So there we were, standing in the spaciousness of the gilded and marbled lobby of Trump Tower, pressing the UP button.
The voice mail had come in a few weeks before.
"David, this is Nicholas Ribis, CEO of Trump Hotels and Casino Resorts. Give me a call at your convenience." Nasal voice, no-nonsense but friendly, New Jersey accent. Short and to the point.
But what was the point?
My first reaction was one of amusement, amusement tinged with a faint anxiety. What was this about? We have never had any dealings with any of the companies we have shorted in the Rule Breaker portfolio, and if you know Wall Street, you know that companies by and large hugely dislike any entity that is short their stock. Further, the Rule-Breaking act of shorting the stock of Donald Trump's public company, a profitable move of a few years' duration, couldn't have made us popular with one of America's better-known tycoons.
My Foolish mates and I settled on an 80% likelihood they wanted to have us up and discuss their company, and a 20% likelihood that all manner of other things (some quite unpleasant) might be in store.
Always one aiming to live life to its fullest, I called Mr. Ribis back right away. He was an avuncular chap, and quickly warmed to the subject.
"David, thanks for the call. I think you know me! Listen, I'd like an opportunity to have you up and tell you our story. We're very excited about our prospects and we want to share those with you.
"You're a smart boy. And I know you have not been a fan of the company. But hey, who knows? You might even like me! So I could come down there or if you'd like to come up here, we'd love to have you. And Donald would like to meet you."
Recognizing one of those unique opportunities that life sometimes tosses a Fool's way, I made my flight plans shortly thereafter. That was about a month ago. August 3rd. What follows is what happened.
First off, I invited three others to go along. Jeff Fischer, my fellow Rule Breaker Portfolio manager, was a shoo-in. I also wanted to invite Dale Wettlaufer, long-time writer/analyst for the Fool, present manager of the Boring Portfolio, and an expert at untangling financial statements. And our fourth was a wildcard, a talented young woman who was one of 40 interns we had here at Fool HQ this summer and someone who did some superb support work for us here in RuleBreakerville.
I didn't know at the time that not only had she never been to New York City, but she had never even flown on an airplane. So August 3rd should remain a story for years to come for this college student. Not only did she fly on an airplane, and not only did she visit New York City, but her exclusive stop was none other than the private offices of Donald J. Trump.
Now that's Foolish.
On the flight up, I mused. Splitting open the proverbial foil bag of peanuts, I confessed to my colleagues that I had some regrets. "I think I've been a bit hard on Donald. Anyone else feel that way? I mean, heck, for a while there I was referring to Trump as 'Tiny.' 'Tiny' this and 'Tiny' that. Remember?"
"I mean, it was a year and a half ago. I've grown up a lot."
No one agreed.
Dale spoke next. Thrusting out his chin ever so slightly, he said, "I don't think I've ever hit the guy below the belt"... somewhat smugly, I thought. It didn't take me long to thumb through our packet of Foolish writings on Trump to our Dueling Fools dated April 22, 1998, in which Dale played the role of The Bull. In this memorable document, he leads off, "Man, I must be a masochist taking the bull side of Trump Hotels & Casino Resorts (NYSE: DJT). I mean, come on. The stock's trading symbol is made up of the initials of Donald J. Trump, whose marquee name is highlighted in the company's SEC filings as an asset. I sometimes think that at least one of the syllables in 'asset' captures the essence of this throwback to the Gilded Age."
OK, so there we were, standing in the spaciousness of the gilded and marbled lobby of Trump Tower, pressing the UP button.
We were headed to the top, the 26th floor, where we were shortly met at reception by Mr. Ribis. "Come right back. Donald is waiting."
We proceeded into Trump's office. It was very large -- two offices' worth -- decorated with many pictures of Mr. Trump and friends on the walls, an architectural model or two, and a mammoth desk that had, among other things, a printed sheet of dollar bills on it.
