Baron Real Estate Fund | Q4 2025

In 2025, Baron Real Estate Fund® (the Fund) increased 5.19% (Institutional Shares), outperforming the MSCI US REIT Index (the REIT Index), which increased 1.68%, and marginally outperforming the MSCI USA IMI Extended Real Estate Index (the MSCI Real Estate Index), which increased 4.88%.

In the fourth quarter of 2025, the Fund declined 1.32%, outperforming both the REIT Index, which declined 1.99%, and the MSCI Real Estate Index which declined 3.45%.

Following double-digit annual returns in 2024 (12.46%) and 2023 (25.04%), the Fund’s more modest 5.19% gain in 2025 was due to various factors including superior relative growth in several non-real estate sectors, ongoing interest rate headwinds, a slowdown in the new and existing home sales market, and other considerations.

Importantly, we believe that agood portion of the issues that weighed on real estate performance in 2025 are, at this stage, reflected in share prices. Looking forward, we believe now is an attractive time to prioritize public real estate and our Baron Real Estate Fund. Please see “Our current top-of mind thoughts” and “Concluding thoughts on the prospects for real estate and the Fund” sections later in this letter for our expectations for the year ahead.

We are pleased to report that according to Morningstar, the Fund, since inception, has maintained its #1 real estate ranking for the 16-year period ended December 31, 2025. Further, according to Morningstar, the Fund is in the top 1% of all real estate funds for each of its trailing 15-, 10-, and 3-year performance periods ended December 31, 2025.

We will address the following topics in this letter:

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

As of December 31, 2025, the Morningstar Real Estate Category consisted of 215, 205, 196, 153, 116, and 156 share classes for the 1-, 3-, 5-, 10-, 15-year, and since inception (12/31/2009) periods. Morningstar ranked Baron Real Estate Fund Institutional Share Class in the 8th, 1st, 26th, 1st, 1st, and 1st percentiles, respectively. On an absolute basis, Morningstar ranked Baron Real Estate Fund Institutional Share Class as the 16th, 3rd, 50th, 1st, 1st , and 2nd best performing share class in its Category, for the 1-, 3-, 5-, 10-, 15-year, and since inception periods, respectively.

As of December 31, 2025, Morningstar ranked Baron Real Estate Fund R6 Share Class in the 9th, 2nd, 27th, 1st, 1st, and 1st percentiles, respectively. On an absolute basis, Morningstar ranked Baron Real Estate Fund R6 Share Class as the 17th, 4th, 51st, 1st, and 1st best performing share class in its Category, for the 1-, 3-, 5, 10-year, and since inception periods, respectively.

Since inception rankings include all share classes of funds in the Morningstar Real Estate Category. Performance for all share classes date back to the inception date of the oldest share class of each fund based on Morningstar’s performance calculation methodology. Morningstar calculates the Morningstar Real Estate Category Average performance and rankings using its Fractional Weighting methodology. Morningstar rankings are based on total returns and do not include sales charges. Total returns do account for management, administrative, and 12b-1 fees and other costs automatically deducted from fund assets.

Baron Real Estate Fund Institutional Share Class was rated 4 stars overall, 5 stars for the trailing 3 years, 3 stars for the trailing 5 years, and 5 stars for the trailing 10 years ended 12/31/2025. There were 205 share classes, 196 share classes, and 153 share classes for the 3-, 5-, and 10-year periods. The Morningstar Ratings™ are for the Institutional share class only; other classes may have different performance characteristics. The Morningstar Ratings are based on the Morningstar Risk-Adjusted Return measures.

On November 14, 2025, at our annual Baron Investment Conference, we were interviewed by Morningstar analyst Adam Sabban. Adam asked a series of real estate-related questions.

The key message that underpinned our answers then still holds true today.

BOTTOM LINE: As we peer into 2026, we are optimistic about the prospects for public real estate and the Baron Real Estate Fund.

Below is a synopsis of our Morningstar interview.

Question 1: Why should one “bother with real estate” given concerns ranging from higher interest rates to the state of office properties.

Our Answer:

Real estate has been through a rough period in the last five years.

But while many look in the rearview mirror, we think real estate is at a pivotal moment. We believe real estate is at the doorstep of a positive inflection.

Why is that?

