Assessing Trump’s Wealth Over Time

Many people, myself included, wonder why Donald Trump is so squeamish about releasing his tax returns. One suspicion is that they might show he has business connections with Russia, contrary to his public statements. That’s entirely possible in my view.

My hunch is different, though: His tax returns could prove that he is and never was as rich as he has claimed. If that became known, even the most stupid of his supporters would perhaps understand that he is a conman.

In addition, Trumps’s tax returns could also show that he was in dire straights during the financial crisis about a decade ago, which might have opened him up to influence from the Kremlin. They could also raise questions about how he was able to make a swift comeback.

It is hard to see through Donald Trump’s opaque business empire that consists of hundreds of companies. If there were a direct way to find out about his net worth, I am sure many people would have been able to figure it out. Estimates, however, fall in an astonishingly broad range with orders of magnitude between them. I have some examples for this in a previous post of mine.

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Instead of estimating Trump’s worth directly, I would like to pursue a different route with an indirect approach. I assume that the value of the Trump Organization has developed roughly in parallel with the value of publicly listed companies that have a similar profile.

Of course, it is possible that Trump was more successful or less, so this is only a first stab with a lot of leeway. Still, I think it can lead to some insights that are otherwise hard to gain. My point is not that I can prove any specific results, only that they are plausible and warrant further scrutiny.

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The starting-point is the question: What if Donald Trump had not invested his wealth in his company, but had only tracked the real estate market in general? Other parts of his conglomerate, like chocolates, vodka, beauty pageants and so forth, are ephemeral by comparison, so this should capture much of what went on.

The relevant asset class here are so-called “real estate investment trusts” or “REITs,” which are dedicated companies that hold a portfolio of investments in various types of real estate. They can leverage them with credit, and have to distribute much of their income as dividends to investors. Since they are public companies, there is a lot of transparency and you can follow their market value via their stock prices.

There is a corresponding index, the MSCI US REIT Index, which is, for example, replicated by the “Vanguard REIT Index Fund Investor Shares” with the ticker “MUTF:VGSIX.” (Note: This is no investment advice, I picked it by chance, and there is also no connection with Donald Trump in any way.) Since the index ist for the broad market, it contains many types of real estate. Hotels and resorts only make up a small part of it.

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Let’s walk through how the fund developed over time. I have not checked how accurately it has replicated the index, but I assume it comes very close.

On January 7, 2000, the share price for the fund was $10.09. It then rose to $19.80 at the end of 2005, mostly in the two years before. That is an increase of almost 100%. Keep in mind that part of Donald Trump’s tax returns for 2005 were revealed earlier this year via the Rachel Maddow Show. The suspicion was that Trump himself could have been behind the leak. In light of the strong market gains, this makes sense to me: 2005 was perhaps an extraordinarily successful year for him, too.

The fund then rose further to a peak on Februar 9, 2007 at $28.45. That would be another increase by more than 40%, or about 180% since 2000. In 2007, the first signs of the financial crisis materialized, which was mostly the result of a real estate bubble. The price of the fund decreased from its high, but at first only slowly. Around the time when Lehman Brothers went bankrupt (September 15, 2008), the price had reached $21.72 (September 19, 2008), a loss of more than 20% from its peak, but it was still on a slightly higher level than in 2005.

Then it went very fast. By March 6, 2009, the fund price had fallen to just $7.01, a loss of more than two thirds from half a year before, or more than three quarters from its peak in 2007. This wiped all gains since 2000 out and even more than that. Lest this be misunderstood: That was not due to bad management by Vanguard. They only track an index, and that was what the market for REITs did at the time.

From this low in early 2009, the price started to recover. In 2013 it had reached levels comparable with those in 2008 before the major drop or in 2005. So basically, there was no gain for five or eight years. It then went on to a new high on January 9, 2015 at $28.28, ie. about the level of the former peak in 2007. That took about eight years. With some back and forth ($24.02 on Februar 12, 2016, $30.69 on July 29, 2016) that’s also where the share price stands now: $27.56 per the end of 2017. So over roughly a decade, there was only a small gain and that with huge swings in between.

This is only the price. As I have noted above, much of the income of a REIT is distributed as dividends. I have not been able to find the historical data for the fund. But from eyeballing what I have seen, roughly 5% per year seems plausible. During the financial crisis, however, I guess it must have been less.

If I take an average price of perhaps $20 over the past decade, that would add one dollar per year, or ten altogether. It depends on how you would have reinvested the dividends, though. For the fund, the annual return over ten years was 7.5%, which works out to a gain of somewhat more than 100% over the whole decade, most of it from dividends and their reinvestment.

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Now, the Vanguard fund tracks the broad market and is hence diversified. It should have a lower volatility than for a single REIT that is invested only in a narrower and riskier market segment as is Trump. That’s why I picked a specific REIT next that has a similar portfolio to that of the Trump Organization: “Host Hotel & Resorts” with the ticker “HST.” (Again, this is no investment advice, my choice is random, and there is no connection with Trump.)

Host Hotels & Resorts owned 96 upscale hotels with approximately 53,500 rooms in early 2017. Total assets are $11.8 billion, of which liabilities make up $4.7 billion or about 40% of total assets. Shareholder’s equity is $7.1 billion. I have skimmed through the list of their hotels, which seem to have a broader geographical diversification than the Trump Organization, mostly in the US, but also some in Europe or Latin America. Trump’s portfolio is more concentrated as far as I can tell, which should make it riskier. But then his other businesses would also lower his risks. Hard to tell, but probably a similar profile all in all.

