Baron Real Estate Income Fund | Q3 2024

Baron Real Estate Income Fund® (the Fund) generated strong performance in the third quarter of 2024, gaining 16.25% (Institutional Shares). The Fund slightly outperformed the MSCI US REIT Index (the REIT Index), which increased 15.79%.

Since inception on December 29, 2017 through September 30, 2024, the Fund’s cumulative return of 87.52% was nearly double that of the REIT Index, which increased 45.74%.

As of September 30, 2024, the Fund has maintained high rankings from Morningstar for its performance:

• #4 ranked real estate fund for its 5-year performance period
• #4 ranked real estate fund ranking since the Fund’s inception on December 29, 2017

Notably, the only real estate fund that is ranked higher than the Baron Real Estate Income Fund for the trailing 5-year and since inception periods is the other real estate fund that we manage, Baron Real Estate Fund, which has three share classes.

We will address the following topics in this letter:

• Our current top-of-mind thoughts
• Portfolio composition
• Top contributors and detractors to performance
• Recent activity
• Concluding thoughts on the prospects for real estate and the Fund

The key message from our second quarter shareholder letter was that we believed it was an attractive time to increase exposure to public real estate given our view of favorable valuations, expectations of Federal Reserve interest rate cuts, and generally solid, albeit slowing, business prospects. In the most recent quarter, the Fund increased 16.25%.

As we peer into the fourth quarter of 2024 and the full year 2025, we continue to believe now is an attractive time to invest in real estate.

BOTTOM LINE: WE REMAIN BULLISH.

Additional top-of-mind thoughts are as follows:

The dark clouds over real estate are lifting

For the last five years, real estate fears have been rampant. Concerns about COVID’s negative impact on certain segments of real estate, sharply higher interest rates, bank failures, commercial real estate crisis fears, and recession concerns have cast a dark cloud over real estate.

We have been vocal for some time that real estate-related fears are exaggerated and hyperbole.

Now there is emerging evidence that the dark clouds over real estate are lifting, and brighter days are on the horizon.

• Business conditions, though moderating, are still growing and do not foretell a significant decline in growth.
• We continue to see attractive demand versus supply prospects. Vacancies are low, rents and home prices continue to increase albeit at a slower rate, and competitive new construction is modest for most commercial and residential sectors and geographic markets (see below).
• Most balance sheets are in strong shape and real estate companies are refinancing at lower rates than last year.
• The banking system is well capitalized, with ample liquidity.
• Federal Reserve interest rate cuts bode well for real estate (see below).
• Several public real estate companies have underperformed the S&P 500 Index since 2019, and we believe there is a “catch up” opportunity.
• Much of public real estate has been repriced for a higher cost of capital, and valuations are now attractive (see below).

Interest rate cuts bode well for real estate

Federal Reserve Chairman Jay Powell on September 18, 2024, said the following:

“We think that it’s time to begin the process of recalibrating it (the federal funds rate) to a level that’s more neutral, rather than restrictive.”

Jay Powell used the word “recalibrate” nine times following the Federal Reserve’s decision to cut interest rates 50 basis points to signal, in our opinion, that more interest rate cuts are expected later in 2024, 2025, and perhaps after that. We believe a recalibration of interest rates to much lower levels will be bullish for real estate and the Fund.

Lower borrowing costs and tighter credit spreads tend to:

• Support real estate valuations
• Reduce the weight of debt refinancings
• Reignite the real estate transaction market
• Instill more optimism in tenants about the prospects for their businesses
• Increase the attractiveness of REIT dividend yields compared with other debt and cash-equivalent securities

The Fund excelled during the two most recent interest rate cut periods. The Federal Reserve cut interest rates in both 2019 and 2020. The Fund gained 36.5% in 2019 and 22.3% in 2020, far outdistancing the REIT Index in both years. We are optimistic the Fund will perform well, once again, during the recently initiated rate cut cycle.

The real estate recovery is likely to be faster than expected

In prior real estate cycles, a poorly timed combination of excessive use of debt and overbuilding of homes and commercial real estate (collectively the “curses of real estate”), led to real estate downturns that, in some cases, were severe.

• The 1980s saw a boom in commercial construction which led to a correction in the late 1980s and early 1990s.
• The rapid supply of newly built homes and the excessive use of subprime mortgages and lax lending standards led to the global financial crisis of 2007 and 2008.

Today, we believe the real estate market is much healthier than in prior real estate cycles and this important point is not widely appreciated.