1. Our view is that a large portion of the concerns about real estate – higher interest rates, refinancing challenges, bank failure concerns, empty office buildings, housing affordability challenges – are “old news” and largely reflected in share prices such that the risk/reward for real estate is compelling.
2. Real estate shares have lagged.
3. Valuations have reset for a higher cost of capital.
4. Demand conditions for most segments of real estate are steady with expectations for an improvement in growth in the next few years.
5. New competitive supply has collapsed – in many cases down more than 50% from peak levels in 2022. We believe this important point is not appreciated. Growth is poised to rebound faster than in prior cycles because real estate is not burdened with excess supply at low occupancy levels.
6. Balance sheets are in solid shape.
7. Public real estate is attractively valued relative to private real estate.
8. Long-term interest rates may head lower and that would be a powerful catalyst for real estate.
9. We are identifying attractively valued companies in several segments of real estate.

So, the following is the punch line:

We like the setup for real estate.

We think the risk/reward is compelling for much of real estate. When we aggregate the three key components of total return - growth + dividends + prospects for an improvement in valuation – we believe we can generate double-digit annual returns in the years ahead.

If we are right, we believe these returns will stack up well versus many other investment alternatives.

So, in our opinion, this is the time you want to invest in real estate.

Question 2: Growth and real estate investing aren’t commonly believed to have much overlap. Real estate is thought of as more of a “value” sector. You have more of a growth-oriented approach with your broader take of real estate. Why should investors view this as a valid way to invest in the space?

Our Answer:

You are right about the value categorization of real estate.

Most of our peers tend to limit their real estate investments to REITs – such as office buildings, apartments, malls, and shopping centers – which pay a dividend and grow, on average, only 4% to 5% per year through gains in occupancy and rent and are viewed as value investments (Source: Citi Research)

At Baron, we have never been satisfied with 4% to 5% growth for our real estate investments. That was the impetus to construct differentiated real estate funds that are more growth-oriented and populated with real estate companies that do not grow 4% per year like most REITs but instead may grow more than 10% per year. How do we accomplish this?

1. We embrace a broader, more comprehensive approach to real estate investing. We not only invest in REITs, but we also invest in real estate C-corps and operating companies, many of which grow faster than REITs, in part because they don’t have to pay out their taxable income in dividends.
2. We prioritize best-in-class real estate. If we own the best real estate in the best geographic markets with population and job growth and limited new competitive supply, our best-in-class companies stand to grow faster than the peer group.
3. Examples from our real estate portfolios include:
   • Like our peers, we invest in REITs, yet we prioritize the faster-growing REITs such as senior housing-focused Welltower Inc., which we believe will grow earnings the next few years 15% to 20% annually, or Prologis, Inc., the largest industrial REIT that we believe will compound earnings at 10% per year over the next five years.
   • In addition to investing in REITs, we supercharge the Fund’s growth by investing in highly compelling non-REIT real estate-related companies. Examples include:
     • Commercial real estate services companies CBRE Group, Inc. and Jones Lang LaSalle Incorporated, the two leading commercial real estate services companies in the world that we expect to grow earnings 15% to 20% per year versus 4% to 5% for REITs.
     • In travel-related real estate, we are big fans of Hilton Worldwide Holdings Inc., which we expect will continue to grow earnings approximately 15% per year. Hyatt Hotels Corporation, as well, should be a double-digit grower.
     • In residential-related companies, there are certain companies such as Lowe’s Companies, Inc. and Toll Brothers, Inc., among others, that we believe may grow earnings at more than 10% annually in the next few years.

Brief advertisement: We believe our approach works. Through December 31, 2025 (updated from our November 14, 2025, Morningstar interview reply, which was based on performance results as of September 30, 2025):

• Since inception 16 years ago, our Baron Real Estate Fund has generated a total return of 620% versus the REIT Index which has returned only 224% - and it is the number one ranked fund – according to Morningstar.
• Since inception 8 years ago, our Baron Real Estate Income Fund – which is more analogous to REIT-focused funds – has returned 96% versus the REIT Index which has returned only 39%* – and the only real estate fund that has outperformed Baron’s Real Estate Income Fund over this time are the three share classes of our Baron Real Estate Fund.