Donald is about six foot one, and basically looked like the pictures we all see of him (note the fellow to the right in that picture is Nicholas Ribis), except that he was wearing his hair long in back and had his mane slicked. Looked kind of a like a high-roller, actually. Anyway, a traditional handshake, and a smile, and we were off.
"So anyway, I've made a lot of mistakes with this company," was his first line. "One mistake was what happened with the Marina." For those not familiar, what has hurt DJT shares most for the past three years was the company's decision to purchase from Trump himself the Trump Marina property. In the opinion of the market, Trump the private investor induced Trump the public corporation to pay up too much for the property, remunerating Trump the private investor at the expense of Trump the public company. Further, the public company took on a tremendous amount of debt to finance that purchase. Ever since, Trump Hotels and Casino Resorts has had about $2 billion in debt at high interest rates, putting its annual interest payments right about in line with its annual pull from casinos. Hence our short -- hence our profitable short.
In his own way, Donald was admitting a mistake, an act many people might deem most unDonaldlike. Even then, he was sort of like the Fonz from television's Happy Days trying to say he was sorry -- Fonz was never very good at that. Donald has a tendency to admit a mistake but then in the next breath undercut that by explaining why it wasn't really a mistake. In fact, the Marina is a good property, he tells you, though not as good as the boardwalk.
"Now the boardwalk, we got a million people going up and down the boardwalk every day. A million people."
"That's right," said Ribis, "a million people. You can go down over there right now and see it."
"And we got the boardwalk. But the Marina is an attractive property as well, just not the boardwalk. Now Wynn--"
And we'll pause here to introduce one of Donald's primary adversaries -- no, make that his archrival. Steve Wynn. CEO, Mirage Resorts. As Trump was sewing up Atlantic City, establishing strong relations with the state government while he bought most of the prime real estate, Wynn was busy building an empire centered on Las Vegas. Trump has never entered Las Vegas. But Wynn is crossing the line. He's trying to enter Atlantic City.
This is the key information you need to know before you listen to Trump on Wynn: Trump borrowed lots of money to establish a near monopoly in Atlantic City, and the act of Wynn trying to enter Atlantic City to compete with that monopoly could cripple Trump's hard-won territory. Donald needs his properties to pay off, with little competition, in order to repay the debt. If the town opens up and admits competition, he might never make the money to repay the debt, and DJT winds up in those Great Bankrupt Fields in the Sky.
It probably doesn't help that in a recent big business magazine survey, Trump Hotels and Casino Resorts placed last in the race to be America's Most Admired Company. Meanwhile, Wynn's Mirage Resorts has frequently been near the very top of that list throughout the 1990s.
Trump really does not like Wynn. In one of the more memorable press releases issued this decade, reported on two years ago in this Jeff Fischer Rule Breaker recap, Mirage stated: "For [Trump's] inexcusable and inappropriate conduct, there will most definitely be a day of reckoning. The conduct of Trump... threatens the welfare of the shareholders and the employees of the company. Mirage Resorts sympathizes with them [and believes] that the men chosen to lead the company have no understanding of their responsibilities or the rules of proper conduct." This is trash talk the likes of which we rarely witness in button-down corporate America. This is long before the World Wrestling Federation would go public.
"Now Wynn," Trump said, "he's trying to get down there around the marina. As I told you, it's an OK property, but it's not the boardwalk." Ribis shook his head in agreement. So did we. "Plus, I got all the water. So what's he going to do, exactly? I own the water. Wynn will spend a billion five and I have all the water!
"Now you may wonder why I had you in. I give you credit. You guys are very influential. You know my daughter, Ivanka?"
We did. Ivanka, for those not familiar, is an 18-year-old supermodel. (By the way, it's not enough just to be a model anymore, eh? Either you're a "supermodel" or you're auditioning for B movies and telling people that what you really want to do is direct.) As an 18-year-old supermodel, Ivanka has done Sasson jeans ads and hosted the Miss Teen USA pageant. And apparently, she has excellent taste. You see:
"Ivanka reads what you guys write. We get these other nice things said about us on Wall Street, but then she only listens to you guys. She came to me and said, 'Daddy, the Fools say that you have a crummy company.' So that's why I had you in."
