Cramer: Own Powerhouse Bank or Superstar REIT?
Jim Cramer loves sports.
And after watching Miami face-off against San Antonio in the NBA Finals, Cramer decided to develop a Mad Money series that would run parallel with the basketball championship.
When compared to one another, which is the better play?
Cullen/Frost is a Texas regional bank that's mainly in the business of making commercial and consumer loans. The company has 110 financial centers and 1,100 ATMs across the Lone Star State, with $23.1 billion worth of assets.
"These guys have a solid track record of responsible underwriting with lower than average loan losses, and at the same time, the company has a very low cost deposit base," Cramer said. "In fact, 40% of Cullen/Frost's deposit base is made up of non-interest bearing deposits. That's huge, because a regional bank like Cullen/Frost makes money every day through something called net interest margin, the difference between the rate they pay depositors for their money and the higher interest rate they charge borrowers," Cramer explained.
In addition, as a regional bank that serves Texas, Cramer said Cullen/Frost operates in a very business friendly state.
"Texas has low taxes, a booming oil and gas industry, a robust economy, a thriving housing market, relatively rapid population growth and an unemployment rate of just 6.4%, more than a full percentage point below the national rate. Those are good conditions for a bank."
Equity One is a Florida based REIT or real estate investment trust with 142 properties in 13 states, however the bulk of them are located in South Florida, California and the Northeast.
"Equity One has a lot of exposure to properties in urban areas, and that's prime real estate, as a combination of land constraints and zoning restrictions makes it fairly difficult to build new urban retail space," Cramer explained.
Cramer's crunched the numbers and he likes the results.
"Equity One just reported an excellent quarter back on May first, with funds from operations coming in at 31 cents, a 3 cent beat. The company's occupancy rate rose 60 basis points to 91.8%, and their same property net operating income increased by 3%. Plus, Equity One plans to boost these numbers by selling its 15 worst properties, something that could bring in about $450 million," he said.
So, which is the stock to own right now?
Cramer said comparing such different companies, a Texas-based regional bank and a Florida-based REIT, illustrates an important investing concept.
"When you're choosing between companies in different sectors, you need to look at more than just the characteristics of each business. You have to consider the overall environment, because, the truth is, both Cullen/Frost and Equity One are high quality operators within their respective areas," Cramer said.
And what matters most in this comparison is the recent spike in interest rates and the potential for even higher rates in days to come.
"That makes Cullen/Frost Bankers the stock to own here," Cramer said.
Higher rates could generate negative ripples across a swath of real estate which makes a REIT such as Equity One dicey right now.
However, "higher rates are great news for a bank because they mean the bank can make more money off of its loans, which results in a better net interest margin. Plus, because Cullen/Frost is a regional bank, it doesn't have any international baggage, unlike the big boys in the industry that get hammered when there are problems overseas," Cramer said.
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