*Baron Real Estate Income Fund's annualized returns for the Institutional Shares as of December 31, 2025: 1-year, 3.74%; 5-year, 5.74%; Since Inception (12/29/2017), 8.80%. The MSCI US REIT Index’s annualized returns as of December 31, 2025: 1-year, 1.68%; 5-year, 5.35%; Since Fund Inception (12/29/2017), 4.18%.

Question 3: Given your flexibility, what innovations or secular trends within the broader real estate space get you excited today?

Our Answer:

A lot.

Admittedly, real estate is a cyclical business. Real estate should benefit from the cyclical tailwinds of economic growth. Over time, there will be more demand for apartments, shopping centers, industrial warehouses, and senior housing facilities. And as demand increases, occupancy will rise, rents will increase, cash flow will grow, and real estate values should appreciate, especially because demand versus supply is generally in balance.

What is not appreciated by many is that real estate is also benefiting from secular tailwinds that are less sensitive to the economic cycle and should be enduring for years to come. Examples include:

• Industrial real estate is benefiting from multi-year demand drivers including the move to e-commerce, “last mile” infrastructure, “onshoring,” and a shift from “just-in-time” to “just-in-case” inventory management. Our investments in Prologis, EastGroup Properties, Inc., Terreno Realty Corporation, and Goodman Group should all benefit from these secular trends.
• The multi-year setup for data centers is as strong as it has ever been. The demand vectors are expanding and include rising data consumption, cloud computing, IT outsourcing, and AI. New supply is constrained due to the elevated cost to build and power constraints. And rents are rising. Our investments in Equinix, Inc., Digital Realty Trust, Inc., GDS Holdings Limited, and Goodman should be multi-year beneficiaries of these trends.
• Senior housing real estate companies are benefiting from aging baby boomers, the 80+ population which is among the fastest growing aging groups (source: Organization for Economic Co-operation and Development and U.S. Census Bureau), and people are living longer in part due to wonderful new drugs that contribute to weight loss and extend life! Our investments in Welltower Inc. and Ventas, Inc. should continue to benefit from these trends.
• Travel: Most don’t think about travel as a secular growth opportunity, but, at Baron, we do. Travel companies are benefiting from the favorable shift in consumer preferences away from spending on goods to prioritizing spending on travel. We own best-in-class hotel companies – Hilton Worldwide and Hyatt – which we expect to continue to benefit from these trends.

Question 4: Housing is the most tangible segment of real estate for many investors, and there’s plenty of headlines about that market, ranging from affordability concerns, to lack of supply, and regulation. You invest in a handful of players directly involved in that market, including Toll Brothers. What is the opportunity in housing today.

Please see the “Portfolio Composition and Key Investment Themes” section of this letter for our replay to this question.

Question 5: Given the huge investments in physical infrastructure due to artificial intelligence, what are the ramifications within real estate?

Our Answer:

The topic of artificial intelligence (AI) and its potential impact on real estate businesses is top of mind and a due diligence question that we discuss in all our meetings with companies.

Within real estate, there are likely to be AI winners, losers, and other factors to consider including the path of interest rates.

Our preliminary sense is that the “winner” columns will include:

• Data centers: AI workloads from the “Magnificent 7” companies (e.g., Microsoft, Meta, Amazon) are driving explosive demand for data center real estate, and we are capitalizing on the opportunity globally with our data center investments. In addition to owning the largest global data center companies – Equinix and Digital Realty Trust – we also have investments in China based data center company GDS Holdings, Australian based data center focused company Goodman, and other leading companies with data center operations including Prologis.
• Industrial: AI’s physical manifestation – robotics, chip manufacturing, supply chain automation – will require more industrial facilities (hubs that can accommodate robotics and on-site servers).

Our preliminary sense is that real estate categories that may face headwinds include:

• Office: We have a mixed view on the long-term prospects for office real estate, in part since AI-driven automation and hybrid work models may lead to reduced traditional office demand.
• Residential: AI infrastructure may reshape regional housing markets – areas where job loss may weaken residential markets, while there are other geographic markets attracting large AI campuses and may see housing demand spikes.

Lastly, though we don’t predict the path of interest rates at Baron, AI should lead to greater productivity efficiencies for companies – you can do more with fewer employees. Notably, fewer jobs run counter to the Federal Reserve’s mandate for full employment. AI and associated job loss may result in a secular trend toward lower interest rates to offset job loss – time will tell, but certainly something to ponder, especially for real estate.

