INTRODUCTION
This is the latest of our series of educational blogs on accounting red flags, how to pick wining stocks and how to value companies. In it, for a change, we look at unquoted companies and demonstrate a few of the analytical techniques we teach in our online courses. For fun and to make it more interesting, we have used Trump’s Scottish companies as our examples. Please see the important disclaimer at the end.
President Trump likes to project himself as a highly successful businessman but surprisingly little is known about his true financial position. Various articles, including a 2016 in-depth analysis by the Wall Street Journal, have speculated about his income and asset base. All sorts of claims and counter-claims have been made about his wealth – by Trump himself, pitching his fortune at some $9bn, and by journalist Timothy O’Brien, suggesting that it is as “low” as $150-250m. It’s doubtful whether we shall ever know the truth, but we can use Trump’s UK corporate filings to gain an insight into his business in Scotland.
This article examines the Trump investments there and asks if he is as astute as he claims. (Spoiler – the answer is no). We look at the period to the end of 2018, the last accounts filed by the two Trump UK holding companies. We do not expect the Trump 2019 accounts to be published before Christmas, as UK companies now have 12 months to file because of Covid.
This article compares Trump’s two Scottish properties, Trump International in Aberdeenshire and Turnberry, with two established golf resorts – Loch Lomond Golf Club, considered by cognoscenti to be one of the finest in the world, and Gleneagles, the famous hotel and golf resort.
Loch Lomond is owned by a Caymans vehicle and we understand (from a member there) that this belongs to its members. Gleneagles was sold by Diageo in 2015 to Ennismore (the hospitality company founded by Sharan Pasricha) which previously bought the Hoxton Hotel in Shoreditch. One of the owners of the Hoxton Hotel told me that he was more than pleased with the price he received, so it’s quite possible that Gleneagles was similarly an expensive acquisition. The price for Gleneagles was rumoured to be £150m, but our analysis suggests that the purchase price was £139m; given that the business had net cash of £14m, we use a cost of £125m in this article.
HOW HAS TRUMP FARED OVERALL?
Our detailed analysis below looks at the four properties, in an attempt to understand Trump’s skills in hotel and resort operation. Before drilling down, we do some high level analysis to assess the returns from these investments.
PROFITABILITY
We show below the trends in profit (well, actually losses) for the two Trump properties in Scotland. At Trump International, accumulated losses to end-2018 were £13m, and with other reserves of £1.7m (mainly an accounting technicality), there is negative equity of £12m. At Turnberry, there are accumulated losses of £44m, and negative equity of £51m. Had Trump charged interest on inter-company loans at either company, the losses to date would be significantly higher, on our estimates a 5% rate would have generated an additional £38m of accumulated losses. Had the businesses bene run independently, with directors paid for their services (see below) and arms’ length financing, the two businesses would have accumulated losses of well over £100m in the period of ownership by Trump.
FX EXPOSURE
We examine how the Trump investments have performed below. First problem is that asset exposure does not appear to have been hedged. First rule for any investor in overseas assets is to hedge the foreign currency exposure. Trump does not appear to have done so and looks to have extended sterling loans to the Scottish companies. We estimate that the dollar value of these loans to the ventures have declined significantly:
Resort Balance due* Period Loss to date
Trump International £45m 2006-18 22%
Turnberry £114m 2014-18 15%
The pound was worth $1.27 when we did these calculations and Trump had seen a near-$40m decline in the value of the loans extended to the two companies. Note* – we have included the slither of quasi-equity in this calculation, although the accountants make a technical distinction here. This has arisen because the value of sterling has slumped since Brexit (ironically, a policy which Trump keenly supported).
Our analysis of the losses to date is derived using the estimated sterling amounts extended by Trump and a Trump trust to the two companies, and converting these to dollars at the average rate each year. We then compare the dollar total lent to the current value of the sterling loans accumulated, and the loss totals just under $40m. These numbers do not tie exactly to the current sterling loan balances.