• Healthy balance sheets: Most real estate balance sheets are in far better shape than in prior real estate cycles. Leverage levels, the use of fixed versus floating rate debt, and the staggering of debt maturities are far superior then in the past. For example, REIT leverage levels (net debt divided by cash flow) are approximately 5.5 times today versus more than 8.5 times during the global financial crisis of 2007 and 2008.
• Limited new construction: In the last few years, the steep increase in land prices, labor costs, and material prices has curtailed commercial real estate development because, in most cases, new development has not been economical. The U.S. is building a similar number of homes and apartments today as it did 60 years ago – approximately 1.5 million homes – despite the fact that the U.S. population is approximately 340 million people versus 180 million 60 years ago!
• High occupancy levels: Several real estate categories have occupancy levels above 90% including apartments, industrial warehouses, single- family rental homes, manufactured housing, and others.

Relative to prior real estate cycles which were burdened with excessive debt and an overbuilding of real estate, today’s healthier balance sheets, limited supply of residential and commercial real estate, and high occupancy levels should lead to better-than-expected rent growth, home price appreciation, and cash flow generation in the years ahead.

There are compelling valuations in public real estate

Several real estate segments and individual companies remain attractively valued despite recent share price appreciation. A few examples include:

• REITs: Green Street Advisors, a highly regarded real estate and REIT research company, noted in a report published on September 25, 2024, that the historic underperformance of REITs versus the S&P 500 Index is near the highest levels in the last 20 years. Green Street also believes that REIT valuations are cheap versus the S&P 500 and several years of strong REIT returns (or S&P 500 underperformance) would be required to close the valuation gap. We agree with Green Street’s observations. We believe several REIT categories are attractively valued including hotel, office, retail, and other individual REITs.
• Non-REIT real estate companies: We believe certain dividend-paying non-REIT real estate companies are attractively valued and offer superior growth prospects than REITs.
• A few examples of attractively valued REIT and non-REIT real estate companies
  • Vornado Realty Trust: At its recent share price of $39, Vornado’s office and retail portfolio remains highly discounted from the private market value of its real estate portfolio and at a meaningful and unwarranted discount relative to certain publicly traded REIT peers.
  • The Macerich Company: Shares of this “A” quality mall landlord are highly discounted versus public peers and private market values. We are optimistic about the two to three-year prospects for Macerich following the announcement of its new highly regarded CEO, Jackson Hsieh, who we believe will unlock value by selling non-core real estate properties and repaying debt.
  • Park Hotels & Resorts Inc.: At its recent share price of only $14, Park shares are valued at a meaningful discount to its peers, underlying replacement cost and the market value of its assets.
  • Brookfield Corporation: The recent share price of this best-in-class real asset-related alternative asset manager is only $53 and compares favorably to management’s estimate of its current net asset value of $84 and its expectation of $176 in five years.

We believe the Fund is a compelling mutual fund option

We continue to believe our approach to investing in REITs and non-REIT real estate companies will shine even brighter in the years ahead, in part due to the rapidly changing real estate landscape which, in our opinion, requires more discerning analysis.

As of September 30, 2024, we invested the Fund’s net assets as follows: REITs (80.1%), non-REIT real estate companies (18.3%), and cash (1.6%). We currently have investments in 11 REIT categories. Our exposure to REIT and non-REIT real estate categories is based on our research and assessment of opportunities in each category on a bottom-up basis (See Table II below).

* Individual weights may not sum to the displayed total due to rounding.

REITs

Business fundamentals and prospects for many REITs remain solid although, in most cases, growth is slowing due to debt refinancing headwinds, a moderation in organic growth (occupancy, rent and/or expense pressures), reduced investment activity (acquisitions and development), and, in a few select instances, the impacts from transitory oversupplied conditions. Most REITs enjoy occupancy levels of more than 90% with modest new competitive supply forecasted in the next few years due to elevated construction costs and contracting credit availability for new construction. Balance sheets are in good shape. Several REITs have inflation-protection characteristics. Many REITs have contracted cash flows that provide a high degree of visibility to near-term earnings growth and dividends. Dividend yields are generally well covered by cash flows and are growing.

REIT valuations are attractive on an absolute basis relative to history and relative to several private market valuations. We expect REITs to benefit from the recent Federal Reserve pivot from increasing interest rates to decreasing interest rates. Lower borrowing costs and tighter credit spreads should reduce the weight of debt refinancings, increase the attractiveness of REIT dividend yields, reignite the real estate transaction market, and support an improvement in valuations as valuation multiples expand (e.g., capitalization rates compress).