We currently have investments in REITs, plus eight additional non-REIT real estate-related categories. Our percentage allocations to these categories vary, and they are based on our research and assessment of opportunities in each category on a bottom-up basis, which we outline below.

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

Investment Themes

We continue to prioritize six long-term high-conviction investment themes or real estate categories:

1. REITs
   • Demand > supply + solid balance sheets + growing dividends + inflation-protection characteristics + attractive valuations
2. Residential-related real estate
   • Structural underinvestment in housing relative to demographic needs + cyclical tailwinds (pent-up demand) + secular tailwinds (flexible work and relocation to suburbs + aging existing home stock + lock-in effect = below market mortgage rates for most existing homes that benefit new home sale prospects)
3. Travel-related real estate
   • Increasing wallet share for travel over durable goods + delays in marriage lead to more disposable income for travel + flexible work arrangements allow for more travel + cyclically depressed business activity + compelling valuations
4. Commercial real estate services companies
   • Oligopolistic industry + highly fragmented industry (customers prefer companies that can provide the full suite of services) + outsourcing of commercial real estate + institutionalization of real estate
5. Real estate-focused alternative asset managers
   • Secular growth opportunity given desire for alternative assets + market share gain opportunity for global and multi-service asset managers
6. Property technology companies
   • Intersection of real estate and technology

REITs

Though demand remains tempered for some real estate segments, most REITs enjoy occupancies of more than 90%, and there are several segments of real estate where demand remains strong. Limited new competitive supply is forecasted in the next few years. We expect the transaction market to pick up, and certain publicly traded REITs now have the “green light” to issue equity for accretive external growth. We expect private equity to look for opportunities to acquire discounted public REITs. Most balance sheets are in good shape. Several REITs benefit from some combination of all or some of the following favorable characteristics: inflation protection, contracted cash flows, and an ability to increase dividends. We have identified several REITs that are cheap relative to history and private market valuations. We believe several REITs can generate double-digit returns through a combination of growth, dividends, and some room for valuations to expand.

As of December 31, 2025, we had investments in eight REIT categories representing 25.1% of the Fund’s net assets.

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

At the annual Baron Investment Conference on November 14, 2025, we were asked about our views of the housing market.

Question 4 From Morningstar Interview: Housing is the most tangible segment of real estate for many investors, and there’s plenty of headlines about that market, ranging from affordability concerns, to lack of supply, and regulation. You invest in a handful of players directly involved in that market, including Toll Brothers. What is the opportunity in housing today?

Our Answer:

This is an important topic.

We are cognizant that there is a logjam in the housing market.

On the one hand, we have a buyers’ strike because homes are not affordable for many following a 50% increase in home prices in the last 5 years and a spike in mortgage rates from 3% to 6% to 7% (source: National Association of Realtors).

On the other hand, we also have a sellers’ strike given that many who own a home and are considering selling are reluctant to do so because their in-place mortgage rate is much lower than current mortgage rates.

It is critical that the new administration, the homebuilders, and others collaborate and address the logjam and the housing challenges. It is too important to ignore. Why?

1. Two-thirds of all households own their home. Home ownership is typically the largest personal investment for many – and so it is important that the value of the home increases over time.
2. The American dream to own a home is not over – but homes must become more affordable.
3. It is critical to address because there is a multiplier effect on the housing market. As housing is fixed and more homes are built, it doesn’t stop there. The spending ripples through the economy in the form of more jobs, more consumer spending, higher prices, and faster economic growth.

We have been near-term cautious about the opportunities in the housing market – in part due to the affordability challenges and logjam with buyers and sellers of homes – yet remain long-term bullish.

The case for our long-term bullish view on housing is as follows:

1. There is a structural shortage of homes in our country relative to the demographic needs. The U.S. is building the same number of homes today – 1.4 million - as it did in 1960 or 65 years ago even though the population back then was only 180 million people versus 342 million today. 160 million more people today than in 1960, yet our country is building the same number of homes. More homes must be built. (Source: Census Bureau)
2. There are secular tailwinds that bode well for housing, including demographic tailwinds in the form of millennials who want to own homes, flexible work arrangements that favor suburban living and home ownership and a desire to own newly built homes rather than existing homes which, on average, are more than 40 years old.
3. Several housing-related companies are attractively valued.
4. We believe a rebound in the housing market is on the horizon because there is bipartisan support to address the housing crisis and make homes more affordable.

