The Wall Street Journal reports (subscription required) that "The Dow Jones Equity All REIT Total Return Index, which tracks 114 publicly traded REIT stocks, rose 28.9% in the April-June period, the biggest quarterly gain for the index since it debuted in 1989."

REITs still have a long, long way to go until they've regained the ground they've lost during the real estate rout -- they were down 31.6% in the first quarter and 38.8% in the fourth quarter of last year.

Real estate investment trusts have been, as you might expect, pulverized by the downturn in housing but the Wall Street Journal reports (subscription required) that that may be setting the stage for a wave of consolidation in the field.

30% of REITs are trading at prices below $5 per share, and experts say that those are the companies most likely to be the target of acquisitions.
For most investors though, the sub-$5 REIT strategy probably isn't such a hot idea. The Journal piece mentions General Growth Properties (NASDAQ: GGP) but the problem with that is that the company is very likely destined for bankruptcy court unless it can make a deal. The best strategy is to find good companies with good long-term prospects with low valuations that will make them attractive to potential acquirers. Buying junk companies in the hope that they'll be acquired by a bigger player is just too speculative -- especially in an environment where credit is so tight.

"With occupancy rates around 95%, apartment REITs appear to be the one bright spot in the REIT sector," says Asif Suria in The SINLetter; he looks at AvalonBay Communities (NYSE: AVB).

"The company generates nearly half its net operating income from the NY/NJ metro area and New England. California represents an additional 32% of net operating income.

"With a management team that is well respected and leverage that is the lowest of any apartment REIT, AvalonBay has traded at a premium over the last few years and the stock was trading at nearly $150 when I first came across the company in early 2007.

"I continued watching the company over the last two years looking for an opportunity to start a position. With a decline of over 70% from its 2007 high and a yield of 8.1%, this apartment REIT is finally at a level that not only offers a fat yield but also the potential of price appreciation.

"Not all REITs are created equal," notes Richard Lehmann, who looks at the Neuberger Berman Real Estate Income Trust (NYSE: NRO) in his The ETF Trader.

"The decline in Real Estate Investment Trusts (REITs) has been sharp, reacting to the mortgage crisis and the associated financial meltdown. However, here are sectors of the real estate market that have not been affected by the mortgage crisis.

"Such sectors like health care and multi-family projects and self-storage buildings are relatively less sensitive to the economic cycle. In addition, these sectors may have an inverse benefit from foreclosures such as rental properties and self-storage.

"The Neuberger Berman Real Estate Securities Income Trust fund invests in REITs in defensive areas such as health care and multi-family projects. Common stocks of REITs are trading at a discount to the properties they own, a reversal of premiums evident in last year.

"This closed end fund trades at 9% discount to its net asset value. In essence, a shareholder gets a portfolio of REITs that trade at a discount to their real estate value at another discount. In addition to the double discount, the fund yields an astounding 24.89% paid monthly.

"The fund trades at $7.38 versus its net asset value of $8.11. Should the real estate market see a decline, fund holders are doubly protected by the high yield and double discount. The fund's top holdings are Ventas Inc. (5.7%), Omega Healthcare Investors (4.8%) and Nationwide Health Properties (4.8%)."

Steven Halpern's TheStockAdvisors.com offers a daily look at the latest market commentary and favorite stock picks and investment ideas from the nation's leading financial newsletter advisors.

Checking on one of my big calls of the year:Newcastle Investments (NYSE: NCT), which is down significantly so far through mid June, it is nice to see that a dividend will be paid for this past quarter of $0.25 per share. This amounts to a current yield of over 12%.

I started writing about NCT last November when I posted Chasing Value: Newcastle's 21.9% yield too good to be true?.

In late December I made it one of my Chasing Value: Final list -- 8 stocks for 2008.

Some would say it was to good to be true as the stock price drifted downward and the dividend was cut. I maintain that this is just a waiting game until the real estate market migrates back to a more sure footing while you collect a healthy dividend.

Most advisers would remind investors not to try and catch a falling knife and I would agree, but at some point there is real value and I have taken several "stabs" at this one trying to dollar cost average while a I wait.

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture & planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: I own shares of NCT.

"Housing starts have swooned, foreclosures have jumped and home prices saw their steepest drop in 26 years," notes income expert Carla Pasternak, who nevertheless is suggesting a real estate investment.

