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.

In a curious side effect of the stock market's shakeout this week, two companies that have already agreed to buyouts at hefty premiums have become screaming buys again.

Hilton Hotels ( HLT) and Penn National Gaming ( PENN) -- two components of the Bricks and Mortar mock portfolio -- have been unjustly beaten down by concerns about financing for their takeovers.

In short, recent financing worries for the buyouts of DaimlerChrysler's ( DCX) Chrysler Group and newspaper owner Tribune ( TRB) have raised concerns that credit will be much harder to obtain for private-equity giants performing leveraged buyouts. Thus, risk arbitrage spreads are widening for buyout deals already in the hopper.

But Hilton and Penn shouldn't run into trouble.

Hilton, which agreed to a $47.50-a-share buyout by Blackstone Group ( BX) earlier this month, has seen its stock fall over the past five trading days on fears about the debt markets. Hilton's stock recently was trading around $44, representing a 7.4% discount to offer price.

The Hilton deal is expected to close in the fourth quarter. Assuming the transaction closes at the end of December, you're being offered an 18.7% annualized return to buy the stock today.

One veteran real estate investment banker says there is zero chance of the Hilton deal not closing. Banks have fully committed to the financing, and even if they can't immediately sell the debt paper, they'll hold on to it in the short-run, the banker says.

There also is "no risk" that Blackstone can't close, he says. Blackstone is in the midst of raising a fresh $10 billion real estate fund and recently sold of most of the assets from its mammoth purchase of Equity Office Properties.

But let's play devil's advocate. Imagine the deal does fall apart. You're left owning a stock with a huge international growth platform and a portfolio of very attractive assets at a reasonable valuation.

Plus, if Blackstone backs away, it must pay Hilton $660 million.

Buying Hilton at these levels is not a no-risk situation. But it does provide a very attractive risk-reward scenario.

Penn National is in a similar boat. The racetrack and casino operator agreed in June to be acquired by Fortress Investment Group ( FIG) for $67 a share. The stock was recently trading around $58.25, representing a 15% discount to the buyout price.

The deal's closing is still 11 to 15 months away. However, the merger agreement specifies that commitment letters are in place for the debt financing from Deutsche Bank and Wachovia.

There could very well be more risk to this debt deal falling apart, given the longer time frame. But if the deal collapses, you're again left with an attractive stock that boasts a reasonable valuation.

Furthermore, the buyout deal totals $8.9 billion, including the assumption of $2.8 billion of outstanding debt. It's not clear how much debt Fortress was looking to employ for the buyout. But the private-equity giant is very well capitalized and could write the check for that entire amount if it wants Penn National badly enough.

On Friday morning, Jefferies & Co. analyst Lawrence Klatzkin upgraded Penn National from buy to hold, saying he believes the buyout deal is likely to be completed.

"As the buyers have committed financing coupled with a termination fee of $200 million, we believe there is little risk the deal would not be completed as planned and thus, the selloff is unwarranted," he wrote.

Portfolio Update

Despite the ugliness of the recent stock market plunge, the Bricks and Mortar portfolio has held up relatively well.

Since its inception in late January, my picks are now up an average 10%, compared with a 3.8% rise in the S&P 500 and a 17.7% decline in the U.S. MSCI REIT Index.

Aside from Hilton and Penn, let me give an update on a few other portfolio names.

Trump's ( TRMP) stock continues to be a dog, which is good for the Bricks portfolio, since I flagged it as overvalued in January. The stock is down 56% since then.

The new credit crunch has very important ramifications for Trump. The casino operator is highly leveraged and is losing money. Thus, any future buyout for the company is becoming more difficult in this market. That's why Trump's stock has fallen nearly 11% over the past five trading days.

This stock is a falling knife. Don't try to catch it. Results in Atlantic City, Trump's sole market, remain ugly in the near term, and the private-equity hopes are gone.

Elsewhere, Ryland's ( RYL) earnings held up better than other homebuilders. Of course, the company still lost $53 million in the second quarter. Land impairment charges were at the low end of guidance, but most analysts expect more of these charges to come for the entire sector.

I continue to flag Ryland's stock as overvalued, because the housing market will only get much worse over the next year. The concept of book value for homebuilders has become a joke, because impairment charges keep mounting. Stay clear of buying Ryland.

Earnings from one of my "buy" holdings, Brookfield Properties ( BPO), came in better than expected Friday.

The office owner said second-quarter funds from operations totaled $167 million, or 42 cents a share, up from $106 million, or 30 cents a share, a year earlier. Analysts expected 35 cents a share.

Funds from operations, or FFO, is a common real estate performance metric that adds back depreciation and other non-cash items to net income.

Brookfield also raised its full-year guidance because of strong residential land sales in Canada and strong fundamentals in its commercial real estate portfolio. Brookfield now expects FFO of $1.50 to $1.60 per share, compared with its previous guidance of $1.40 to $1.47.

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 $21.95 -23.4%
Global Real Estate ETF (RWX) 1/23/2007 $64 Own $61.00 -4.7%
Ryland (RYL) 1/23/2007 $56 Flag $33.27 40.6%
Trump (TRMP) 1/23/2007 $17.50 Flag $7.81 55.4%
Penn National (PENN) 2/6/2007 $45.56 Own $56.79 24.6%
Hilton (HLT) 3/2/2007 $34.69 Own $43.36 25.0%
Melco PBL (MPEL) 3/12/2007 $15.46 Own $12.14 -21.5%
Home Solutions of America (HSOA) 4/24/2007 $4.98 Flag $4.74 4.8%
Starwood Hotels 7/12/2007 $72.37 Own $64.26 -11.2%
Average Total Return, Unweighted 10.0%
Close At Start of Portfolio Current Value
S&P 500 1427.99 1482.66 3.8%
U.S. MSCI REIT Index 1140.36 938.51 -17.7%
*(7/26/07 closing 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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