From a growth perspective, we are picking our spots. There are several super-compelling housing-related growth companies that are poised to potentially benefit from a rebound in the housing market in the years ahead. For example:

Toll Brothers, led by its fabulous CEO, Doug Yearley, is the leading luxury homebuilder in the country that has a tremendous runway for growth given its competitive advantages versus private builders and an enormous addressable market (delivered 11,292 homes in 2025 versus an addressable market of approximately 600,000 homes). We believe the company will grow its book value at a double-digit annual rate in the next few years.

We are taking a bar bell approach to investing in housing by also researching more affordable homes - manufactured housing companies. Stay tuned for a more complete update in the year ahead. Also, please see our “Top net purchases” section for a discussion about Champion Homes, Inc., a recent manufactured housing addition for the Fund.

Lowe’s is the second largest home improvement center in the U.S. that owns its real estate, with revenues highly correlated to the housing industry, benefits from an oligopolistic industry structure, and offers prospects the potential for double digit earnings growth in the next few years.

As of December 31, 2025, residential-related real estate companies represented 28.1% of the Fund’s net assets.

Residential-related real estate companies

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

We continue to believe that several factors are likely to contribute to multi-year tailwinds for travel-related real estate companies including a favorable shift in consumer preferences (demand for experiences/services such as travel over goods), a growing middle class, and other encouraging demographic trends (more disposable income for the millennial cohort due to delays in household formation and work-from-home arrangements which allow for an increase in travel bookings). In addition, private equity’s long history of investing in travel-related companies may serve as a catalyst to surface value, which the public market may be overly discounting.

As of December 31, 2025, travel-related real estate companies represented 15.1% of the Fund’s net assets.

Travel-related real estate

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

Commercial real estate services companies

Leading commercial real estate services companies CBRE Group, Inc. (CBRE), Jones Lang LaSalle Incorporated (JLL), and Cushman & Wakefield plc (CWK) should continue to benefit from structural and secular tailwinds: the outsourcing of commercial real estate, the institutionalization of commercial real estate, and opportunities to increase market share in a highly fragmented market. Looking forward, we believe we are in the early days of a rebound in commercial real estate sales and leasing activity. We believe CBRE, JLL, and CWK may generate annual growth in earnings per share of more than 15% in the next few years.

Real estate-focused alternative asset managers

Leading real estate-focused asset managers Blackstone Inc. and Brookfield Corporation have an opportunity to increase market share of a growing pie due to impressive investment track records and global scale advantages. They are positioned to potentially benefit from a secular growth opportunity for alternative assets due to track records of generating attractive relative and absolute returns with what is perceived, in some cases, as less volatility than several other investment options.

Property technology companies

The collision of real estate and technology has led to a new category within real estate–real estate technology, also referred to as proptech. The emergence of proptech and the digitization of real estate is an exciting and promising new development for real estate. We believe we are in the early innings of a technology-driven investment cycle centered on data and digitization that allows real estate-related businesses to drive incremental revenue streams and lower costs.

We believe CoStar Group, Inc., the leading provider of information, analytics, and marketing services to the real estate industry, is positioned to capitalize on this burgeoning secular growth trend.

As of December 31, 2025, other real estate-related companies (which include the three investment themes mentioned directly above plus modest exposure to an infrastructure related stub position in Legence Corp.) represented 30.1% of the Fund’s net assets.

Other real estate-related real estate companies

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

Leading commercial real estate service company Jones Lang LaSalle Incorporated contributed positively to performance during the fourth quarter, aided by the company’s “beat and raise” third quarter financial report, coupled with broad-based strength across the business. We expect the company to continue benefiting from structural and secular tailwinds: the outsourcing of commercial real estate, the institutionalization of commercial real estate, and opportunities to increase market share in a highly fragmented market. Looking forward, we continue to believe we are in the early days of a rebound in commercial real estate sales and leasing activity. We believe Jones Lange may generate annual earnings per share growth of mid- to high teens in the next few years, and the company is being valued at a discounted multiple of less than 17 times our estimate for next year’s earnings versus 22 times for its closest peer, for comparable growth.

