Mad Money

Cramer: REIT-mania extends to gymnasium


There are timber REITs, apartment REITs, hospital REITs, retail REITs and now a gym REIT.

"A couple of weeks ago, Life Time Fitness, the owner of about 112 fitness centers across the country, announced that it was exploring the idea of converting into a real estate investment trust," Cramer said.

According to the plan, Life Time Fitness would split company into two entities, a regular operating company that runs the fitness centers and related services, and a property company, a REIT that would own, acquire and lease the real estate, with the operating company being their only tenant.

Source: Lifetime Fitness

Cramer's crunched the numbers and he thinks the move could unlock significant value, in part because a REIT must pay at least 90 percent of profits to shareholders in the form of a dividend,

"Let's start with the REIT side of things. Assuming that the REIT component can pay out a 6 percent dividend yield, which is only slightly above average for somewhat similar hospitality REITs, you get a business that's worth $25 per share," Cramer said.

Then, as a health club operator, Cramer said, conservatively, the company should be awarded an enterprise multiple of 6.5. "That puts the operating company around $35 per share. And that's being conservative."

Add the two values together and you get Cramer's price target of $60 for the combined entity; for the sale of comparison shares closed at $49 and change on Tuesday.

Now it should be noted that the Life Time's plan needs to be ok'd by the IRS and "given how inscrutable the IRS is about these things, it's possible that Life Time won't get the nod."

Also, given that Life Time Fitness would be the first fitness center REIT in existence, it's possible the valuations used in Cramer's calculations my not reflect the real world valuations.

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However, despite those potential headaches, Cramer thinks the risk is well worth the reward.

"The average REIT typically trades at a much higher price to earnings multiple than the average stock in the S&P 500; typically it sells for more than 22 times earnings," Cramer said. "And even though shares have already jumped more than 20 percent in a month, I think the path of least resistance remains higher. I think Life Time Fitness is a buy."

Call Cramer: 1-800-743-CNBC

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