Of course, we don’t know what sophisticated hedging Trump may have engaged in at home. It does seem a bit odd to us, however, not simply to borrow locally with a cross guarantee – but perhaps the UK banks would be less willing to lend. More likely, Deutsche Bank, believed to be his main source of credit, has a bigger loan book in the US and these loans would be combined with many others.
And we are assuming that the loans are in sterling, which is how it appears from the accounts, but it’s possible that part of the loans to the Turnberry operation are in dollars, so it’s conceivable that our estimates are too high. These estimates are for the period to December, 2018, the latest financial filings. Although 2019 may have seen an improvement, 2020 must have seen significant losses at the properties.
This means that Trump’s losses will certainly have increased significantly. The decline in the value of the sterling loans into the two companies plus cash injections required as a result of Covid must amount to $50m and probably significantly more today.
BUSINESS VALUES
Of course, these are merely paper losses. If Trump sold the businesses tomorrow, how would his investments fare? That is the more important question. Note that at Trump International, planning permission was granted last year for a second course, a 500 unit residential village and more – we have not allowed anything for these, as it’s unclear what they would be worth – it would be impossible for us to make any realistic assessment.
Trump paid $65m for Turnberry. Loans at end-2018 amounted to £43m at Trump International and £115m at Turnberry. In addition there is another £6m of quasi equity – these are loans which are treated as equity because the loans do not bear interest – an accounting technicality. So overall, Trump needs to recover £164m plus $65m or roughly £215m, in order to break even.
If Gleneagles sold for £125m, and if we consider that was probably a high price, how do these two businesses compare with Gleneagles? Turnover for Turnberry and Trump International totalled £21m vs £55m at Gleneagles, while EBIT was a loss of £8m vs a profit of £3.5m (pre loss on sales of assets) at Gleneagles. Tangible assets are similar at c.£95m.
Given that the businesses are loss-making, we can use an EV:sales approach; the companies have significant negative equity so price:book is not appropriate. Gleneagles changed hands for 2.6x sales and on that basis the Trump properties would be valued at just £56m. There may of course be additional development value.
We are not professional hotel valuers and we don’t have enough detail on these properties to do a full valuation. Nevertheless, it’s clear that Trump was showing a significant loss on his investment, before Covid struck. We don’t have enough data to conclude that his £215m investment would be worth c.£56m at end-2018, but post Covid, it’s hard to imagine that his losses to today could be less than say 50%. Moreover, there is an opportunity cost to this also.
OPPORTUNITY COST
We looked at the injections made by Trump each year into the two businesses, including the purchase price, and asked how he would have fared if he had invested in an S&P 500 tracker instead.
We assumed that instead of buying the assets he invested in the S&P at the same time, We assumed that cash injections made each year into the hotels were instead made on January 1 in the following year into the S&P – a conservative basis of calculation.
On this basis, and ignoring dividends for the sake of simplicity (and to be more conservative), we estimate that investing this cash in an S&P tracker would have generated an investment value today of around $420m. If this cash had been invested in a portfolio of tech stocks like Amazon or Apple it would likely be worth over $1bn today.
Poor Donald Trump, the opportunity cost of his investment in these Scottish hotels has likely been at least $250m (assuming the hotels were worth $170m not our calculated £56m/$70m) and possibly over $1bn – that’s real money, even if he were worth his claimed $9bn.
DRILLING DOWN INTO THE BUSINESSES
We now examine the operational performance of Trump’s two businesses in the context of the peer group. We begin, as we would if reporting on a quoted stock, with revenue growth. Before detailing our analysis, we highlight that we have not consulted any of the companies concerned, that the analysis has entirely been desk research of filed accounts and these are simply our estimates – do your own research and please do not rely on this for any financial or other decisions. Our full disclaimer is on the website.
