Trump real estate finance #3 – valuation baloney

  

The prior two parts of this series of posts have looked at my take on the basic Donald Trump real estate investment strategy and on his likely issues with collateral. In this and the next posts, I want to take a look at the basic issue of “valuation,” that is, “How much is Trump worth?” First up, we need to wade through a deep pile of baloney on “What is NOT value” and then look at some more conventional measures as applied to Trump’s business.

For a substantial portion of my career I worked in the U.S. and the U.K for companies owned by the late Kenneth Thomson, the head of a Canadian family dynasty and a hereditary British lord, who appeared in the Top 10 of several “world’s richest people” lists during the 1990s. Thomson assiduously maintained a low personal profile and a low-debt/high-cashflow financial strategy. I was in New York at a meeting of one of his legal information services companies in the late 1990s (he was a majority owner of Westlaw, among other services, at that time) and had lunch with one of the company attorneys who related a comment about a minor tiff the company had experienced with Donald Trump.

There is Lord Thomson rich,” he said, “and then there is Donald Trump rich. They are not the same thing.”

His point was that it was possible to play the part of a billionaire if you had enough chutzpah, but that doesn’t mean you are one. Forbes has most recently placed Trump’s net worth at $3.1 billion, far below the $10 billion number that Trump provided to the Federal Election Commission, and I think even this estimate might be far too high. [1] Forbes has a breakdown of their estimate that looks like this:

  • New York real estate – $1.5 billion
  • Golf clubs and resorts – $560 million
  • Non-New York real estate – $500 million
  • Brand businesses – $180 million
  • Cash and personal assets – $290 million [2]

I will give my take on the Forbes list in the next post of this series, but first we need to address the “missing” $7 billion. This is where the “baloney” (or use your own preferred term) comes in.

Gross versus net

This is likely the biggest source of misstatement. Donald Trump has long bragged about the size of certain of his businesses, but a little bit of math inevitably reveals that he often (intentionally?) confuses “gross revenues” with “net profits.” A grocery store that grosses $10 million per year is not “worth” $10 million because of that gross revenue. The net profit from the store is certainly a small fraction of that. In the next part, I will look at different ways to derive a “worth” from the net, but that is not what Donald Trump does. He just quotes the gross. I will just note that Sears/Kmart still grosses over $15 billion in top line revenue per year, and they remain in deep financial trouble.

That said, Trump’s nemesis Jeff Bezos and his Amazon do seem to pull off a high stock value based primarily on still-growing top-line gross revenue, with very little accounting net income to show for it. But Bezos has his own version of “chutzpah” going, and so far he is, frankly, managing it better than Trump. Most other companies who try to emulate the Amazon model fail miserably.

Trump has even claimed as part of his wealth the total retail sales from independent retailers in a building he only partially owns. And that’s next.

Minority ownership of real estate

Donald Trump has commonly asserted, as part of his worth, the total market value of buildings in which he is only a minority owner, especially hotels. Some other investor, usually invisible, often bringing foreign money of questionable provenance, and holds the large majority of the actual equity, with Trump often holding little more than token ownership and perhaps an operating contract. Sometimes only an operating contract.

Many people commonly quote the market value of their home as “what they are worth.” But if your property is mortgaged to the hilt, then your estimate of your net worth is very flawed.

The value of brand

Being chronically short of cash and a pariah to conventional banks, Donald Trump has avoided direct ownership in real estate projects in recent years in return for a much smaller royalty derived from having his name on products, residential buildings, golf courses, and hotels. Many of these have turned out to be duds, for instance his steaks, his “university,” or his hotel in Toronto. [3]

Forbes is likely quite correct in valuing Trump’s brand businesses at only $180 million. In the next post of this series I will look at different ways to derive a “worth” valuation from an “intangible” asset like a brand. At this point, suffice it to say that the value of a brand can disappear quite quickly.

After a tragic fire just a few days ago in Trump Tower in New York City, a condominium unit fire killed its owner, who had been driven into bankruptcy after failing to find a buyer for his Trump-branded property recently valued at $2.5 billion dollars. I call this the “zero-billion dollar condo.” Brand is a notoriously-fickle asset.

So, poof, we have just made about $7 billion of “Trump worth” disappear into a pile of baloney. Next: how low can you go?

Part Four of this series, looking at the Trump businesses most at risk of a “valuation crash,” has been posted.


Notes:

  1. Brownell, Claire. “Donald Trump Is Rich, but Is He ‘Really Rich?’ We Break It Down.” Financial Post, 5 Nov. 2015.
  2. “The Definitive Net Worth Of Donald Trump.” Forbes Magazine, Feb. 2018.
  3. Northam, Jackie. “Trump Tower In Toronto Is Up For Sale And Facing Legal Woes.” NPR, 8 Feb. 2017.
  4. Leland, John, and Luis Ferre-Sadurni. “Art Collector and Bon Vivant Dies in Trump Tower Home He Couldn’t Sell.” The New York Times, 8 Apr. 2018.

 

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