Forget About Assets; Now Think Income
It sounds like a story from the 1980s, when the game was asset appreciation and big investors bought properties and businesses in the belief they could always sell them at a higher price. Donald Trump buying New York’s Plaza Hotel in 1988 is a perfect example.
But this is a new decade and the game is changing. The question will be how much income a business can earn--not how much it can fetch in a sale of assets. It’s a time to shift perspective, and if you pay attention you can see the smart money selling out of yesterday’s game to buy into tomorrow’s.
Specifically, the news is that Marvin Davis is entertaining a bid of $400 million for 49% of Pebble Beach Co., owner of some of the world’s most spectacular golf courses and real estate. Davis bought the property for a fraction of that price when he acquired the Twentieth Century Fox film studio in 1981.
Davis, 65, a one-time oilman, always has been a timely seller. He saw the writing on the wall in 1981 and sold his oil company to Canada’s Hiram Walker distillers for $630 million--just before the price of oil took a decade-long nose dive.
Then, with some of the cash from oil plus borrowed money, he bought the film studio, and its extensive real estate, for $800 million. Davis subsequently sold some of that real estate to pay down debt. And then he sold the film studio in 1985 for $650 million, but kept Pebble Beach, with its four golf courses and two hotels in the beautiful Monterey area of California.
Now he is taking bids on Pebble Beach that value the company at $800 million--just when enthusiasm for golf properties is at white heat. The boom can be seen in recent attempts to pay almost $1 billion for the golf course properties of Carmel-based Landmark Land Co. or in Bob Hope’s attempt to give 5,700 acres of land to the federal government in return for permission to build a golf and residential community. Golf is hot on Main Street; “The Golf Boom” says the headline in Sports Illustrated. And on Wall Street: presenting a stock issue for Toro Co., the lawn mower firm, Goldman Sachs stresses how much Toro equipment is used on golf courses.
But the boom is riding on a concept--that aging baby boomers will turn from tennis to less strenuous golf--and on soaring expectations of revenues. Already, golf courses are charging greens fees of $50 to $200 a round in an attempt to recover costs of course construction or recent purchase.
When fever gets that high, smart money takes a walk--as CBS Chairman Laurence A. Tisch did three years ago when record amounts were being offered for magazine properties. Tisch sold CBS Magazines for $600 million and was criticized because prices subsequently went higher. But today magazines are struggling and folding, almost without bidders, and Tisch’s timing looks shrewd.
Similarly, Robert Bass sold Trump the Plaza Hotel for $390 million in 1988. Now, two years later, Trump would be happy to get $350 million for the hotel he called a “trophy property.”
What do smart investors look at that others don’t see? They look for income, not stories or concepts. Barton Biggs, director of investment strategy for Morgan Stanley, sizes up the Plaza Hotel as Bass might have seen it. The hotel can earn $25 million a year, Biggs estimates, which indicates a 6% pretax return on the $390 million Trump and his banks put into it.
That’s not an adequate return, but Trump, believing that there would always be a higher-price buyer for the Plaza, wasn’t thinking of income. He should have been, for buyers are scarce these days.
Meanwhile, having sold out at the peak of New York real estate, Bass put $400 million into a savings and loan. Bass took over American Savings & Loan, the big California thrift that was near bankruptcy, in a deal in which the government took the worst assets off his hands. Now, less than two years later, American has returned to strong profitability and Bass, having correctly calculated its potential, has a winner.
That kind of investing will characterize the new decade, says Biggs, a time when smart money will look for a company’s income, not its liquidation value. It will be a time when commercial buildings go down in price, and houses no longer qualify as sure-fire investments. So smart money will go into high-quality bonds and common stocks.
Which bonds and stocks? One way to know will be to watch what smart folks are buying--to the extent you can discern it through the public chatter. Today, for example, conventional opinion on Wall Street is extremely bearish on banks--large and small, without exception--because of problem loans in real estate. But just as Bass saw value in American Savings, some investors are making distinctions; Warren Buffett is reported contemplating investment in Wells Fargo.
Successful investors think just a little ahead of the crowd, which is why Marvin Davis may be taking money out of golf and real estate today. The trick will be to watch where he puts it.