Summary REIT and Non-REIT Category Commentary 

Health Care REITs (15.6%)

• We maintain a favorable view of the multi-year prospects for senior housing and remain bullish on the outlook for Welltower Inc. and Ventas, Inc. We believe senior housing real estate is likely to benefit from favorable cyclical and secular growth opportunities in the next few years. Fundamentals are improving (rent increases and occupancy gains) against a backdrop of muted supply growth due to punitive financing and construction costs. The long-term demand outlook is favorable, driven in part by an aging population (baby boomers and the growth of the 80-plus population), which is expected to accelerate in the years ahead. Expense pressures (labor shortages/ other costs) are abating, and we believe highly accretive acquisition opportunities may surface, particularly for Welltower given its cost of capital advantage. The Fund also maintains an investment in Healthpeak Properties, Inc.

Data Center REITs (14.7%)

• We maintain conviction in the multi-year favorable prospects for data centers. Data center landlords such as Equinix, Inc. and Digital Realty Trust, Inc. are benefiting from record low vacancy, demand outpacing supply, more constrained power availability, and rising rental rates. Several secular demand vectors, which are currently broadening, are contributing to robust fundamentals for data center space globally. They include the outsourcing of information technology infrastructure, increased cloud computing adoption, the ongoing growth in mobile data and internet traffic, and AI as a new wave of data center demand. Put simply, each year data continues to grow exponentially, and all of this data needs to be processed, transmitted, and stored – supporting increased demand for data center space. In addition, while it is still early innings, we believe AI could not only provide a source of incremental demand but also further accelerate existing secular trends by driving increased prioritization and additional investment in digital transformation among enterprises. Aside from positions in Equinix and Digital Realty, the Fund also recently initiated a position in Iron Mountain Incorporated, which we consider a data center REIT even though GICS classifies the company in other specialized REITs (shown as Other REITs in Table II).

Industrial REITs (10.3%)

• We remain cautious in the near term due to demand normalizing to pre-pandemic levels (elongated corporate decision making), elevated supply deliveries in first half of 2024, moderating rent growth in certain geographic markets, inventory de-stocking, and pricey headline valuations relative to other REIT categories.
• We are long-term bullish as the demand/supply outlook remains compelling on a multi-year basis (deliveries expected to drop 50% to 75% in the second half of 2024), in-place rents that are generally more than 35% below market rents, strong visibility into high single-digit cash flow growth the next few years, and industrial REITs should remain a beneficiary of secular growth tailwinds (e-commerce and supply-chain logistics).
• The Fund recently added cold storage REIT, Lineage, Inc., during its July IPO. Investment merits include: an irreplaceable portfolio with dominant share in high barrier markets, pronounced scale benefits (technology, big data, value-added services), positive demand inflection expected soon for the cold storage industry, attractive growth and less cyclicality versus most REITs, and an excellent management team with high inside ownership.

Multi-Family REITs (8.4%)

• We have become more cautious than earlier in 2024 as the shares of multi-family REITs have performed well, rent growth is moderating, and valuations are reasonable but not as attractively valued as other segments of real estate.
• Long term we remain optimistic due to the rental affordability advantages versus for-sale housing (move-outs to buy remain low), an attractive supply outlook in 2025 to 2027, the benefits of a partial inflation hedge given annual leases, and still modest discounts to private market valuations.

Mall REITs (5.9%)

• We are optimistic about the prospects for the Fund’s investments in mall REITs Simon Property Group, Inc. and The Macerich Company. The fundamental backdrop for high-quality mall and outlet real estate remains favorable. Tenant demand remains robust. There is a shortage of desirable retail space (occupancy is high and there is a dearth of new mall developments). The favorable demand/supply imbalance is enabling landlords to raise rents. Valuations are attractive. We are optimistic about the two to three-year prospects for Macerich following the announcement of a new highly regarded CEO (Jackson Hsieh) who we believe will unlock value (sell non-core properties and repay debt).

Office REITs (5.7%)

• The Fund recently added New York-centric office/retail landlord, Vornado Realty Trust. Investment merits include a positive inflection in New York City office leasing activity, improved tenant interest in the company’s PENN development, favorable pricing for retail asset sales (4%-plus capitalization rates), occupancy and earnings that are likely to improve the next few years, a management team that is focused on lowering leverage, and shares that we believe are discounted relative to private market values and certain public traded peers.

