads. Go Back UNDER

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