Best-in-class industrial REIT Prologis, Inc. contributed positively to performance during the fourth quarter, aided by the company’s strong third quarter financial report, coupled with management’s robust multi-year business outlook. As we outlined earlier this year in our first quarter shareholder letter, our sense had been that leasing activity had begun to stabilize and was poised to accelerate as the year progressed, which ultimately played out. We also outlined our view that Prologis is a competitively advantaged company with bright multi-year growth prospects, predicated on a favorable multi-year outlook for demand/supply/ rent growth, significant embedded growth potential from in-place rents that are generally over 20% below market rents and 40% below replacement rents, several secular demand tailwinds (e-commerce, supply chain logistics, more inventory safety stock, nearshoring/onshoring), and a growing pipeline of lucrative data center development opportunities. We continue to believe the appreciation potential for Prologis’ shares remains compelling given the strong runway for future cash flow and earnings growth in the next several years and an undemanding valuation.

The shares of Hyatt Hotels Corporation, a global hospitality company that focuses on serving high-end travelers, performed well in the most recent quarter due to solid quarterly results and the market’s realization that its valuation multiple was too low relative to its growth rate and peers.

We remain optimistic about the prospects for Hyatt because: (i) the company offers industry-leading 6% to 7% net unit growth at a two to four multiple point valuation discount relative to industry peers; (ii) management has prioritized outsized exposure to high-end leisure, group business, and international markets; and (iii) the company maintains an approximately $2 billion portfolio of owned hotels which we believe will be accretively sold over time with proceeds perhaps redirected to ongoing capital returns to shareholders. We anticipate that as Hyatt’s asset-light mix approaches 90% by the end of 2027 versus 80% currently, the company’s valuation multiple will improve further.

The shares of CoStar Group, Inc., the global leader in digitizing real estate, declined in the fourth quarter, due to concerns that the company’s residential Homes.com platform will continue to require significant capital investment and competitive worries that Google’s new real estate advertisement format and Zillow’s OpenAI partnership could divert traffic from Homes.com in the years ahead. Further, investors appear worried that CoStar’s apartments.com business may face increased competition from Zillow Rentals due to its lower price point.

On January 7, 2026, management addressed some key investor concerns by providing expectations for capital allocation, Homes. com spend reductions, share buybacks, and other key steps. We are digesting management’s announcement and will have more to say in our next shareholder letter. At this stage, our sense is that the concerns are overblown and largely factored in the company’s share price. We believe CoStar’s shares are attractively valued as its commercial business is valued at less than 20 times 2026 estimated cash flow.

Shares of Iron Mountain Incorporated, a company that offers records storage management along with an evolving fast-growing data center segment, detracted from performance during the quarter after the company posted a disappointing quarter of new bookings within its higher growth data center business. In addition, a short report added an overhang to Iron Mountain’s shares as it questioned the company’s accounting adjustments and overall leverage levels. While we disagree with the short report and believe the company has compelling long-term growth prospects, we harvested losses, exited our position, and reallocated capital to higher conviction ideas. We may revisit the investment later.

After strong performance in the first nine months of the year, shares of GDS Holdings Limited, the leading developer and operator of data centers in China and a fast growing developer and operator of data centers outside of Asia, lagged in the fourth quarter as investors digested the potential timing of the step-up in new business bookings and the associated capital investment required. We continue to see increasing evidence of the AI wave on the cusp of a step-change and further progress being made toward the loosening of chip supply in China that previously hindered data center leasing volumes. We remain long-term bullish on the company due to its undemanding valuation level, blue-chip customer base, valuable capacity in tier-1 markets and imbedded value in its international business demonstrated via private capital raises backed by highly regarded investors.

We added to our senior housing investment theme by purchasing shares of Ventas, Inc. Ventas is an operator of senior housing, life science, and medical office buildings. We have been encouraged by the company’s continued robust fundamental results, growing investment momentum in its external growth pipeline (expected at over $2.5 billion for the year) and increasing openness to shedding slower growth assets to redeploy proceeds into higher growth areas.

