SAM’s Ski Area Ownership Timeline in the March issue illustrated the growing importance of REITs—an importance that could well extend into the future. REITs and resorts are a good fit.

“Back in 1990, when we started getting this going, there was a lot of action happening in the public markets,” recalls Tim Boyd, whose Peak Resorts was the first to seek out and find a REIT partner. “The American Skiing Company was going strong, Intrawest was ramping up. But we felt that wasn’t the best way for most areas. To us, it seemed that a REIT was a better holding mechanism.”

Going public, Boyd felt, was an option for only a few resorts. “In the public market, you have to keep growing your net income all the time,” he says. “That requires real estate. And when that sours or runs out, as a public entity, you’re going to run into a problem. You can’t just keep growing earnings.”

A REIT, however, purchases a property for the long term, and earns income from rent. Growth decisions are justified by the ongoing revenue and rent expectations. “If you want to put in lifts or snowmaking, it increases your lease payment. So you justify your investment by growing visits,” Boyd says.

“In a REIT, you’re in the property for 20 or 30 years. Guys like me, we don’t think about what’s happening just two years away. We can’t have the short-term view; the ski area has to work in our operations. So to us, REITs are the way to hold these types of properties. It gives you liquidity and capital for improvements, and you can’t do that through traditional bank financing,” he says.

Today, this sounds smart. “In our current economy, you really can’t drive earnings. But we don’t have to drive earnings. We may make more or less after our lease payments, but we’re not getting punished in the public markets,” Boyd says.

REITs are generally stable capital partners. They raise capital from individual investors, and don’t rely on debt to anything close to the extent that banks do, let alone private equity partners. REITs typically use a 50/50 debt/equity ratio; for private equity, the ratio can be 95/5. And we’ve all seen the impact of high debt ratios in the past few years.

Still, REITs can get in trouble. “They have to do deals where people can pay their rents,” Boyd says. “Currently, the shopping-center REITs are getting punished because the leases aren’t being paid.”

Will we see more REIT ownership in the future? Count on it.


How REITs View Resorts
“From the short-term outlook, the ski business doesn’t look so good,” says Baxter Underwood, chief investment officer of CNL Income Properties, which owns 14 resorts. “You could have one bad year in five, and that could kill the deal [for a private equity partner]. But we could see a trend line over 15 to 20 years that was pretty healthy. We could see that visits would grow, and that the number of areas wouldn’t. The long-term prospects are pretty appealing.”

The supply and demand situation is important. Winter resorts are unlike, say, office buildings and golf, where it’s relatively easy to expand capacity.

The bottom line, though, is steady income. “We’re patient capital,” says Greg Silvers, COO of Entertainment Properties Trust. “We buy for the steady income stream for our shareholders. And in that sense, the ski industry is pretty reliable.”

Underwood agrees. “In the ski business, if a tenant has a bad year, they are not going away. Even if you lose 20 percent of your revenue, you haven’t lost that much. For example, if you own an office building and it’s 50 percent empty, you’re stuck.” The ski industry just isn’t subject to those types of swings.

The operations background is another key reason that winter resorts and REITs are a good fit. “Ours is a little different business model [from private equity],” Silvers says. “We come from the theater business, and it’s all about admissions and F&B. Our question is, can ski hill operations support the fundamentals of the lease payment? We look at true operations,” he says.

“In metro day ski operations, there’s weather volatility, but very little consumption volatility, year in and year out,” he continues. “And when you can make snowmaking upgrades, you can drive the top line significantly.”

Both CNL and EPT focus on the same type of resorts: day or weekend areas close to metropolitan areas, with managements that have the experience and knowhow to pay their bills and stay on top of industry trends and the potential of expansion through operations. And both feel that the experience of this past winter has validated those criteria.

When CNL first began looking at winter resorts, Baxter says, “We wanted to be in those near-major-metro resorts, that maybe had some development potential, but were really places where if you couldn’t get in a plane—this was right after 9/11—we thought, maybe experiences closer to home would be important. It takes less dollars to get to Loon or Cypress or Brighton and still have the experience people are craving.”

EPT looks at two key considerations. “We ask, ‘where can you take an asset and make measurable improvements?’” says Silvers. He sees a real opportunity to grow revenues through the combination of skiing, riding, tubing, and improved snowmaking. EPT also looks for “long-lived activities,” like winter sports.


Dancing with REITs
Entering into a relationship with a REIT requires a different mindset from selling an area outright. The usual buyer-seller relationship doesn’t apply. Sooner or later, sellers realize they don’t want to get the highest possible price, because that raises the rent. And the buyer is not out to pay the least amount possible, because that lowers the lease payment.

“There’s a conundrum there,” Underwood admits. “That’s the Zen moment, when the operator realizes, ‘I want to make a profit but leave the operation healthy.’ For our part, we want to be successful, but keep our tenant healthy so they can go forward.”

It’s that good-landlord act that gets the attention of many managers. “We’re really good at partnering up with good operators and then getting out of their way,” Silvers says. “We’re not trying to run your business and you don’t have to worry about that. We’re a small company, 22 people, and we simply want to make a good investment. We want you to make a lot of money, because that makes our investment more safe. We are long-term capital that enables people to operate to the best of their ability.”

No wonder Tim Boyd thought (and still thinks) REITs are a good way to hold winter resorts.