Trump Cashes In On Property Sale

Shares of Trump Entertainment TRMP surged more than 25% Thursday on news the casino operator inked a deal to sell one if its Atlantic City properties for a healthy price.

Trump -- a stock I've been flagging as overvalued in the Bricks and Mortar mock portfolio since last year -- sold the Trump Marina for $316 million to a private developer that plans to turn the property into a Margaritaville-branded resort.

The price amounts to 11 times 2007 earnings before interest, taxes, depreciation, amortization at the property. This is a bullish multiple on first glance. However, the property's EBITDA was also down 40% to $29 million in 2007.

The sale price amounts to just 6.6 times the 2006 cash flow at the property.

The sale is a mixed blessing for Trump. The company is losing one of its three properties in Atlantic City, a popular destination for families and retirees, but it can use the proceeds to reduce its heavy debt load.

The property is located in the city's marina district, where MGM Mirage MGM is planning a massive casino development in the future and where the popular Borgata Resort is located.

Trump shares surged 76 cents, to $3.65 in recent trading -- a rally that's likely helped by some short-covering, since 24% of the stock's float is sold short.

A good way for investors to think about the sale is as follows:

Trump is losing about $30 million of annual EBITDA from the Marina casino (using the 2007 annual number) but will no longer need to sink maintenance capital expenditures into the property, which I estimate at roughly $15 million annually. Thus, the net loss is about $15 million of free cash flow.

Receiving a $316 million payment for that lost cash flow represents a very attractive price for Trump.

If all of the sale proceeds are used to reduce debt, then Trump should now have outstanding debt of around $1.39 billion, with $121 million of cash.

Absent the Marina property, I estimate Trump's free cash flow will now be around $110 million in 2009. This year, cash flow is messy given the weak Atlantic City market and the massive capital expenditures for the development of a new hotel tower at Trump Taj Mahal.

Given the firm's high cost of capital and a tough Atlantic City operating environment, I continue to think Trump shares represent a difficult investment. Later this year, smoking is set to be banned on all casino floors in the market, expect for isolated smoking lounges. Meanwhile, the slot parlors of nearby Pennsylvania continue to reduce travelers to the Atlantic City market.

However, today I am removing my flag rating on Trump's stock, as I now think all the negativity in Atlantic City has been properly priced into shares.

I will be removing Trump from the Bricks and Mortar portfolio at the stock's closing price today.

Even with today's rally, shares are still down about 80% since I flagged the stock as overvalued in January 2007, making it the portfolio's best position (since flags are equivalent to short sales).

Bricks and Mortar Portfolio A Look at How Nicholas Yulico's Picks Have Performed
	Rating Date	Price at Rating	Rating	Current Price*	Total Return**	Year-End '07 Price	2008 YTD Return
Brookfield Properties (BPO)	1/23/2007	28.67	Own	20.22	-29.5%	19.25	5.0%
Global Real Estate ETF (RWX)	1/23/2007	64.00	Own	54.56	-14.8%	56.95	-4.2%
Ryland (RYL)	1/23/2007	56.00	Flag	28.15	49.7%	27.41	-2.7%
Trump (TRMP)	1/23/2007	17.50	Flag	2.89	83.5%	4.30	32.8%
Penn National (PENN)	2/6/2007	45.56	Own	45.05	-1.1%	59.55	-24.3%
Melco PBL (MPEL)	3/12/2007	15.46	Own	12.25	-20.8%	11.56	6.0%
Starwood Hotels (HOT)	7/12/2007	72.37	Own	50.08	-30.8%	44.03	13.7%
Home Depot (HD)	1/30/2008	29.71	Own	27.43	-7.7%		-7.7%
Pulte Homes	1/31/2008	16.35	Flag	12.61	22.9%		22.9%
Average Total Portfolio Return, Unweighted, (including closed ratings)					18.8%		7.6%
Closed Ratings	Rating Date	Price at Rating	Rating	Closing Price***	Return**
Hilton (HLT)	3/2/2007	34.69	Own	47.50	36.9%
Home Solutions of America (HSOA)	4/24/2007	4.98	Flag	1.06	78.7%
Standard Pacific (SPF)	10/26/2007	5.25	Flag	2.20	58.1%	3.35	34.3%
	Close At Start of Portfolio			Current Value*
S&P 500	1427.99			1,390.84	-2.6%	1468.36	-5.3%
U.S. MSCI REIT Index	1140.36			921.63	-19.2%	870.64	5.9%
*(5/28/08 closing prices) **For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative. ***Hilton closed out of portfolio on 10/26/07 because Blackstone Group completed purchase of firm. HSOA closed out of portfolio on 12/26/07 at day's closing price SPF closed out of portfolio on 1/11/07 at day's closing price