REVENUE GROWTH
Revenue at Turnberry has increased from £11.4m in 2015 to £18.5m in 2018, an impressive percentage increase, but less so relative to the investment made – capex has totalled £56m in the first five years of Trump’s ownership. A BBC article suggested that Trump claimed that he would invest £200m, and that his company said that £150m had been invested in 2016. It would not have been money well spent, with nearly £8 being spent to generate £1 of additional revenue in a loss-making business.
The doubling of revenue at Turnberry in the chart is slightly exaggerated because its 2014 accounts covered February to December. Adjusting for this pro rata (unrealistic as January is a low month for revenues) would yield an increase of 78%; the 2015-2018 increase was 62%, still much higeh rthan peers.
We show below that the Trump companies have clearly been less profitable than the established Scottish golf courses. And growth at the latter looks to have been fairly limited – this probably reflects the fact that they are already full, and additional income is dependent less on filling vacant golf capacity and more on attracting visitors to alternative activities. And let’s face it, Scotland is pretty, but the weather is unreliable and even when it’s nice, there are midges. Donald Trump could conceivably be successful in creating a large new market, but it looks a long shot.
PROFITABILITY
We show both the EBITDA margins (the statistic beloved of private equity) and the potentially less comparable EBIT margins in the following charts. Turnberry made a small positive EBITDA contribution in the first partial year of Trump’s ownership but in spite of the significant increase in revenues, the contribution at this level remains negative. Losses are much higher at the EBIT level which includes depreciation. Turnberry was partly closed in 2016, with the investment programme, and hence this has resulted in higher than normal losses.
Both Gleneagles and Loch Lomond make small positive margins at the EBITDA level but profits are slim once depreciation is taken into account. It’s possible that this reflects a deliberate policy by the Loch Lomond’s member owners.
Trump’s Scottish Holding Company Boards
Trump International Golf Club Directors Turnberry Directors
Mr D Trump Jnr Mr E Trump
Mr E Trump
Mr A Weisselberg (Trump’s CFO, in his 70s)
Donald Trump resigned from the Trump International Board on 19 January, 2017, before he took office and does not appear to have been on the board of the Turnberry vehicle. Ms I Trump is a former director of the Trump International Golf Club vehicle.
When comparing profit margins, Trump’s companies have an unconventional board structure and directors do not charge the Scottish companies for their services. Hence, the margins are slightly flattered compared to companies whose directors charge fees. At Gleneagles, directors took home £659k in 2018 and the parent imposed a management charge of £2m. Without these, margins in the last two years would have increased from 3.7-3.8% to 8.7%. Directors of Loch Lomond Golf Club, including the City grandee Chairman, Sir Nigel Rudd, do not charge fees.
[In the 1990s, as a sell-side analyst, I wrote a note on Williams Holdings, accusing it of cooking the books and having undue influence on its auditor; it was one of a handful of FTSE100 companies which did not use one of the then big 5 firms. Rudd called up his contact on our sales desk and threatened that if I didn’t withdraw the note, he would sue and would never again come on our golf day. I was forced to change the front cover. I was completely right – who has heard of Williams Holdings today?]
EBIT margins are before fx gains or losses where reported.
The Trump companies have not recognised over £10m of tax assets on their balance sheets. In order to recognise the asset, the directors have to establish that there is a reasonable likelihood of the company making sufficient profit to take advantage of the tax losses. Perhaps that would be too much, even for Donald Trump, to hope for.
INVESTMENT
Gleneagles has the largest asset base with land and buildings at cost/valuation of over £100m. This reflects the values conferred upon purchase, and the same is true for Turnberry, which has seen £56m of capex vs £3m for Trump International in the last 5 years (the main investment was earlier). Gleneagles has enjoyed investment of £37m and Loch Lomond £10m. Clearly this investment is directly related to expansion plans and the state of the infrastructure, and for this type of business we would expect a fairly flat asset profile.
