Editor's note: "Bricks and Mortar" is a new series of columns written by real estate reporter Nicholas Yulico and meant to help TheStreet.com readers generate real-estate-related stock ideas.


Last week proved to be a busy one for the Bricks and Mortar portfolio, with earnings reports from Penn National Gaming ( PENN), Brookfield Properties ( BPO) and Trump Entertainment ( TRMP).

The end of the week also saw a sharp sector-wide selloff among REITs, homebuilders and casino operators.

The downtick was a natural correction, since each of these sectors has been off to a hot start this year.

I still believe that adding quality names among REITs and gaming companies remains a solid investment strategy. Meanwhile, the disastrous news from subprime lender New Century ( NEW) and the disappointing order numbers from Toll Brothers ( TOL) only reinforced my bearish opinion of housing stocks.

I'll start off the discussion this week with Penn National, a casino stock I recommended last week prior to its earnings. Since that time, the stock is down 2.4% because its earnings missed Wall Street's target by 6 cents a share.

Is it still worth owning Penn? The short answer is yes, because the earnings report represented only a small hiccup.

Meanwhile, the earnings reports from Brookfield and Trump also helped to solidify my opinion of those stocks.

Penn National (Own)

Much of Penn National's quarterly earnings miss was due to higher-than-expected depreciation charges and costs associated with the company's failed attempt to purchase Harrah's ( HET).

On a property cash-flow level, results remained strong, particularly at Penn's two largest properties. EBITDA, or earnings before interest, taxes, depreciation and amortization, rose 18% at the Charles Town casino in West Virginia and 7% at the Lawrenceburg riverboat casino in Indiana.

The disappointing news was that the opening of the expansion at the Lawrenceburg casino in Indiana has been pushed to mid-2009 from late 2008.

For 2007, Penn National forecast earnings per share of $1.86, below analysts' mean estimate of $1.90. The guidance implies that EBITDA margins will drop from 28% in 2006 to 26.4% in 2007.

On Friday, Jefferies analyst Larry Klatzkin cut the company to hold from buy, citing valuation concerns. Shares fell 3.8% to close at $44.48.

"Currently, we believe the stock is fairly priced, however, the fundamentals and long-term value remain strong at PENN," Klatzkin wrote.

On a more positive note, Brean Murray analyst Ryan Worst said the selloff in the stock presented a buying opportunity.

CIBC analyst David Katz maintained his sector outperformer rating and raised his price target on Penn from $47 to $52.

At around $44.50, the stock remains attractive, though it could come under pressure if the sector-wide correction in gaming stocks continues. One short-term positive catalyst remains the possible legalization of table games in West Virginia, which would be a huge score for Penn and would immediately add $1 to $3 per share in value.

Brookfield Properties (Own)

With office stocks, it's possible to be both cautious and optimistic. The past month has seen a heated bidding war for Equity Office Properties ( EOP), which ended last week.

Mike Kirby, the director of research with Green Street Advisors, told me last week that even if valuations are getting stretched, now is no time to be bearish .

The reason is that fund flows into commercial real estate continue to remain strong, and that will prop up valuations this year. Rents for office properties in major cities, meanwhile, continue to grow at a steady clip, on the basis of a healthy economy.

Brookfield's earnings were essentially in line with estimates. The company's funds from operations, or FFO, rose 16%. FFO adds back depreciation and amortization charges to net income.

One of the most interesting parts of the conference call was when Brookfield CEO Rick Clark said that the bidding war for Equity Office Properties represented yet another new repricing upward for quality office buildings in major cities.

Last week, Blackstone Group closed on the purchase of Equity Office after fending off a rival offer from Vornado Realty Trust ( VNO).

"We're all going to send Steve and Mike a box of candy for Valentine's Day for what they did," Clark said on the conference call, referring to Vornado CEO Steve Roth and Vornado's head dealmaker Mike Fascitelli.

Even though office cap rates, or initial rates of return, are getting low, market rents are moving fast, Clark said.

Brookfield's supplemental financial data in its earnings report highlighted just how fast those rents have moved over the past year. In the fourth quarter, net market rents (after leasing costs) rose 67% year over year in midtown Manhattan, a key market for the company. From the third quarter to the fourth quarter, market rents rose 7% in downtown Manhattan.

Meanwhile, the high valuation on the EOP deal gives support to Brookfield's attractiveness.

Trump Entertainment (Flag)

Trump's results last week missed estimates as margins came in weak.

Trump declined to give earnings guidance for 2007, citing the uncertain impact of competition from Pennsylvania slots and the partial smoking ban in Atlantic City. Absent some huge private equity deal, there's little to move this stock significantly higher over the next few months.

Ryland (Flag)

There was no news from my other flagged stock, Ryland ( RYL), last week. But there were a lot of data related to the housing sector, with Toll Brothers giving disappointing orders number and guidance. As well, subprime lender New Century practically blew up, losing 40% in two days.

On Friday, St. Louis Federal Reserve President William Poole said the housing market still isn't out of the woods, adding that "at a minimum we can say that we do not have evidence as yet that home prices have stabilized."

Homebuilder stocks could continue to sell off this week on earnings news from KB Home ( KBH) and housing permit data from the government on Friday.

Bricks and Mortar Portfolio
rating date price at rating rating current price* return
Brookfield 1/23/2007 $43.00 Own 46.71 8.6%
Global R.E. ETF 1/23/2007 $64.00 Own 66.9 4.5%
Ryland 1/23/2007 $56.00 Flag** 54.27 3.1%
Trump 1/23/2007 $17.50 Flag 17.5 0.0%
Penn National 2/6/2007 $45.56 Own 44.48 -2.4
*( market close 2/9/07)
**While the stock is down since the initial rating, it is tracked as a positive return for the portfolio, since the stock was "flagged."

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