The domestic real estate investment trust (REIT) sector roared into 2007 on a seven-year winning streak during which it smoked the Dow Jones Industrial, S&P 500, Russell 2000, Nasdaq Composite and 10-year U.S. Treasury benchmarks. But following the subprime mortgage crisis and ensuing credit crunch, the collective group exited the year with its tail between its legs.

The FTSE NAREIT All REIT index lost nearly 18% last year, which underperformed the other major market metrics by a mile. REITs are companies that own and often manage income-producing real estate, and they have nothing to do with the residential home market (with the exception of the small mortgage REIT subsector that makes or owns loans secured by real estate collateral). But the subprime mess gave investors an excuse to book profits in a sector many thought was overextended after a long bull run.

The carnage was severe, with big losers ranging from apartments (-25.4%) and self-storage (-24.8%) to lodging/resorts (-22.4%) and office (-19%).

Some people think the REIT sell-off was overdone and that the sector is primed to rebound. U.S. REITs on average traded at a 13% premium to their underlying net asset value at year-end 2006, far above the typical 4% premium. By year-end 2007, REITs traded at an 18% discount to net asset value. It reached 20% earlier this year before the group rallied in March to cut the discount to about 9% by the end of the first quarter, according to Green Street Advisors, a REIT investing and consulting firm in Newport Beach, Calif. But some analysts believe the discount is actually higher. Richard Moore, a REIT analyst at RBC Capital Markets, pegged the discount somewhere in the mid-teens.

Either way, REITs have been through the wringer, and some recently traded at very hefty discounts in the 20% to 30% range. That's bargain-bin territory. "When you buy REITs at a discount, you tend to get extraordinary returns," says Brad Case, research chief at the National Association of Real Estate Investment Trusts (NAREIT).

Investors already seemed clued into that. Two of last year's big losers zoomed in this year's first quarter, with the self-storage sector up 20.23% and apartments up 11.20%. And the group as a whole held steady during the tumultuous quarter, with the NAREIT All REIT index down a hair at 0.42%. That handily beat the other major market benchmarks thanks to the index's nearly 4% rise in March. Excluding hotels, all sectors gained in March.

Have We Hit Bottom Yet?

REITs were created by Congress in 1960 (as part of a tobacco bill, no less) as a way for the public to invest in income-producing real estate. Before the recent slump, there were three significant downturns in that brief history, including one in the early 1970s that offers little guidance because the REIT universe was so small then.

According to NAREIT, REITs tumbled 23.9% during a 14-month peak-to-trough downturn that began in August 1989, a setback blamed on a real estate depression caused by oversupply. During that period, the average annual return for individual REITs sank 20.9%. But after REITs hit their nadir, the group enjoyed an 89-month rally.

Then came a 23-month peak-to-trough downturn that began in December 1997 and lasted through November 1999 when the group plunged 23.7% and companies suffered annual declines of 13.2%. "There wasn't anything wrong with real estate fundamentals," Case says. "It was that nobody wanted to invest in real estate when they could invest in tech stocks." Afterward, REITs rallied for the next 86 months.

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