Business Week

These are trying times for Las Vegas casino operators. And the betting is things will get worse before they get better. A casino-building boom along Las Vegas Boulevard, better known as the Strip, has created an overcapacity of hotel rooms, which is squeezing room prices, occupancy rates, and profits. So how do the promoters of a large, Las Vegas-oriented gaming real estate investment trust announced on June 15 think they'll attract investors? ''We're not interested in the Strip,'' says billionaire financier Richard E. Rainwater, chairman of Crescent Real Estate Equities Co. (CEI), which is launching the REIT. ''We're only interested in the locals [gaming] market, which I think is a great market niche.''

REIT and gaming industry experts agree that focusing on the lucrative ''locals'' niche--Las Vegas residents--bodes well for Crescent's ability to get the industry's first ''pure'' gaming REIT off the ground. Initially, the new entity will consist of Station Casinos Inc. (STN), the dominant owner of locals casinos in Vegas that Crescent is in the process of acquiring for $1.7 billion.

''LESS VOLATILE.'' 

But over the next year, Crescent CEO Gerald Haddock anticipates snagging an additional $700 million in acquisitions or developments for the gaming REIT, which will also see growth from expanding existing facilities. ''The locals sector is less volatile than the Strip,'' says analyst R. Christopher Case of Southwest Securities Inc. ''Many investors are attracted to that.''

Indeed, the residential gaming business is everything the Strip is not--no overbuilding, a consistent customer base, and predictable revenues. ''This is a very different play from the Strip,'' says Haddock.

Not to mention a different play for Crescent. Investors have given the REIT a long leash to carry out its strategy of scooping up a wide array of assets. Since its 1994 inception to the end of 1997, the Fort Worth (Tex.)-based company has snapped up $3.8 billion of assets--everything from office buildings and psychiatric hospitals to cold-storage units and hotels. Over the same period, its share price appreciated 215%, and its funds from operations--the best measure of a REIT's performance--soared nearly 370%, making Crescent one of the best performing REITs in the country.

STICKER SHOCK. 

But last January, when the company announced plans to roll the dice on gaming by buying Las Vegas-based Station, some investors wondered if the REIT was wandering too far afield. Specifically, they were concerned that Crescent paid too high a price to enter the volatile gaming business, which trades at a lower earnings multiple than REITs. While the entire REIT market is off about 12% so far this year, Crescent's stock is down 20%, mostly because of the gaming move.

Now, Crescent is banking on the creation of the separate gaming entity to help ease those concerns and bring its core real estate investors back into the fold, while also giving it a distinct capital base with which to increase its swelling interest in Las Vegas gaming. ''The separation will be good,'' says Haddock. ''Crescent stockholders who have been concerned about gaming will be comforted.'' Crescent expects to continue owning about 60% of the gaming REIT, whose non-real estate assets will be placed in a separate operating company in order to maintain its REIT status. The casino REIT will be formed upon completion of the merger with Station, whose hotel and casino properties feature amenities like movie theaters and bowling alleys that appeal to local residents. The deal is expected to close in early October.

Now, the question is, will Crescent's big gamble pay off? It's too early to tell, but, says Warren E. Spitz, managing director of Prudential Investments Inc., a Crescent shareholder, ''given their great track record, I'm not willing to bet against them.'' Odds are someone else will.