Last year Forbes published an analysis by James Elkins, a professor in the finance department at the University of Texas, that concludes Mr. Trump has underperformed the average real estate professional in the US by a whopping 57% over his career, despite the boost to returns he achieved by maintaining almost twice the average amount of financial leverage.
The results are highly tentative. Prof. Elkins uses a REIT index as a proxy for overall real estate returns. He also employs Mr. Trump’s statement of his starting net worth and the Forbes $4.5 billion estimate of his 2016 wealth (the 2017 estimate is $1 billion lower).
On the industry benchmark, my experience with real estate moguls, mostly outside the US, is that the returns on their private real estate investments are generally higher than those they achieve in their publicly traded vehicles. In Mr. Trump’s case, his net worth includes his considerable earnings as a reality show star, as well as the potentially positive effect of debt forgiveness through bankruptcies.
In short, the 14.4% annual return on equity Elkins uses for the industry is probably too low and the 12.5% return he figures for Trump is too high.
My question is what the returns on capital are in the Elkins example.
According to Elkins, REITs have an average debt to equity ratio of about 30%. This means they have a mix of roughly three parts equity, one part debt. Assume that their average cost of debt has been 8%–a figure that seems reasonable to me but which I’ve just plucked out of the air. If so, their 14.4% return breaks out into roughly a 13% return on capital (actually operating real estate ventures) and 1.5% from using financial leverage.
This calculation implies that Mr. Trump’s 12.5% return breaks out to something like 9.5% from real estate and 3% from financial leverage.
At first glance, the difference between a 14.4% annual return and a 12.5% return doesn’t seem like much. Prof. Elkins’ point is that over a career being a relative laggard adds up. In this case, it translates into having $4.5 billion instead of $23 billion. Mine is the numbers flatter Mr. Trump’s planning and management skills, which fall more deeply below the average in the real estate industry than his overall results.