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Data center delight, multifamily malaise

Tom Yeatts is a reporterwith S&P Global Market Intelligence. The views and opinions expressed in thispiece are those of the author and do not necessarily represent the views of S&PGlobal Market Intelligence.

The second-quarter REITearnings season got underway this week with a few big names reporting, includingPrologis Inc. and

S&P Global rounds up a fewanticipated themes and best ideas before the earnings trickle becomes a flood.

* Signs of an extended cycle

Barclays'REIT team expects REITs for the most part to deliver "solid" results,supporting its "constructive view" of commercial real estate fundamentals.

"Wethink disciplined supply, a sustained low interest rate environment and the viewthat U.S. assets are a safe haven amid geopolitical uncertainty will ultimatelyextend the real estate cycle," the Barclays team said.

The teammaintained its "neutral" stance on the REIT space but said it liked fournames in particular going into earnings: Prologis, Kimco Realty Corp., ApartmentInvestment and Management Co. and Boston Properties Inc.

* Trio brio

Jefferies'REIT team expects a strong second-quarter showing from data center and self-storageREITs, but it cautioned companies will have to do better than in-line quarters andflat guidance to add to the high expectations already priced into their stocks.CyrusOne Inc., and CubeSmart are theteam's tops picks in the two subsectors.

The teamsaid triple-net REITs also could outperform "on improved spreads on acquisitionsand/or increased acquisition volume." The analysts see multifamily asthe sector with the most risk.

* Multifamily fears

Most if not all analysts agreed multifamily is a potential weakspot in the REIT picture.

"Recent data suggests that US apartment rent growth continuedto decelerate in 2Q16," the Barclays team said. "We are curious to seeif the weakness in new leases has begun to spill over into renewals."

* Retail therapy

Stifel's Nathan Isbee had a glowing assessment of the shoppingcenter space at midyear, the relatively high number of retailer bankruptcies sofar in 2016 notwithstanding. Isbee expects a solid second quarter from the group,which he said is vital to validating their "lofty" share prices.

"Shopping center fundamentals are healthy and the sectorshould continue to benefit in limited supply environment which has allowed shoppingcenter REITs to drive rents, re-tenant underperforming retailers, and pursue valuecreation opportunities within their portfolios," the analyst said.

Isbee identified retailer demand, potential store closures andredevelopment pipeline plans as likely topics of focus on second-quarter earningscalls.

* Leasing, leasing, leasing

EvercoreISI's team thinks leasing velocity in New York and San Francisco will be a focalpoint for the office REITs, as itwas earlier in 2016.

"Wemay see some companies announce a slight deceleration in leasing pace in Q2 versusQ1 given slower net absorption and company comments (SLG), but we believe that activityaccelerated early in Q3 and that any weakness could be transitory," the EvercoreISI team said.

The teamnoted that office absorption "disappointed" again in the second quarter,a result they attributed largely to the "economic malaise" that attendedspeculation over the Federal Reserve's interest rate policy.

* List of six

In hiscoverage of the office and industrial segments, Stifel's John Guinee plans to focuson six distinct drivers of REIT performance: operating fundamentals, "real"leasing economics, submarket strength, value creation, replacement cost and theinvestment sales market.

"Eventually,these aspects will (hopefully) matter and drive REIT performance," Guinee saidof his list of six. "We think that they may matter a lot and very soon."

The analystsaid he is "convinced more than ever" that the REIT run of the last coupleof months was driven largely by dividend yields, fund flows and macroeconomic factors,and that investors will focus on other factors and probably will "make decisionsbased on the early reporters" — Prologis in industrial's case and and SL Greenin office's case.