Our conversation ran an hour and six minutes. What I'll spare you is the numbers being batted back and forth, earnings before income tax and depreciation (EBITDA) for each of the properties. "E-bit-da this and e-bit-da that," aggregating to $310-$340 million EBITDA next year. "We'll do that." Also: "We're going to refinance the Marina, because it's a prime property that we can get less than 9 percent interest on." More: "We'll do $75 million this year in cash flow, and $100 million next year. We might do better."
I asked my "deeper question," the one that I use to try to understand companies and managers. It's a simple one: "What are your long-term aims, and the long-term aims of your business?" This is what I care about as an investor, and it is this question which often quickly reveals insights not only into a business, but into the character of the person running it. I wanted to know here if he was serious about this "gaming" industry, for the long term.
"Basically, I'm a real-estate developer. I haven't focused enough on Trump Hotels and Casino Resorts, but I plan to. This is important to me."
It does have his name. But we are then handed a brag sheet showing his other company, his private real-estate company which owns, for example, the building we were sitting at the top of. This company is the one investors would find more interesting, one that has many admirers.
It was time to put down the Styrofoam cup of Coca Cola and walk out. "I have always said," said CEO Ribis, "that the greatest asset any business can have is Donald J. Trump. And now you have met him, and so now you can agree with me." Uh, whatever. On the way out, I asked the affable Mr. Ribis how much of Donald's time would actually be devoted to DJT. "We think we'll get 50% of his time," was the answer. That might not sound like the amount you want from the chairman of a company, but then again, it was more than he'd been giving. Which had been his point.
OK, to the point.
We have held this short position with the belief that Trump Hotels and Casino Resorts will go bankrupt. We've been pretty good with shorts; actually, sometimes we haven't been "greedy" enough. Take our previous short, Quarterdeck, which made us a cool 20%.... But, if we'd only held!
For two years we have watched DJT largely flounder as a public company, having shorted it at $8 1/2 on April 30, 1997, and seeing it close today under $5. With the S&P 500 up 67.8% since that day, we've managed to find a short that lost more than 40% of its value over that time. This will rank among our best shorts ever, especially given market conditions.
But following our meeting with Trump, we no longer believe that DJT will go bankrupt anytime soon. Perhaps Trump is just a convincing salesman, with nothing to back it up. All the talk is about the future. I really don't know; perhaps I don't have enough of the "e-word" (Experience) to evaluate this yet. "I give you my word," he said, looking us straight in the eye. "We are totally focused on reducing the debt, paying off the debt, and increasing cash flow." We are willing to give him the benefit of the doubt. If he follows through, our short will certainly not be profitable from here. A big "if," right? No doubt about that.
But in the end -- I confess it! -- I liked The Donald. I liked Ribis. You have to admire some aspects of Trump, and for me personally it starts with his willingness to invite us over in the first place. There's something very Foolish about that. He's made some mistakes, he'll be the first to tell you, even if he goes on to qualify the statement. And he's in a business for which I have no admiration and very little respect. But the last image I had as I walked out of his office was him pointing to his phone, saying, "You can call me, anytime. I'll answer your questions."
We live in a world today in which some companies I otherwise admire won't even allow us private shareholders to listen to their quarterly conference calls!
"You can call me, anytime. I'll answer your questions."
In the next five days, we are covering our short sale of Trump Hotels and Casino Resorts. It is time to move on, and I believe we can find other better shorts from here. We'd love to hear from you on our Rule Breaker Companies message board! Or drop us a line over in our DJT discussion.
Fare thee well, Donald.
-- David Gardner, September 8, 1999
So there we were, standing in the spaciousness of the gilded and marbled lobby of Trump Tower, pressing the UP button.
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