Baron Real Estate Fund: Latest Insights and Commentary

U.S. stocks struggled during the first quarter of 2025 as the shock of Trump’s tariff war erased any optimism that the U.S. stock market or economy would continue to flourish under the new administration, replaced by heightened concerns of a possible recession. The mass layoffs of federal workers added to the confusion. The Magnificent Seven, which had led the market on AI-driven enthusiasm, were hard hit by tariff uncertainties, given their relatively high valuations, as well as the January launch of Chinese AI app DeepSeek, which raised questions around the potential profitability of massive investments in AI. The MSCI USA IMI Extended Real Estate Index declined 3.1% during the quarter.

GDP growth is widely predicted to slow during 2025, reflecting weakening consumer demand and more cautious corporate spending. Consumer confidence has plummeted. The March 2025 inflation figure came in above the U.S. Federal Reserve’s target of 2%, as measured by the Consumer Price Index. The Fed has taken a wait-and-see approach as the effects of heightened U.S. policy uncertainty on growth, inflation, and employment play out. It left interest rates unchanged in its first meeting of the year.

Against this challenging backdrop, Baron Real Estate Fund declined. Holdings within the data centers and real estate service companies categories contributed. Investments within the building products/services, hotels & leisure, and casinos & gaming operators categories detracted. Gains within data centers were driven by third largest contributor GDS Holdings Ltd. CoStar Group, Inc., a provider of marketing and analytics to the real estate industry, drove appreciation within real estate service companies. Building products/services had a difficult quarter, with share price declines in all eight holdings within the category. Second largest detractor Hyatt Hotels Corporation led weakness within hotels & leisure, and third largest detractor Las Vegas Sands Corporation led depreciation within casinos & gaming operators.

Despite near-term uncertainty, we continue to see improved prospects for real estate on the horizon. We believe we have assembled a portfolio of best-in-class competitively advantaged real estate companies with compelling long-term growth and share price appreciation potential, structured to capitalize on high-conviction investment themes.

We think the benefits of our flexible approach, which allows us to invest in a broad array of real estate companies including REITs and non-REIT real estate-related 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.

CONTRIBUTORS

• Welltower Inc. operates senior housing, life science, and medical office real estate properties. Shares increased on robust cash flow growth in its senior housing portfolio, driven by strong occupancy and rent growth, a strong 2025 growth outlook, and execution on highly accretive proprietarily sourced capital deployment opportunities. We remain investors. We are optimistic about the prospects for both cyclical and secular growth in senior housing demand against a backdrop of muted supply. We view Welltower as a “best-in-class” operator with a high-quality curated portfolio and a management team of astute capital allocators who have demonstrated the ability to capitalize on both organic and inorganic growth opportunities.
• Shares of tower REIT American Tower Corporation performed well in the quarter due to accelerating carrier bookings activity and a solid outlook for underlying 2025 financials. The company sold its loss-making Indian business unit to Brookfield Asset Management last year, and investors seemed encouraged by the prospects for a “clean” American Tower that will prioritize the allocation of capital into developed markets that should produce more predictable and recurring earnings growth with less volatility going forward. We retain conviction in American Tower given durable demand drivers in data growth and video, accelerating overall growth, and the expectation that it will continue to expand its portfolio and return excess capital to shareholders.
• GDS Holdings Limited is a leading data center operator in Tier 1 cities in China as well as a growing Pan-Asia data center platform. Shares contributed on improving demand in China, the continued ramp of its now de-consolidated international business (renamed “DayOne”) and monetization of select assets at a premium valuation via a REIT transaction anchored by one of the largest life insurance companies in China. We remain investors given undemanding valuation levels, accelerating growth, progress toward debt reduction, and imbedded value in its international business via private capital raises backed by highly regarded investors at compelling valuations. GDS benefits from durable secular tailwinds in cloud adoption, increasing demand from AI deployments, growth visibility, and its status as a provider of choice to leading technology companies in China and the U.S.

 

DETRACTORS

• Equinix, Inc. is the premier global operator of network-dense, carrier-neutral data centers. Following two years of robust absolute and relative performance, shares declined on discrete earnings headwinds that dampened reported growth, normalization of valuation levels, evolving concerns around the trajectory of customer bookings given the uncertain macroeconomic environment, and signs of a “pause” in new business trends for certain customers (e.g. bookings for enterprise software companies). We retain conviction in Equinix due to a long demand runway behind cloud adoption and IT outsourcing, AI as an evolving demand vector, its unique ability to offer a global platform, and continued execution on strategic M&A transactions to enhance its moat.
• Shares of global hotelier Hyatt Hotels Corporation detracted as Trump's tariff policies generated heightened uncertainty around the macroeconomic environment. While the volatility during the first quarter is a concern, we believe it will be short term. Business fundamentals were strong, with solid forward bookings numbers as the business transient segment continued its post-pandemic recovery and the group business segment paced up by mid-single-digits. We expect double-digit EBITDA growth in 2025. The company has a strong balance sheet. The planned acquisition of Playa Hotels should be accretive to earnings, especially after Hyatt sells the underlying real estate properties. Once the sale is complete, over 90% of revenue will be fee-based, which should help close Hyatt's multiple discount to peers.
• Las Vegas Sands Corporation, a casino company operating in Macau and Singapore, detracted due to uncertainty regarding the potential return on its recent $2 billion investment in Macau given the deceleration in the Chinese economy. While it is experiencing some disruption in the completion of projects slated for May of 2025, we believe the company will capture additional share and generate a respectable return on capital over 2026. Las Vegas Sands has the best balance sheet in the gaming industry with leverage of just 2x, which provides the liquidity to increase capital returns to shareholders while awaiting earnings results. The company is buying back 7.5% of shares each year while paying out a well-covered 3% dividend. The stock trades at a significant discount to its historical valuation, which we believe should narrow as investors start seeing returns from recent capital projects and the Macau market reaccelerates.