I have gleaned a few data points for the share price of Host Hotel and Resorts from Motley Fool (in dollars, not the same dates as above, mostly lows and highs):

December 1999: 8.25
January 2001: 13.42
March 2003: 6.92
December 2005: 18.95
January 2007: 26.47
February 2009 3.70 (!)
January 2011: 18.51
September 2011: 10.94
December 2014: 23.77
January 2016: 13.85
December 2017: 19.85

Basically, it is the same pattern. All companies behave roughly like the market, but it depends on their respective portfolios how much they react to general developments. As with the Vanguard fund, you should not conclude form the data that the management of the company did anything wrong. The financial crisis was really brutal, noone could escape it.

The share price goes sideways from 2000 to 2003 with larger swings than for the whole market. Then there is a considerable move upwards, which is almost 300% from 2003 to a peak in 2007. That is plausible because, with a riskier portfolio, you would also expect higher returns than the market when things go well.

Unlike the broader REIT index, the share price starts to fall faster already from early 2007 on. Again, that seems plausible to me for a company that has more exposure to general developments than the broader market. Hotels and resorts should feel the brunt of a downturn faster than other types of real estate.

The loss from the peak in 2007 until early 2009 was more than 85% for Host Hotels & Resorts, and still more than 80% versus the level in 2005. From the low the share price gradually started to recover. It remained more volatile than the broader market as it should with a riskier and narrower portfolio. At the end of 2017, the share price for Host Hotels & Resorts had only reached about the level in 2005, and was still 20% below its peak in 2007.

That’s only the share price again, we have to add dividends in. I could not find data over the long run, but they seem to be in a similar range as for the market in general, around 5%. It depends on how dividends would have been reinvested. But the overall result should probably be that the gain over the past decade was well below 100%.

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What does this mean for Trump?

There is only one moderately reliable figure for his net wealth. It comes from Deutsche Bank who assessed Trump’s worth in 2005 when he wanted a loan (see my previous post for a reference). The result was only $788 million, while in public he claimed to have between five and six billion.

As I have noted above, Trump’s portfolio seems riskier than that of Host Hotel & Resorts because it is concentrated in fewer markets. But then he has also his other businesses that could lower the risk through diversification, and that could cancel some of the higher risk out.

In any way, it is plausible that the Trump Organization is more similar to Host Hotel & Resorts, though, than to the broad market. And hence a loss of 80% seems not implausible from 2005 to 2009. A decrease by two thirds appears like a lower bound for an estimate.

That would mean that Trump saw his net worth shrink to only perhaps $150 million in 2009 and within a short period of time. With a more favorable assumption, it could have been also $250 million. That alone should have put him under enormous pressure.

Host Hotel & Resort would have had several advantages over the Trump Organization in this horrible phase: They were a transparent publicly listed company, and had probably easier access to new loans. Credit dried out at the time in general. But it should have been worse for Trump with his opaque empire and a track record of bankruptcies. Few banks wanted to touch him even before the financial crisis.

On top of this, it is not clear how indebted he was. Host Hotel & Resort seems to work with 40% liabilities against their total assets. If Trump had had something like 50% or more instead, he would have had a higher leverage, which makes losses worse. In this case, his worth could easily have fallen below zero, ie. he would have been insolvent. But then I don’t know how much debt he had. If he could not get credit before that might have rescued him from himself. Still, it does not seem implausible that Trump might also have been effectively bankrupt around 2009.

What made his situation probably also more desperate than it may seem in retrospect was that noone knew how bad the crisis could get. From fall of 2008 to spring of 2009, everything was in free fall and there was no bottom in sight. Even if Trump had remained solvent, he would have been in dire straights and desperate at the time. I would think tha he needed money whereever he could get it to stay afloat.

With a return in line with the market, it is plausible that Trump could now have $1.6 billion or twice as much as in 2005. If it worked out more like with Host Hotels & Resorts, it could be less, perhaps somewhat more than a billion. And in case, Trump had to make more concessions and found it harder to refinance at the time, it could also be less than a billion. In any event, he would not have been a billionaire for many years although he played one on TV.

But then he might also have managed his company better than the market. It still looks implausible that he could be a multibillionaire at the levels he boasts about. All this depends on whether the anchor, the estimate by Deutsche Bank in 2005, is realistic, though. Some people at the time thought he could be worth much less, only $150 million or $250 million. In this case, Trump would never have been a billionaire ever. And around 2009, he could have been down to a few ten million or even in the red.

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My analysis is only crude and approximate. But my hunch here is that Trump is and was much less rich than he has claimed, and that he was in a desperate situation around 2009. I would not conclude from this, however, that Putin made a big long-term investment in Trump at the time. He was a very long-shot then. But I could imagine that Trump had to resort to rather dubious sources to finance his business. That could have led to obligations, or at least to a deep feeling of gratitude to his counterparties for saving his empire.

If Trump needed credit in the phase from 2008 to 2010, such loans might mature from now on and would have to be refinanced if they had a maturity of ten years. That could explain the pressure Trump seemed to be under especially in early 2017. He was bent on delivering something of value to Putin, before all lifting the sanctions.

If I remember it correctly, Trump made a remark in his first presser how there was only a short window of opportunity with Putin and that’s why he had to act fast. This remark made little sense on a political level: The US can live with the sanctions for years even if there were a good argument to lift them. Either Trump empathized so much with Putin that he could feel his pain, or the window of opportunity was for his own business perhaps?

I am speculating here, and I may be wrong. My analysis is certainly not optimal either. But then something in this direction could explain various developments: The timeframe for the deeper relationship that developed between Trump and Russia over the past decade, the unexplained leak of part of his tax returns for 2005, and also the time pressure to deliver something of value to Putin.