Six Flags' (SIX 0.69%) stock has fallen by roughly 50% so far in 2022. That decline was driven by a number of issues, but a big piece of the story is that management began a major overhaul of the company's business model. In such situations, there are always two questions that need to be asked: First, is the new business model reasonable? And second, can the company afford to make the transition?

Here's what well-informed investors already know about Six Flags as they think about its future.

From here to there

Six Flags operates regional amusement parks, many of which are basically seasonal operations. Historically, it had focused on getting as many people through the front gates as possible. Its efforts to boost traffic often included offering free tickets, with the expectation that people who get in for free would still end up buying food and other things in the park ("in-park spend," in industry lingo). 

Two friends eating cotton candy and laughing at the amusement park.

Image source: Getty Images.

This is not at all a unique model. Regional amusement park peer Cedar Fair basically does the same thing. Both companies, meanwhile, play up the holidays to attract more visitors, with Halloween festivities being a big annual draw. Essentially, Six Flags was looking to provide families who live within driving distance of its parks with a reasonably priced day trip option.

Or at least, that was the goal until new CEO Salim Bassoul arrived in late 2021. In early 2022, during Six Flags' fourth-quarter 2021 earnings conference call, he outlined a very different approach.

To simplify things a lot, he wants to up the quality of the experience at Six Flags parks and charge visitors more to get in. According to company research, its customers have long said this was a trade-off they would be willing to make. 

There are very real risks to the strategy, though. For example, raising prices has resulted in lower attendance, as expected. That means the company is relying on a smaller group of guests to support sales, which so far hasn't exactly been the end result. In the third quarter, attendance was lower year over year, in-park spending per person was higher, but overall revenue was off by 21%.

The transition is still in its early days and the shift is dramatic, so it was unlikely to go completely smoothly, but investors have good reason to worry that Six Flags may be heading in the wrong direction.

The overhang

One of the biggest problems for Six Flags is actually not its business model, but its debt-laden balance sheet. In fact, the two cash priorities that Bassoul highlighted as he announced the new corporate direction were capital investments in the parks that could help justify higher ticket prices, and debt reduction. So the story here isn't just about the operating direction of the company. It's also about whether or not it has the financial wherewithal to make this transition.

That's where activist investor Land & Building Investment Management comes in. This shareholder, which owns about a 3% stake in the company, recently put out a report that suggested Six Flags should break its business into an operating company and a property company that would lease out the amusement parks to the operating company. This would allow Six Flags to sell the properties to raise cash it can use to strengthen its balance sheet and, essentially, support the transition to a new business model.

Land & Building believes that Six Flags' current market capitalization is lower than the value its real estate would have if it were sold or spun off as a real estate investment trust (REIT). 

This isn't a crazy idea. In fact, Six Flags already leases a handful of properties from REIT EPR Properties, which focuses on experiential assets. Casino landlord VICI Properties, meanwhile, has expressed an interest in expanding into new areas of the entertainment space that could easily include amusement parks. A few other companies could easily pull off buying Six Flags' properties in whole or in part as well, including Realty Income or even Blackstone on the non-public REIT side.

Importantly, moving in this direction would buy management time to fine-tune its approach to balancing attendance and pricing to maximize the company's revenues. Although this could be a one-shot deal if Six Flags were to spin off a REIT, it doesn't have to be. The company could also sell properties one by one, as needed and if needed. 

Simply put, the smart money knows that Six Flags is embarking on a big change, but it has more flexibility than some on Wall Street seem to believe based on the weak stock price. Land & Building is, at the very least, trying to point this fact out to more investors.

Not for everyone

When all is said and done, Six Flags is basically trying to evolve into a regional version of higher-priced amusement industry heavyweights such as Walt Disney. Based on early results, it isn't clear that this is a workable approach, and risks alienating consumers with high prices as it increasingly relies on the spending habits of fewer of them. Risk-averse investors should probably watch this story unfold from the sidelines. 

However, as Land & Building has highlighted, there is more here than meets the eye -- specifically, a large and potentially valuable property portfolio. That could be the difference between Six Flags falling short of its goals and it having the financial wherewithal to continue updating its business model until it finds the right balance between cost and value.