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The Q3 earnings season is off to a strong start, with the bank-dominated results so far not only exceeding expectations, but also offering a positive outlook on the broader macroeconomic environment.

Investors may be lured by the profits of companies that have already released their quarterly figures. However, rather than adding the stock to your portfolio later, accumulating the ones poised to beat estimates can generate higher gains. Earnings beat typically boosts investor confidence, acting as a catalyst for stock price growth, which can lead to greater gains in your portfolio.

This is likely to be reflected in the earnings releases of Digital Realty Trust, Inc. (DLR - Free Report), AvalonBay Communities, Inc. (AVB - Free Report), and SBA Communications Corporation (SBAC - Free Report).

The rate-sensitive REITs are in the spotlight now because the Federal Reserve has already announced a 50-basis point (bps) cut to the federal funds rate in September, and there are indications for further rate cuts this year and the next. 

Lower interest rates benefit REITs due to their reliance on debt, and they are often seen as bond alternatives because of their steady, high dividend yields. As a result, a potential rate cut boosts investor sentiment toward REIT stocks.

Moreover, focusing on REITs is prudent as the industry provides essential real estate infrastructure for various economic activities, be it real or virtual, highlighting areas of strength even in any challenging environment.

For example, data center infrastructure demand has remained robust due to accelerated digital transformation strategies by enterprises. With growth in cloud computing, the Internet of Things, and Big Data, as well as elevated demand for third-party IT infrastructure, the data center market is booming. Moreover, emerging demand drivers like AI and edge computing are likely to have spurred the need for digital infrastructure globally.

Moreover, the advancement in mobile technology, such as 4G and 5G networks, and the proliferation of bandwidth-intensive applications have propelled growth in mobile data usage globally. With increasing smartphone adoption, greater broadband demand, and plans for 5G service worldwide, wireless service providers and carriers have been deploying additional equipment for existing networks to enhance network coverage and capacity. This has been spurring the demand for wireless communications infrastructure, creating scope for such REITs to prosper.

For REITs dealing with residential real estate, we note that, per RealPage data, the U.S. apartment market witnessed a surge in demand in the third quarter despite supply continuing to grab headlines. This is evidenced by high absorption rates.

The Zacks Methodology

Picking the right stock could be difficult unless one knows the proper method. To make the task simple, we rely on the Zacks methodology, combining a Zacks Rank #1 (Strong Buy), #2 (Buy), or #3 (Hold) rating and a positive Earnings ESP.

Our proprietary methodology, Earnings ESP, shows the percentage difference between the Most Accurate Estimate and the Zacks Consensus Estimate. Research shows that for stocks with this combination of the Zacks Rank and ESP, chances of a positive earnings surprise are as high as 70%.

Here are three REITs that have the right combination of elements to deliver positive surprises this season. 

Digital Realty Trust, Inc.

Digital Realty Trust currently carries a Zacks Rank of #3 (Hold) and has an Earnings ESP of +1.36% for the quarter under review. Over the trailing four quarters, the company surpassed the Zacks Consensus Estimate on two occasions, met in one, and missed on the other, with the average beat being 0.77%.

Digital Realty Trust, Inc. Price and EPS Surprise

Image Source: Zacks Investment Research, Digital Realty Trust, Inc. Quote

With a portfolio of data centers located all over North America, Europe, South America, Asia, Australia, and Africa, Digital Realty is likely to have capitalized on this upbeat trend, benefiting its third-quarter earnings.

Moreover, this data center REIT has a high-quality, diversified customer base comprising tenants from cloud, content, information technology, network, and other enterprise and financial industries. Most of the company’s tenants are investment grade, and numerous customers use multiple locations across the portfolio. This is anticipated to have aided stable revenue generation for the company during the to-be-reported quarter, driving its top line.

Digital Realty is scheduled to release earnings on Oct. 24 after the market close.

The Zacks Consensus Estimate of $1.44 billion for quarterly revenues suggests a 2.3% increase year-over-year. The consensus estimate for the quarterly funds from operations (FFO) per share is pegged at $1.67, which indicates 3.09% year-over-year growth.

AvalonBay Communities, Inc.

AvalonBay Communities holds a Zacks Rank #2 (Buy), and it has an Earnings ESP of +0.72% at present. Over the trailing four quarters, AvalonBay Communities surpassed estimates on each occasion, the average surprise being 1.40%.

AvalonBay Communities, Inc. Price and EPS Surprise

Image Source: Zacks Investment Research, AvalonBay Communities, Inc. Quote

AvalonBay Communities is a key player in the residential REIT sector, with a strong portfolio of premium apartment communities. It is expected to have benefited from solid renter demand in high barrier-to-entry U.S. regions, driven by favorable demographics and rising homeownership costs.

The company's focus on leveraging technology and scale to boost margins and efficiency is promising. Strategic acquisitions and development projects, supported by a healthy balance sheet, bode well for long-term growth.

AvalonBay Communities is scheduled to report its quarterly figures on Nov. 4 after the market close.

The Zacks Consensus Estimate for quarterly revenues stands at $731.67 million, which calls for a 4.9% year-over-year increase. The consensus mark for the third-quarter FFO per share of $2.71 marks a 1.9% increase year-over-year.

SBA Communications Corporation

SBA Communications Corporation carries a Zacks Rank of #3 (Hold), and it has an Earnings ESP of +1.15% for the to-be-reported quarter at present. Over the trailing four quarters, this telecommunications REIT surpassed the Zacks Consensus Estimate on three occasions and missed on the other.

SBA Communications Corporation Price and EPS Surprise

Image Source: Zacks Investment Research, SBA Communications Corporation Quote

SBA Communications is an independent owner and operator of wireless communications infrastructure, including towers, buildings, rooftops, distributed antenna systems (DAS), and small cells having communications sites in 15 markets throughout the Americas, Africa, and the Philippines.

With its extensive and geographically diverse wireless communication infrastructure portfolio, this REIT is well-positioned to gain from the wireless carriers’ high capital spending for network expansion amid growth in mobile data usage and accelerated 5G network deployment efforts.

SBA Communications is set to release earnings results on Oct. 28 after the market close.

Currently, the Zacks Consensus Estimate for the company’s quarterly revenues stands at nearly $669 million. The Zacks Consensus Estimate for the quarterly FFO per share has been revised marginally over the past three months to $3.32.

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