Single-Family Rental REITS (4.4%)

• Near term we have become more cautious in part due to the onset of elevated supply in a few key geographic markets.
• We remain long-term bullish due to favorable demand/supply prospects (homeownership affordability challenges, a desire for flexibility and not to be burdened by mortgages, and limited supply of homes for rent in most geographic markets) which should lead to strong long-term growth prospects and an ability of landlords to increase rents.

Hotel REITs (4.2%)

• Recent travel trends have been mixed – leisure demand is moderating, and business travel is mixed in certain cities. On the other hand, group and convention travel remain strong.
• We remain long-term bullish about the prospects for hotel REITs and other travel-related real estate companies. Several factors are likely to contribute to multi-year tailwinds including a favorable shift in consumer preferences, a growing middle class, and other encouraging demographic trends. We maintain an allocation to select travel-related real estate including hotel REITs because we believe the long-term investment case for travel is compelling, valuations are appealing as many hotel REITs are currently valued at 25% to 50% discounts to net asset value, and we believe hotel REITs could be targeted by private equity firms for purchase.

Shopping Center REITs (3.3%)

• We remain optimistic about the prospects for Federal Realty Investment Trust and Brixmor Property Group Inc. Shopping centers are seeing strong tenant demand for space, limited store closures/ bankruptcies, tenants that are broadly healthy, and positive rent growth. Rumored private equity interest in shopping centers would suggest that certain shopping center REITs are undervalued in the public market.

Wireless Tower REITS (3.1%)

• We have remained near-term cautious on wireless tower REITs because we are identifying superior total return prospects in other REIT categories. We remain long-term bullish on the prospects for American Tower Corporation given strong secular growth expectations for mobile data usage, 5G spectrum deployment and network investment, edge computing, and connected homes and cars.

Triple Net REITs (2.6%)

• We are optimistic about the long-term prospects for triple-net REIT, Agree Realty Corporation. Investment merits include its high- quality retail real estate portfolio and tenant base, the company’s investment grade portfolio, a cost of capital advantage to pursue accretive acquisitions, an opportunity to triple the size of the current portfolio and Agree is a founder-led firm with shareholder interests aligned. We believe Agree could be an outsized beneficiary of a decline in interest rates given its reliance on acquisitions to drive earnings growth and the long duration nature of cash flows.

Non-REIT Real Estate Companies (18.3%)

• We emphasize REITs but have the flexibility to invest in non-REIT real estate companies. We tend to limit these to no more than approximately 25% of the Fund’s net assets. At times, some of our non-REIT real estate holdings may present superior growth, dividend, valuation, and share price appreciation potential than some REITs. We remain optimistic about the Fund’s prospects for its non-REIT holdings.

Shares of GDS Holdings Limited appreciated significantly during the quarter. We were encouraged by several fundamental updates and recently met with CEO/founder William Huang and CFO Daniel Newman in our offices.

We remain optimistic about the company’s growth prospects over the next several years, which can be bucketed into: i) its Asia ex-China data center business (GDS International or GDSI); and ii) its mainland China data center business (GDS Holdings or GDSH).

Bottom line: We see a path for the business to be worth $46 to $56 a share in two to three years versus approximately $20 at the recent market price.

• GDS International (Asia ex-China): We see cash flow for GDSI growing from less than $50 million today to over $500 million over the next three years! We value GDS’ ownership stake at $16 per share after accounting for the growth capital it has secured from renowned U.S. and global investors. Blackstone’s recent $16 billion acquisition of Southeast Asia based data center operator AirTrunk at 25 times cash flow is still at a substantial premium to where GDS is raising growth capital today, which provides an important valuation marker for a potential IPO of this business over the next 12 to 15 months.
• GDS Holdings (China): We believe the China data center business is at the doorstep of a growth inflection and see cash flow growing from about $700 million today to $1 billion over the next three years. We value the China business at $30 to $40 a share on what we believe is a conservative cash flow multiple and remain encouraged that there will be several catalysts to further surface value (e.g., a transaction to place certain stabilized assets into a listed REIT vehicle).

The shares of Welltower Inc. continued to perform well in the third quarter. Share price appreciation was due to continued strong cash flow growth in its senior housing portfolio driven by strong occupancy and rent growth, strong execution on its highly accretive proprietarily sourced capital deployment opportunities, and an improved full-year growth outlook.

