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


The buyout of Hilton Hotels ( HLT) is a huge score for investors and sent the entire lodging sector surging Thursday.

Unfortunately, the buyout, and subsequent sector run-up, leaves few big stock-buying opportunities left in the hotel space. But there are some plays that could still win big.

Readers of this column know that I've been recommending Hilton since early March. The story was simple: You could buy the stock for a multiple that was cheaper than trying to buy one actual Hilton property in Kansas. Plus, the stock offered a huge international growth platform.

With Hilton on its way out, there are three lodging stocks left that investors should eye: Host Hotels ( HST), Strategic Hotels ( BEE) and Starwood ( HOT).

Today, James Altucher and Jim Cramer decided to throw in their hotel picks, too. (You can read Altucher's take from Stockpickr, and watch Cramer discuss his ideas on TheStreet.com TV.)

Incidentally, both say that Wyndham ( WYN) is the most likely buyout candidate. I'd caution investors who are buying Wyndham because they believe it is a cheaper version of Hilton. Wyndham has much heavier exposure to timeshares and a different overall business model than Hilton.

There are better picks out there.

The Hilton deal "provides what is likely the most powerful data point yet that the public lodging companies are priced at a material discount to their private market values," said a research report from John Arabia, an analyst with Green Street Advisors, an independent real estate research shop.

Even after the run-up in stock prices Thursday, Arabia believes that there is still value in the lodging space because the stocks are trading well below what their assets are worth on the private market.

Strategic Hotels, a REIT that owns luxury hotels across the U.S. and Europe has a net asset value (or private market value) of $28 a share, Arabia said in an interview. This means Strategic, whose shares were up 5.6% to $23.59 Thursday, is trading at a 16% discount to Green Street's private market value.

"If management doesn't the close gap, somebody will close it for them," Arabia says.

Host Hotels, the largest hotel REIT, which owns a high-quality portfolio of luxury assets across the U.S., is also worth $28, he says. Host shares surged 9% to $26 Thursday, but that still represents a 7% discount to Green Street's NAV estimate.

Using NAV estimates is more helpful than just applying Hilton multiples to every hotel stock. Blackstone is buying Hilton for certain synergies with its existing hotel portfolio, so direct comparisons are difficult.

Starwood, owner of the Sheraton, Westin and W Hotels brands, is probably the most comparable company to Hilton. Starwood shares recently were up more than 7% to $74.28.

On a quick glance, Starwood might look cheap at $74 in comparison to Hilton's takeout valuation. Hilton is being bought at over 15 times Wall Street estimates for 2007 earnings before interest, taxes, depreciation and amortization.

Starwood is trading around 13 times EBITDA. If you think Starwood deserves a 14 multiple, the stock is worth around $80. You can even make a case for $90, some analysts and buy-siders say.

While the Hilton news is great for the sector, it does make finding new lodging bets tough. I'm sharpening my pencils on a number of these companies, but I'm not making any additions to my portfolio just yet.

As a hedge fund manager who invests in the space and owned Hilton shares tells me: "Today got rid of a lot of the juice left in the sector."

Bricks and Mortar Portfolio
A Look at How Nicholas Yulico's Picks Have Performed
Rating Date Price at Rating Rating Current Price* Return**
Brookfield Properties (BPO) 1/23/2007 $28.67 Own $24.83 -13.4%
Global Real Estate ETF (RWX) 1/23/2007 $64 Own $65.59 2.5%
Ryland (RYL) 1/23/2007 $56 Flag $37.06 33.8%
Trump (TRMP) 1/23/2007 $17.50 Flag $10.81 38.2%
Penn National (PENN) 2/6/2007 $45.56 Own $60.24 32.2%
Hilton (HLT) 3/2/2007 $34.69 Own $45.41 30.9%
Melco PBL (MPEL) 3/12/2007 $15.46 Own $12.76 -17.5%
Home Solutions of America (HSOA) 4/24/2007 $4.98 Flag $5.89 -18.3%
Average Total Return, Unweighted 11.1%
Close At Start of Portfolio Current Value
S&P 500 1427.99 1524.65 6.8%
U.S. MSCI REIT Index 1140.36 1041.26 -8.7%
*(7/5/07 afternoon prices)
**For "flagged" stocks, a drop in price is tracked as a positive for the portfolio, and a rise in price is a negative.

'Bricks and Mortar' is a mock portfolio meant to generate investing ideas. In keeping with TSC's editorial policy, Yulico doesn't own or short individual stocks. He also doesn't invest in hedge funds or other private investment partnerships.

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