In her High Yield Investing she explains, "Our money-making opportunity isn't based on the housing market; rather, it's with a REIT -- Omega Healthcare Investors, Inc. (NYSE: OHI).

"REITs and housing are both real estate, but that's where the likenesses begin and end. Property-holding equity REITs invest in commercial real estate. And commercial properties continue to generate steady cash flow from rental income, thanks to long-term leases.

"Above-average dividends are what allow REITs to pack a punch. These companies must distribute at least 90% of their profits to shareholders, making them especially attractive to income investors.

"Founded in 1992, Omega manages a $1.3 billion portfolio of over 200 hospitals and nursing homes in diverse locations across 28 states. The company leases the properties to established healthcare operators.

"One long-term opportunity is in the hotel sector," says real estate industry expert Peter Slatin, editor of the Forbes/Slatin Real Estate Report. Here, he finds a trio of opportunities among hotel REITs.

"We think it's misleading to suggest that REITs and other real estate companies are due for a big bounceback this year. They have already picked up some, but the economy, including deepening inflation and weakening jobs markets certainly suggest that those gains are fragile and that further gains will not come easily, if at all.

"In other words, the best posture at this moment is to sit tight and watch. Nevertheless, there are a few opportunities out there for strong income and for growth potential.

"The hotel sector has been hit hard this year. Share prices for Diamondrock (NYSE: DRH) and Strategic Hotels and Resorts (NYSE: BEE) suggest that investors have been running away from a bogeyman that isn't really there.

A real estate play? In this market? Sure, if you can identify one with the right financial metrics. AvalonBay Communities is one.

AvalonBay Communities, Inc. (NYSE: AVB) is a real estate investment trust specializing in the ownership of multi-family apartment communities. AvalonBay owns about 150 apartment complexes containing more than 43,000 apartments in 10 states and Washington, DC. Most are branded under the Avalon name.

Analysts like the fact that AvalonBay is likely to outperform a majority of its sector peers. Analysts see AVB's rents increasing 3-5% in 2008, after a 5.5% average increase in 2007.

Further, performance in the relatively strong Northern California and Pacific Northwest markets is expected to offset poor operating conditions in Boston and Washington, D.C.

Interesting post from Bespoke Investment Group this morning segmenting out house price declines in different communities around the U.S.

Needless to say, prices are continuing their downward plunge, and some places have been hit harder than others.

Some takeaways from the article:

• Using the S&P/Case-Shiller Median Home Price indices to measure drops from house price peaks until now, Bespoke's 10-city index is down 9.4%;
• San Diego has fallen the most at -16.3%, followed by Miami (-15.3%) and Las Vegas (-14%);
• Chicago has fallen the least from its peak at -4.1%;
• Almost all cities (Charlotte appears to be the exception) are down below 1992 prices

How does an investor play this amazing 15-year reversal?

If investors believe we're beginning to reach a bottom (big assumption), take a look at REIT (Real Estate Investment Trusts) ETFs: iShares Cohen & Steers Realty Majors Index Fund (ICF), iShares Dow Jones U.S. Real Estate Index Fund (IYR), iShares FTSE NAREIT Real Estate 50 Index (FTY)

Zack Miller is the Managing Editor of IsraelNewsletter.com and a former equity analyst for a leading multinational hedge fund.

The Forbes/Slatin Real Estate Report, edited by industry expert Peter Slatin, is a professional-level newsletter geared to the more sophisticated real estate investor.

Along with his own insights and advice on investment opportunities in the sector, one feature of the service is its monthly interviews with REIT-sector equity analysts. Below, I share some highlights from Slatin's interview with Jordan Sadler of KeyBanc Capital, who discusses some of his current favorite ideas among REITs.

FORBES/SLATIN: KeyBanc is focused on the U.S. What are you seeing here?

SADLER: My view, initiated last October, was a cautious outlook overall. The recent M&A squeezed shares. We continue to feel that way. REITs are trading at a level where it's hard to justify incremental investment across the space, although you can be tactical with names that are more attractive.

FORBES/SLATIN: In your universe of tactical moves, what stands out?

SADLER: Our top pick was Digital Realty Trust (NYSE: DLR), and it continues to be. It has fundamental drivers that are significantly differentiated from most of their REIT brethren. That, in theory, should be able to generate excess profit until competition gets hip, which seems to be slowly happening. For their type of building, there is limited supply, and a ton of demand, from financial services, Internet and enterprise companies and channel users.