Welltower is a REIT that is an operator of senior housing, life science, and medical office real estate properties. We recently met with the entire Welltower senior management team and remain encouraged that the shares can continue to be a strong multi-year contributor for the Fund. We are optimistic about the prospects for both cyclical growth (a recovery from depressed occupancy levels following COVID-19) and secular growth (seniors are the fastest growing portion of the population and people are living longer) in senior housing demand against a backdrop of muted supply that will lead to several years of compelling organic growth. Welltower is a “best-in-class” operator with a high-quality curated portfolio that is led by astute capital allocators, thereby allowing it to capture outsized organic and inorganic growth opportunities.

In the most recent quarter, the shares of Equinix, Inc., the premier global operator of network-dense, carrier-neutral data centers, performed well following solid second quarter results. We continue to be optimistic about the long-term growth prospects for the company due to its interconnection focus among a highly curated customer ecosystem, irreplaceable global footprint, strong demand and pricing power, favorable supply backdrop, and evolving incremental demand vectors such as AI. Equinix has multiple levers to drive outsized bottom-line growth with operating leverage. Equinix should compound its earnings per share at approximately 10% over the next few years and we believe the prospects for outsized shareholder returns remain compelling from here given the superior secular growth prospects combined with a discounted valuation.

The shares of Park Hotels & Resorts Inc., an owner and operator of 43 hotels with an outsized presence in Hawaii, declined in the most recent quarter due to signs of a moderation in travel.

We believe the total return prospects for Park remain compelling due to: i) the company’s attractive valuation with shares trading at a meaningful discount to peers, underlying replacement cost and market value of its assets; ii) enhanced cash flow realization from its recently completed large renovation projects that will contribute outsized growth; iii) a diverse set of demand drivers across group, business transient, and leisure with group recovery in full swing; iv) outsized exposure to the attractive Hawaiian market, with a mid-priced offering, where Japanese travelers (a key demand driver) still remain 80% below pre-COVID levels; v) an improved balance sheet and portfolio mix after its exit of two large San Francisco assets; and vi) the company’s attractive high single-digit dividend yield.

The shares of Wynn Resorts, Limited, an owner and operator of hotels and casino resorts, detracted from performance in part due to the disappointing recovery in business in Macau. The shares rebounded late in the third quarter in response to monetary and fiscal stimulus from the Chinese government. We chose to exit the Fund’s investment in Wynn and reallocated the capital to other investments that we believe offer superior performance prospects the next few years.

The shares of Invitation Homes, Inc. underperformed after several execution hiccups and ongoing near-term headwinds from new supply in certain markets. We reduced our position due to fair-to-full valuation and lower conviction regarding the near-to-medium-term growth prospects for the company.

During the third quarter we initiated a position in Vornado Realty Trust, a REIT that owns a portfolio of premier office and street retail properties concentrated in New York City. The company also owns a small portfolio of apartment units in NYC and two iconic commercial properties in Chicago (the Mart) and San Francisco (555 California Street).

While we have remained generally cautious on office real estate for several years in light of both cyclical and secular headwinds that we expected would persist, we also have acknowledged that certain well-located, modern office properties were poised to gain market share and outperform as market conditions improved. We would categorize Vornado’s portfolio as falling into the latter bucket.

We are optimistic about our investment in Vornado for several reasons:

1. We have begun to see several encouraging signs that lead us to believe that office fundamentals are bottoming and beginning to improve in several markets, most notably New York City. These signs include stable or rising utilization of office space, strong and broad leasing activity and tenant interest, more confident corporate decision making, and stabilizing market rents and concessions. We think Vornado CEO Steve Roth framed it well with his comments during the company’s second quarter earnings call in August:

“After a difficult four or so years, market dynamics are now reversing and growing constructive. There is no new supply on the horizon, tenants are growing and expanding and searching for space. And New York continues to be the single best market in the nation.”

2. Prospects appear bright for Vornado’s recently completed PENN 2 redevelopment project (total cost $850 million), as management recently noted a significant pick up in tenant tour activity and proposals in recent months at rents consistent with their underwriting. The lease-up of this property is expected to contribute meaningfully to cash flow growth over the next several years and improve tenant interest in the Penn District more broadly, where Vornado has a leadership position.
3. Management has also noted a pickup in buyer interest for its best-in-class street retail properties in New York City (17% of total cash flow) and recently sold one property at a premium valuation. Management believes valuations for many of their retail properties are back to or in excess of 2019 levels and that additional property sales may occur.
4. Vornado is well positioned to capitalize on any distressed real estate opportunities that may arise given its strong balance sheet and liquidity position.
5. Though Vornado’s stock has appreciated significantly since we first began acquiring shares, we still think Vornado’s valuation remains untethered from the private market value of its real estate portfolio. We also observe that Vornado’s stock trades at a meaningful and unwarranted discount relative to certain publicly traded REIT peers.