As outlined in prior letters, we continue to be optimistic about the prospects for both cyclical and secular growth in senior housing demand against a backdrop of muted supply that will lead to several years of favorable growth. Among senior housing operators, we believe shares of Ventas remain attractively valued given our expectation of approximately 10% underlying per share growth, the company’s increasing mix of senior housing operating assets (currently at approximately 50% of cash flow), its declining leverage levels, and the company’s ability to capitalize on a robust external growth opportunity.

We began acquiring shares of Champion Homes, Inc. during the quarter. Champion Homes is one of America’s largest manufacturers of factory-built housing, having sold over 26,000 homes during its most recent fiscal year. We are excited about the prospects for Champion Homes for several reasons:

1. Factory-built homes are potentially a key solution to housing affordability issues. The average home built by Champion Homes costs $93,000 compared to approximately $400,000 for the average site-built home in America (source: National Association of Realtors via FRED). Factory-built homes can also be produced much more quickly than site-built homes due to the efficiencies of building a home in a controlled, assembly-line environment. The U.S. is in search of fast, affordable housing options and we believe factory-built homes can play a key role going forward.
2. Several current initiatives are focused on increasing demand for factory-built homes. While the factory-built housing industry has produced approximately 200,000 homes per year over the long-term, recent trends such as limited availability of financing options and aesthetic concerns have caused the industry to produce only 100,000 homes per year in recent years (source: U.S. Census Bureau). In response, lawmakers are currently prioritizing several initiatives designed to spur greater demand in the near term. This includes lowering the cost of financing through chattel loan reform, removing permanent chassis requirements to improve aesthetics of the home, and HUD code changes to allow for larger, multi-unit homes.
3. Strong market share positions the company well in a more favorable demand environment. As the initiatives listed above take hold, we believe the industry is set up for demand to inflect positively. Champion Homes is the second largest producer of factory-built housing in America with approximately 20% to 25% market share today, trailing only Berkshire Hathaway owned Clayton Homes. We believe this positions the business to be a key beneficiary of greater demand.
4. Ability to ramp production quickly from current levels and deliver products to the consumer. Champion Homes has 46 manufacturing facilities that are operating at just 60% capacity utilization today. The business can ramp production quickly if needed to fulfill greater demand. It also has several distribution channels, including 82 retail locations, through which it can bring its homes to market.
5. Discounted valuation on an absolute and relative basis. We view valuation as attractive, with Champion Homes trading at a 1-2 multiple point discount to its typical trading multiple at the time of our purchase due to mixed recent results and incremental cost pressures from tariffs. Additionally, while Champion Homes has historically traded at a roughly 1 multiple point premium to its closest publicly traded peer due to its superior scale, market share and profitability profile, it was trading at 2 multiple point discount at the time of our purchase. We believe that the relative valuation will normalize over time as the business works through these near-term issues. Finally, we believe that there is potential for the multiple to re-rate sustainably higher if the factory-built housing industry does experience the demand inflection that we previewed above.

During the quarter we initiated a new position in Fortune Brands Innovations, Inc. following a sharp correction in the share price. Fortune Brands is a leading provider of plumbing, outdoor, and security products, primarily servicing the U.S. new residential construction and remodel sectors.

We are excited about the medium-term prospects for Fortune Brands for several reasons:

1. High quality business and company. The company holds leading (mostly #1) market positions across its business lines in well-structured industries, with demonstrable pricing power and a portfolio of well-known brands, including Moen, Rohl, Therma-TRU, Yale, August, and Master Lock. We have deep respect for CEO Nick Fink and other members of the management team.
2. Dimensional growth drivers.
   1. U.S. new single-family home construction and remodel activity are at cyclically depressed levels. Fortune Brands should benefit from any pickup in U.S. new home construction and repair and remodel activity, which have been depressed for several years amid a challenging U.S. housing market and cautious consumer. Together, these end markets drive most of the revenue for Fortune Brands.
   2. Market share gains. Historically, Fortune Brands has demonstrated the ability to grow sales faster than the underlying market, driven by its leading brands, new product innovation, and strong distribution relationships.
   3. Pricing power. Fortune Brands has historically demonstrated ample pricing power to offset cost inflation.
   4. Connected Products. Over the last several years, Fortune Brands has been introducing new products to address an estimated $100 billion market for smart safety & security and energy & water control. Fortune Brands generated approximately $300 million of annualized sales at year end 2025 from these initiatives and is targeting $1 billion of sales by 2030.
   5. Margin expansion. Management expects EBITDA margins can expand as revenue grows, owing to high incremental margins realized on incremental volumes, coupled with a relentless focus on operational excellence.
3. Potential for mid-teens annual earnings per share growth over the next several years.
   1. Management believes that, as the new residential construction and remodel markets begin to recover, combined with other growth drivers outlined above, the company can grow earnings per share at a mid-teens rate.
4. Attractive valuation.
   1. We view valuation as attractive, with the stock trading at less than 9 times our estimate of next year’s cash flow (which is cyclically depressed), relative to a historical range of 9 to 14 times.

