Baron Real Estate Income Fund: Latest Insights and Commentary

U.S. stocks were volatile 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. In this risk-off environment, there was a market rotation to what are viewed as more defensive sectors such as Real Estate, which, after two years of being largely out of favor, also offered relatively attractive valuations. The MSCI US REIT Index increased 0.8% during the quarter while the broader U.S. equity markets declined.

Against this backdrop, Baron Real Estate Income Fund declined in the quarter. Investments within the health care REITs, wireless tower REITs, and triple net REITs categories contributed the most to performance. Holdings within the data center REITs, non-REIT real estate companies, and office REITS categories detracted the most. Health care REITs had a strong quarter, led by Welltower Inc. and Ventas Inc., the top and third largest contributors to performance, respectively. Second largest contributor American Tower Corporation led gains within wireless tower REITs. The Fund’s only triple net REIT, Agree Realty Corporation, drove advances within the category. Data center REITs retreated on share price declines in Equinix, Inc. and Digital Realty Trust, Inc. Equinix was the top and Digital Realty was the second largest detractor in the quarter. Wyndham Hotels & Resorts, Inc. led declines within non-REIT real estate companies. We exited our position.

Despite the widespread near-term volatility, longer term, many of the real estate-related challenges of the last few years appear to be subsiding, and we 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 believe the benefits of our broader and more flexible approach that prioritizes a full array of REITs but also invests in non-REIT income-oriented real estate companies will shine even brighter in an evolving real estate landscape.

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.
• Ventas, Inc. is a senior housing-focused health care REIT with a $30 billion-plus portfolio across senior housing, medical office, hospitals, and life science properties. Shares performed well in the quarter due to strong topline and occupancy growth, margin expansion and a robust 2025 initial outlook. The company also demonstrated progress toward accelerating accretive external growth, reporting $1.4 billion in investments in the fourth quarter alone versus $2 billion for all of 2024, with expectations for more opportunities ahead. We retain conviction in Ventas due to its high-quality real estate portfolio, prudent capital allocation, and compelling occupancy recovery story

 

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.
• Digital Realty Trust, Inc. is a global provider of data center services to enterprises, cloud service providers, network providers, financial services, media, and other customers. Shares detracted due to the normalization of the valuation from elevated absolute and relative levels, a drop in new bookings off the high water mark in 2024, and a more tempered outlook for capital investment allocations by global cloud providers on the back of the AI wave (i.e. digestion period). Rumors that Microsoft Corporation, a top customer of Digital Realty, was incrementally canceling certain leases also raised questions about the level of future demand. We remain shareholders. Digital Realty's generally ironclad lease agreements likely includes Microsoft-specific considerations that protect it from the threat of cancellation. Longer term, we believe Digital Realty will benefit from strong secular tailwinds in cloud adoption and IT sourcing and further scaling of its retail colocation business.
• Vornado Realty Trust is a REIT with a high-quality portfolio of office and street-level retail properties largely concentrated in New York City. Although the company noted healthy demand leasing activity across its properties, shares fell on investor disappointment in lackluster forecasts for earnings growth in 2025 before accelerating in 2026. We believe Vornado is deeply discounted in the public markets, presenting an opportunity to own a best-in-class New York City-based office portfolio at an attractive price.