In the most recent quarter, we acquired additional shares of Equinix, Inc., the premier global operator of network-dense, carrier-neutral data centers.

We continue to be optimistic about the long-term growth prospects for the company due to its interconnection focus among a highly curated customer ecosystem, irreplaceable global footprint, strong demand and pricing power, favorable supply backdrop and evolving incremental demand vectors such as AI. The company has multiple levers to drive outsized bottom-line growth with operating leverage. Equinix should compound its earnings per share at approximately 10% over the next few years and we believe the prospects for outsized shareholder returns remain compelling from here given the superior secular growth prospects combined with a discounted valuation.

We increased the Fund’s position in The Macerich Company during the most recent quarter. Macerich is a REIT that owns a portfolio of 43 exceptionally high-quality malls in the U.S., with key states that include California, New York, and Arizona.

We are excited about the medium-term prospects for Macerich for four reasons:

1. The fundamental backdrop for high-quality mall real estate remains favorable. Tenant demand remains robust, as a broad-based group of retailers seek to secure space to meet their 5- to 10-year growth objectives. In the meantime, there is a shortage of desirable space that is available, since industry occupancy is high and no new mall developments are underway. This demand/supply imbalance is enabling landlords to raise rents.
2. Macerich owns an exceptionally high-quality portfolio of mall real estate. Approximately 90% of the company’s portfolio value is derived from malls graded Class A, which means the properties are well located, highly productive, and appealing to prospective tenants.
3. We see continued growth opportunities for Macerich through increases in occupancy, rents, margins, and redevelopment projects, which should lead to continued cash flow growth.
4. CEO transition is underway for the first time in decades. Effective March 1, 2024, Jackson Hsieh became President and CEO of Macerich. Jackson most recently served as CEO of net lease REIT Spirit Realty Capital until its acquisition by Realty Income in January 2024. At Spirit, Jackson led a successful turnaround effort to improve overall portfolio quality and simplify the capital structure. We believe Jackson has an opportunity to make similar improvements at Macerich, including selling non-core properties and repaying debt (debt levels are presently elevated).

At the current share price, we believe Macerich is valued at a significant discount relative to its closest publicly traded mall peers and relative to recent mall transactions that have taken place in the private market. We anticipate that this valuation discount may narrow or close in the coming years as the turnaround plan progresses.

The shares of American Tower Corporation performed well in the most recent quarter following the company’s execution on several key milestones. We chose to reduce our position in the company during the quarter after the shares reached what we believed was a fair valuation level. We recycled capital into several other new ideas with what we believe are more compelling risk/reward opportunities. Nonetheless, our fundamental conviction regarding the secular growth of mobile data, evolving network needs and the idiosyncratic growth prospects for American Tower remain unchanged and we may look to acquire additional shares in the future.

Shares of Equity Residential and AvalonBay Communities, Inc. performed well during the quarter. We reduced our positions due to less attractive return prospects for the shares over the medium term as our investment underwriting was pulled forward combined with fair current valuation levels. As we have previously written, we remain optimistic about the prospects for rental housing over the next several years due to favorable supply/demand dynamics and attractive renter income demographics. We continue to hold the management teams at Equity Residential and AvalonBay in high regard and are optimistic about the fundamental growth prospects for their curated rental housing portfolios in high barrier to entry coastal markets over the next several years.
 

As noted earlier, we believe many of the real estate-related challenges of the last few years are subsiding and brighter prospects for real estate are on the horizon. We are optimistic about the prospects for the Fund with a two to three-year view.

We believe we have assembled a portfolio of best-in-class competitively advantaged REITs and non-REIT real estate companies with compelling long- term growth and share price appreciation potential. We have structured the Fund to capitalize on high-conviction investment themes.

We believe valuations and return prospects are attractive.

We continue to believe our approach to investing in REITs and non-REIT real estate companies will shine even brighter in the years ahead, in part due to the rapidly changing real estate landscape which, in our opinion, requires more discerning analysis.
 

I would like to thank our core real estate team – assistant portfolio manager David Kirshenbaum, George Taras, David Baron, and David Berk – for their outstanding work, dedication, and partnership.

I, and our team, remain fully committed to doing our best to deliver outstanding long-term results, and I proudly continue as a major shareholder, alongside you.

Sincerely,