EMPLOYMENT
Labour is a significant cost element for all these businesses but it’s much higher for the Trump resorts. The ratio of labour costs to sales for Turnberry has been falling closer to the two independent companies here, as sales and employment numbers have doubled while the average salary has fallen. Gleneagles is by far the most efficient but clearly the mix of business may be significantly different.
The following employment ratios include part time staff for Gleneagles. It appears that the full time equivalent is disclosed but, as mentioned earlier, we have not consulted the company directly for this blog (one of the problems we face when doing analysis of this type).
Average salary has been lowest at Gleneagles but as it has grown, Turnberry has dipped below it – this could be more lower paid staff (cleaners etc) to cater for the growth. What is unquestionable, given the generally remote nature of these companies, is their positive impact on the local economies – even little Loch Lomond has a wage bill of £5m and although it’s close to Glasgow, it’s likely that there is significant local employment. The impact will be much greater for Turnberry with a wage bill of £8m in a small rural area and especially for Gleneagles with its £18m wages bill in the countryside. For Trump International, the wage bill is lower but the influx of tourists is also helpful for all these local communities.
Tips are a major part of the wage bill – Loch Lomond’s guests contributed an estimated c.£6k/week last year.
CONCLUSIONS
It’s hard to see how Donald Trump will extract a return from his investments in Scotland. It may be possible to stem or slow the losses, but there is a large amount invested and generating a return on that investment will be difficult. One tailwind now may be a weakening dollar, although the pound has not been in favour and we have the consequences of Brexit to come. Two factors may come to Trump’s rescue:
The further proposed developments at Trump International could be lucrative, but given the track record, this seems unlikely.
Perhaps by magic there will be another golf loving billionaire with Scottish blood whose appetite will match Trump’s, but this looks even more of a long shot.
We have explained in this article that Trump lost c.$40m to the end of 2018 and this must have risen. Even if 2019 was a better year, 2020 must have been extremely difficult. As we explained, losses to date are likely to have been well over $50m. We shall learn more when the 2019 accounts are filed at the end of the year but will need to wait until this time in 2021 to gain a fuller picture.
FOR THE ACCOUNTING GEEKS
When conducting this type of analysis, we look at audit fees, in order to assess the risk of a curtailed audit (low fees, or high non-audit fees). Trump uses the less well-known firm of Johnston Carmichael LLP as auditors. While we have not come across them before, their website mentions 650 staff and “a team of sharp minds based in 13 locations across Scotland”. Their last group accounts show revenues of £49m, 56 partners and 721 staff.
We believe Scottish accountants, trained under ICAS (Institute of Chartered Accountants of Scotland) are the best in the world – of course, I am a member. We have no reason to believe that there is anything amiss in the preparation of the accounts nor of the audit – 2018 audit fees were £30k at Turnberry and £15k at Trump International vs £21k at Loch Lomond (pwc) and £24k at Gleneagles (BDO). Fees paid by Trump (revenues of £21m) were similar to the combined fees at the two other companies (revenues of £66m), so there is no question of low fees impacting audit quality, although Turnberry’s accounts in 2014 appear to contain an error, as shown in the extract below. This is simply a typo, but such errors are unusual in company accounts.
This is something that we teach professional analysts on our Forensic Accounting Course to be wary of. A trick we teach on that course is that CFOs and Finance Directors who are short of earnings at results time may resort to changing depreciation lives. At Trump International, there appears to have been one such change in 2016, but it was immaterial, only helping profits by £2k.
Disclaimer: This is an educational blog using President Trump’s investments in Scotland as an illustration. It’s a piece of business analysis, not political analysis. I am not a US voter and am not seeking to express any political view, nor should the reader draw any poltical conclusions from this blog. Trump has dozens of investments listed in his filings – we have highlighted just two – and overall may have a very different result from the Scottish companies. We have taken care in compiling the data, but have not checked with the companies involved and you should not rely on our conclusions but should do your own research. Please also refer to the Disclaimer and Terms and Conditions linked below. Photos are stock photos and do not represent any of the courses mentioned in the article.