While we recognize that uncertain business conditions could continue to weigh on shares of Fortune Brands in the near term, we are excited about the company’s compelling medium-term growth prospects and depressed valuation. We see potential for significant share price appreciation in the coming years, driven by growth and potential multiple expansion.

During the quarter, we exited the Fund’s position in Vornado Realty Trust, an owner and developer of premier office and street retail properties concentrated in New York City and reallocated the capital to real estate companies that we believe have superior near-term growth. We remain optimistic about the long-term prospects for Vornado and may revisit the company in the future.

We trimmed the Fund’s positions in American Tower Corporation and Taylor Morrison Home Corporation but maintain ownership positions in both companies.

We recognize that in the months ahead there may be choppy periods in the market, yet we remain directionally positive and believe there are valid reasons for optimism for the stock market, public real estate, and the Baron Real Estate Fund.

Stock Market Outlook

We remain optimistic about the prospects for the stock market in 2026. Our research leads us to believe that economic conditions, which are broadly steady, may experience an acceleration in growth due to a series of potential tailwinds that include: lower trade uncertainty, lower taxes, depreciation benefits that will allow businesses to deduct capital expenditures such as investments in equipment and research and development, deregulation and the likelihood of further mergers & acquisition activity, a Federal Reserve that may continue to ease financial conditions, likely steps by the new administration to address the logjam in the housing market, and AI productivity gains that may lead to lower inflation (due to fewer jobs), lower long-term interest rates, and an expansion in profitability margins.

For these reasons, we remain positive about the outlook for the stock market.

Real Estate Market Outlook

We believe the conditions are in place for much of real estate to perform well in the year ahead. As detailed earlier in this letter, demand conditions for most segments of real estate are steady with expectations for an improvement in growth in the next few years. New competitive supply has collapsed – in many cases down more than 50% from peak levels in 2022. We believe this important point is not appreciated. Growth is poised to rebound faster than in prior cycles because real estate is not burdened with excess supply at low occupancy levels. Real estate shares have lagged, and valuations have reset for a higher cost of capital. Public real estate, in most cases, is attractively valued relative to private real estate. We believe private equity is likely to accelerate acquisitions of public real estate companies given the discounted valuations of several public real estate shares. Balance sheets and credit markets are strong. Lower shelter inflation and AI productivity gains may lead to lower long-term interest rates. This possibility would, of course, be a powerful catalyst for real estate. We believe a favorable combination of cash flow growth, dividends, and the prospects for an improvement in public real estate valuations may generate double-digit annual returns in the years ahead.

So, in our opinion, this is an attractive time to invest in real estate.

Baron Real Estate Fund Outlook

We continue to believe the benefits of the Fund’s broader and more flexible approach, which allows us to invest in an extensive 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. Some companies will experience an acceleration in tailwinds and others are likely to face ongoing headwinds. We believe we have constructed a portfolio that is populated with competitively advantaged real estate companies that generally are expected to grow faster than the real estate peer group. We have structured the Fund to potentially capitalize on compelling investment themes. Valuations and return prospects are attractive.

For these reasons, we remain positive about the outlook for the Baron Real Estate Fund.

Our Core Real Estate Team

A big shout out of appreciation and admiration for our core real estate team - assistant portfolio manager, David Kirshenbaum, senior analyst, George Taras, and David Berk. David, George, and David are outstanding. Their commitment to our real estate business and strong work ethic are impressive. They are smart and driven to deliver excellent results. Each of them has developed a deep knowledge of real estate. And, on a personal note, they are fabulous people.

I, and our team, remain fully committed and energized to continue to deliver outstanding long-term results.

I proudly remain a major shareholder of the Baron Real Estate Fund®.

Sincerely,