10/01/2009 | By Christopher M. Wright
Jim Cramer started recommending selected REITs on CNBC's "Mad Money" at the beginning of the summer. His new book "Getting Back to Even" due out this fall will discuss REITs as well as his "accidental high-yielding" philosophy of investing. Real Estate Portfolio magazine recently spent a New York minute with the madman of money and came away with his no-holds-barred views on REITs and what he thinks of his critics. On with the show...
Portfolio: Let's start with a staple of your program, the Lightning Round. Speak to me…Your basic investing philosophy?
Cramer: I like to find stocks with great fundamentals selling at a reduced price-to-earnings multiple versus their growth rate or, alternatively, that pay good dividends. Lots of people who call in to my show have this weird notion that the cost basis doesn't matter. However, I presume the market will go against me and start small in building my positions. I bet against the stock and don't put all the basis on at the same level.
If the market takes good companies down as I presume it will, they become more of a bargain and the dividend yield goes up-I call that the "accidental yield"-so I buy bigger chunks at reduced prices. If a stock takes off instead, of course you can take your gain.
Cramer: I want people who have a long history of being able to return capital to the shareholders, preferably in dividends rather than buying back stock. The REITs I like have been pretty good about returning capital in dividends.
Cramer: I can't stand it when I see a situation overwhelmed by what I call "institutional hot money." Your fellow shareholders can be your enemy. These guys would sell a stock down to nothing, particularly when they have redemptions. That's why you need dividend protection.
…What you learned from Peter Lynch?
Cramer: A good place to start in investing is with something you know and like, and then you do your homework. A place to start would be a Clorox or a Colgate, instead of a specialty chip maker. Then look at whether they are inexpensive versus their peers.
Portfolio: Why did REITs come to your attention in June?
Cramer: Some REITs had much-too-much leverage and were committed to not hurting the bondholders, so they issued a lot of equity. The equity offerings were often at really great prices and the stocks often went up afterwards. If you wait until they've done their equity offerings, then you know that the debtholders aren't going to take control of the company. That's when you want to own the stock.
You haven't had this kind of wholesale price decline and hatred of the group since 1990. That turned out to be a great time to buy REITs. If you bought the ones that were going to survive, you ended up making a ton of money, and I feel the same way now.
Portfolio: Were there specific companies that caught your eye?
The REIT that really got me interested this year was Brandywine Realty Trust (NYSE: BDN). I'm from Philadelphia, and I know how good the Brandywine people are. When they completed a gigantic equity offering, I knew they weren't going to go belly up and the stock was a terrific opportunity.
Mike Fascitelli and Steve Roth at Vornado Realty Trust (NYSE: VNO) are guys I admire. It's difficult to bet against them. I've also been a big, big proponent of Federal Realty Investment Trust (NYSE: FRT) because they have been a huge, huge dividend increaser, with probably one of the best records of any company in America. I think that Don Wood (Federal's president and CEO) never over-extended himself, unlike General Growth Properties.
Over the long term, you've got to bet with Mort Zuckerman at Boston Properties (NYSE: BXP, Fascitelli and Wood. These guys are fabulous real estate investors. Zuckerman, like Sam Zell, is one of our generation's greatest acquirers of real estate. Why wouldn't you get into his REIT at a substantial discount to what you could before?
Portfolio: You arrived at your conclusions at a time when pessimism about commercial real estate was rampant. What did you see that others were missing?
Cramer: If those people had been right and commercial real estate was falling apart like so many believed, you would have had many more collapses like General Growth by then.
Some companies overpaid for properties at the top of the market in 2006 and 2007. Everybody who made big acquisitions then got hurt. But you have to recognize that much of what was bought beforehand is still good. The bears simply lumped everything in together and said the whole sector was bad. What I'm saying is, "no!" only some buyers were bad. The sector is good.
Portfolio: Manipulation by hedge funds, the spreading of false rumors, Madoff-style scams, you've commented on all of these. Why should individuals be in the market if the deck is so stacked against them?
Cramer: You should be in stocks because there's really not a lot of value in bonds. They yield much lower now than they have in my lifetime. You have a much better opportunity to compound your returns with stocks that pay good dividends or my accidental yield approach, even if the tax advantage of dividends is changed some degree by President Obama.
And I've never seen growth priced as cheaply as it is right now, because most people feel like we're going to be in some kind of permanent recession. I believe there's always a bull market somewhere.
Portfolio: What do say to those who highlight your recommendations that don't work out?
Cramer: If all my recommendations worked out, then I would never fool around with a TV show. I would just go and be rich as Croesus. Anyone who claims they're right all the time is a liar.
Portfolio: You make a distinction between being wrong and being catastrophically wrong. How do you manage risk?
Cramer: If you pick stocks that have decent balance sheets and have historically provided good returns or raised dividends, you have a far better chance of making money than where the balance sheet is challenged and you have to fight bondholders for the equity.
Portfolio: How can viewers tell whether you're recommending a stock for a quick flip or longer term?
Cramer: I do "Speculative Friday" which is clearly meant to be trading. Aside from that, I've generally been recommending the same stocks for more than a year and a half-oil, technology and banks-it's hard to call those trades.
And I constantly tell people not to buy the bump, even though I get criticized for it. I would buy momentum if I felt a lot of money could be made, but momentum is a dangerous strategy in a market as vicious as this one.
Portfolio: You've alluded to your critics, of which there have been many over the years. What have you learned about handling controversy?
Cramer: If you're going to be in the arena, then you've got to expect to be criticized, as Theodore Roosevelt pointed out. I don't read most of the criticism directed at me because it doesn't do me any good. I'm widely criticized and, if you take counsel of your critics, you would change what you do. I've had a very successful record since 1979, and I don't want to change that. If it ain't broke, don't fix it.
Editor's Note: Cramer held no position in or had any professional relationship with any of the companies mentioned herein at the time of this interview. This article originally appeared in the September/October issue of Real Estate Portfolio magazine.