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January 2008

Wall Street Losers

Slats turns an eye on real estate in the mountains.

Written by Seth Masia | 0 comment

The leaves had turned, but the lifts hadn’t. Slats sat at the bar, watching the Sox clobber the Rox. He appeared especially jovial.

“You’re not a Red Sox fan, are you, Slats?”

“Nah. My dad grew up in Brooklyn.”

“So why the broad grin?”

“I’ve been enjoying the collapse of both Pillage Investments and Drawbridge Partners since the Ultrabeast sale. They’ve both lost about 80 percent of their value since a year ago. The Masters of the Universe bought low.”

“I thought the Drawbridge bubble had a lot to do with Ultrabeast’s weak real estate sales.”

“Of course it did. The geniuses at Drawbridge never foresaw it. I did. Didn’t I dump my condos two years ago?”
“You saw this coming?”

“Sure. You can’t keep building units in a limited market and expect the prices of your new units to keep going up, or even hold.”

“I don’t get it. Prices of ski town real estate keep going up!”

“But not the prices of village condos, which is what these guys were selling. It’s simple arithmetic. Let’s say I have a new village going up and the plan is to build and sell 100 units a year. First year I sell out and there are 100 units on site. Second year I sell out and there are 200 units on site. Meanwhile 20 or 25 original units have come onto the market, so by year three I’ve got my own inventory of 100 units, plus I’m competing with a resell inventory. Every year, about 25 percent of the built units come into that resell inventory. By year five, the available resells outnumber my 100 new units, and prices have softened, a lot.”

“Where do you get this 25 percent turnover?”

“Look it up. Across the board, every year about 20 percent of American workers change jobs or retire. And a certain percentage divorce or marry. So, say 25 percent find they need the money for a new home or to settle a divorce, and the two-room condo has to go, and maybe for less than they wanted. Meanwhile, inventory has climbed beyond the ability of the lodging management to fill the rooms, and the owners are losing money on the rental end. That’s another reason to dump the place.”

“So every condo village is a self-limiting progression?”

“Looks that way. It’s good for the local realtors, who get to churn the resell inventory forever. But the smart developer gets in, makes a killing the first couple of years, and then unloads the whole deal on some unsuspecting Wall Street genius.”

“But this means that most of the big ski village developers are . . .”

“Dinosaurs. Dodos. Dead ducks.”

I stared glumly at the TV and contemplated the demolition of the Rockies. “A guy like me, with my retirement savings in mutual funds, sort of hopes that Wall Street is smarter than that.”

“Some of them are. Look at Warren Buffett. He buys companies with real potential, and leaves their management guys in place. He gives them some extra capital to grow with, and counts his profits in jillions. But these other guys who think they’re just flat smarter than ski industry rubes, they just never learn. This happens again and again.”

“Examples?”

“The folks who thought they could resuscitate ASC. How long was that corpse on CPR?

“You don’t even have to read history to understand this stuff. You just have to read the trade press.”

“So what’s the lesson?”

“Playing in the Big Leagues doesn’t make you brilliant. You have to understand the fundamentals. Don’t bet on Denver teams.”