Texas financier Richard Rainwater's

Crescent Real Estate Equities

(CEI) - Get Report

has made some decisions of late that put the real-estate investment trust back in favor with investors. Most recently, on Friday, Crescent ended its agreement to acquire

Station Casinos

(STN) - Get Report

for $1.7 billion.

A poker-faced move on Rainwater's part. Cut your losses before you get into something you don't understand or isn't one of your core competencies, for it can turn out to be a bad hand even before the draw. Using Station's postponement of a shareholder meeting as the trump card, Crescent said it would seek a court order to terminate the merger and force Station to pay a $54 million termination fee as a result of the failed combination.

Termination is the right move for Crescent; investors were never fans of the proposed merger, sending Crescent's stock plunging after the deal was announced.

While termination is a good bet for Crescent, it may roll "craps" for Station. The casino operator is suffering from mounting debt, a possible liquidity problem and the liability of legal uncertainties surrounding riverboat operations in Missouri. Without Crescent, Station's growth and renovation plan may be in jeopardy. "The prospect of Station finding another potential acquirer

is uncertain," said

Donaldson Lufkin & Jenrette's

Brian Egger in Monday's research note. Said one buy-side analyst, "If I were a Station stockholder, I would be totally embarrassed by this situation. If I was a Station preferred holder, I would slash my wrists."

As for Crescent, other recent moves suggest the company may be repositioning itself for more focused operations. Talk abounds that the company may unload its investment in

Magellan Health Services


, a troubled mental-health provider. That would leave three core real estate ventures for the company: office properties, luxury lodging properties and the cold storage business. The company also has interests in a dozen high-end residential developments, primarily in Texas and Colorado.

Clearly, Rainwater's core business is office property, especially in the Southwest, where Crescent's properties are concentrated. Bets on continued growth in the Dallas and Houston markets have been rewarding, although many believe those markets are close to their peaks. One estimate suggests an additional 10.7 million square feet of speculative office space is set to open in Dallas over the next 24 months, something that could impact Crescent's rents. Additionally, the company's Texas office tenants are highly concentrated in the energy sector, a focus many see as "problematic."

However, Crescent management argues that acquisitions of properties with below-market lease rates provide a cushion for future earnings growth. For example, the company expects to gain $4 a square foot on 12 million square feet of Dallas office space over the next six years. On average, the company's 35-million square foot office portfolio is leased at $4 a square foot below fair market value.

While Rainwater's portfolio is impressive, skeptics still aren't convinced his strategy will pay off in an eventual economic slowdown. "We have to question this 'deal shop' strategy of chasing greater risk for higher reward," says one buysider. "With so much of Crescent's

earnings coming from homebuilding, high-end resorts and high-end suburban office

s, this company is one of the more cyclical risks in the REIT industry."

In a recent attempt to expand its geographic presence, Crescent agreed to take a 50% stake in

Tower Realty Trust


in a partnership with

Reckson Associates

(RA) - Get Report

, a Long Island REIT. Tower gives Crescent a major presence in Manhattan real estate, albeit a lower-end presence. Tower controls just over two million square feet of primarily "Class B" office space in Manhattan.

With both Crescent and Reckson having "aggressive" reputations, analysts look for the partnership to acquire more properties. "I don't know if we'll be interested in paying some of New York's trophy prices, but we will look at all opportunities," said Crescent CFO Dallas Lucas in a recent interview. Ironically, Lucas will leave Crescent at the end of this week to become a partner at

NorthStar Capital Partners

, a New York City real-estate investment firm.

Both Crescent and Reckson expect the Tower partnership, to be flagged

Metropolitan Partners

, to have a marked impact on their bottom line. However, skeptics believe the purchase may turn out to be a lot of work for not so much reward. Lower-end real estate is management intensive. "This is down and dirty real estate," quipped one manager. It is also new territory for both Crescent and Reckson. As most of Tower's management is out, it is uncertain where the companies will find the expertise for this type of property management.

The Tower deal also creates even more cyclical risk for Crescent, according to our buysider. "The Tower assets are the kind that are the last to participate in a real estate recovery, and the first to suffer in a slowdown," he said. "That's why 'Class B' and 'C' assets always look cheap from a cap rate or price per foot standpoint."

Whatever the concerns, investors seem to be reassessing the potential for Crescent. While off its recent lows, at $30, the stock is still 25% below its high of $40 reached late last year. Given consensus earnings estimates of $2.74 for this year and $3.39 for next, many believe Crescent is now a value play. If Rainwater's penchant for winning with long shots continues, the bet could mean another big payoff.

Building Blocks

REIT earnings continue to trickle in and the numbers continue to look good. Among the winners are retail and office REITs. While still positive, single-family developments and apartment REITs show slower growth. We'll take a look at the winners and losers in next week's Building Blocks.

While established REITs like Sam Zell's

Equity Residential Properties Trust

(EQR) - Get Report


Mack-Cali Realty

(CLI) - Get Report

have approved stock-buyback programs, the number of REITs filing for IPOs is reaching levels of late 1997 and early 1998, the beginning of the current REIT price contraction.

REITs looking to float IPOs include:

Hudson Hotels Trust

(HHT) - Get Report

, underwritten by

Morgan Keegan


Monarch Properties


, underwritten by Donaldson Lufkin & Jenrette;

Presidio Golf Trust

(GOF) - Get Report

, underwritten by

Salomon Smith Barney


Timberlands Growth

(TGC) - Get Report

, underwritten by

Goldman Sachs

; and

Healthcare Financial Partners


, led by

NationsBanc Montgomery Securities


Management would do well to pay heed to a recent column on the real problem of oversupply in the REIT markets. Good luck.

Happy building.

Christopher S. Edmonds is the president of Resource Dynamics, a private financial consulting firm based in Topeka, Kan. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. While he cannot provide investment advice or recommendations, he welcomes your feedback at