I'm about to suggest two real estate investment trusts, or REITs, that I think will beat the returns of Nvidia (NASDAQ: NVDA) over the next year and a half. These are not just any REITs; they have relatively "boring" business models even by real estate standards.
Hear me out. I completely understand that Nvidia stock has nearly tripled over the past year alone and is up by a staggering 2,960% over the past five years. And the gains have been well-deserved. Nvidia has been at the center of the AI revolution, and its sales show why it has done so well for investors.
However, Nvidia is an expensive stock. It trades for about 35 times trailing-12-month sales and for 43 times forward earnings. Even given its growth momentum, this is a lofty valuation.
Plus, over the next couple of years, I believe the momentum in the market will shift in favor of dividend-paying value stocks.
A falling-rate environment could be a tremendous catalyst for income stocks
Without getting too deep into an economics lesson, falling interest rates are generally a positive catalyst for income-focused stocks, especially REITs . The short explanation is that when risk-free interest rates (like Treasuries and CDs) rise, it tends to put upward pressure on stock yields as well. Since price and yield have an inverse relationship, rising interest rates tend to push REIT prices downward. In a falling-rate environment, the opposite is true.
In addition, REITs tend to rely on borrowed money more than most other sectors, and falling rates mean lower borrowing costs.
After cooler-than-expected inflation data and some disappointing employment reports, the median investor expectation is for a total of two full percentage points of Federal Reserve rate cuts between now and September 2025. And I think this could be a big catalyst for some beaten-down REITs.
Two stocks that could be big winners
I own about 10 different REITs in my portfolio and think they all have the potential to outperform in a falling-rate environment. But two REITs in particular that could be major beneficiaries are Easterly Government Properties (NYSE: DEA) and Vici Properties (NYSE: VICI) .
We'll start with Easterly Government Properties, and in full disclosure, I don't personally own shares of this one -- not yet anyway. If you aren't familiar, this is a REIT that owns a portfolio of properties, all occupied by a single tenant -- the United States government and its subsidiaries. The VA is the largest tenant, and the FBI also has a major presence in the portfolio.
Most of Easterly's properties are essential components of the agencies that operate within them, and generate reliable, growing income year after year. Easterly currently has a dividend yield of just below 8%, and the stock itself has been beaten down by more than 40% since the rate-hike cycle started in early 2022. But this is an extremely rate-sensitive REIT. Not only does the stable nature of its rental income make the stock trade more like a bond, but Easterly is one of the more debt-reliant REITs on my radar, so falling rates could be a big upward catalyst.
Vici Properties' tenants are rather exciting businesses. This is a REIT that is the largest owner of gaming properties in the market. It owns several iconic Las Vegas Strip properties, as well as a portfolio of high-quality regional-gaming assets. But from the perspective of Vici's investors, the company leases its properties to gaming operators, typically with 40- to 50-year lease terms. Its income, for the most part, is highly predictable.
Like Easterly, Vici has been especially rate-sensitive partially because of the stable nature of its income. But unlike Easterly, Vici has a ton of liquidity that it can use to expand its portfolio of experiential real estate assets over the next several years, and a lower-rate environment would certainly be more conducive to growth. Management has already established an impressive track record of value-adding growth, and there could be plenty more in the years to come.
A bold prediction
To be perfectly clear, this is meant to be a bold prediction. I believe both stocks will deliver market-beating returns through at least the end of 2025, and that after an incredible run, Nvidia could cool off a bit. And my thesis is dependent on the Fed cutting rates rather quickly, so if this doesn't happen, I could certainly be wrong. But regardless of what happens in the near term, both Easterly Government Properties and Vici are solid, well-run businesses and could deliver strong income and total returns for long-term investors.
Matt Frankel has positions in Vici Properties. The Motley Fool has positions in and recommends Nvidia and Vici Properties. The Motley Fool recommends Easterly Government Properties. The Motley Fool has a disclosure policy .
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