Baron Real Estate Income Fund | Q1 2026

Dear Baron Real Estate Income Fund Shareholder,

For the first quarter of 2026, Baron Real Estate Income Fund® (the Fund) returned 1.12% (Institutional Shares), trailing the MSCI US REIT Index (the REIT Index), which gained 4.52%.

We remain focused and disciplined in our efforts to drive performance, consistent with our approach during prior periods of short-term underperformance. For additional perspective, please see the “Our Current Top-of-Mind Thoughts” and “Portfolio Composition” sections later in this letter, where we outline our key messages and provide further context on the Fund’s first quarter results.

Despite a slow start to 2026, the Fund’s long-term performance remains strong. As of March 31, 2026, Morningstar ranks the Fund as the #2 real estate fund since its inception on December 29, 2017. The only fund ahead of us is the Baron Real Estate Fund®, which we also manage and offers three share classes.

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 March 31, 2026, the Morningstar Real Estate Category consisted of 207, 197, 190, and 185 share classes for the 1-, 3-, 5-year, and since inception (December 29, 2017) periods. Morningstar ranked Baron Real Estate Income Fund Institutional Share Class in the 15th, 2nd, 32nd, and 2nd percentiles for the 1-, 3-, 5-year, and since inception periods, respectively. On an absolute basis, Morningstar ranked Baron Real Estate Income Fund Institutional Share Class as the 32nd, 4th, 63rd, and 3rd best performing share class in its Category, for the 1-, 3-, 5-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.

OUR BOTTOM-LINE VIEW:

Despite a disappointing start to 2026:

• We continue to believe the outlook for much of public real estate is compelling
• Many publicly traded REITs and non-REIT real estate-related companies are trading at attractive valuations, offering what we believe to be a timely investment opportunity
• The Baron Real Estate Income Fund® offers a compelling way to access the long-term return potential of the real estate sector

Note: In early April 2026, I increased my already substantial investment in the Baron Real Estate Income Fund®. Our team believes the Fund offers compelling multi-year return potential, and we outline the rationale for this view below.
 

We continue to believe the outlook for much of public real estate is compelling

While we remain mindful of the headwinds that have weighed on both the stock market and the Fund in the early months of 2026, we encourage clients to focus on where opportunities are headed. From that perspective, we believe the case for real estate remains highly compelling.

Our optimism for public real estate is due to several considerations including:

1. Real Estate has lagged
   • In the last five years through December 31, 2025, the S&P 500 has increased 14.42% per year versus a return of only 5.35% per year for the REIT Index.
   • The REIT Index has underperformed the S&P 500 Index for four consecutive calendar years through December 31, 2025:

• Certain non-REIT real estate companies have also lagged in the last few years.

Examples of REITs that are cheap

• Malls: The Macerich Company, an owner of exceptionally high-quality U.S. malls, is currently valued at approximately 11 times 2027 estimated funds from operations (FFO) – based on depressed earnings – representing a meaningful discount to its warranted range of 15 to 16 times FFO. Similarly, Simon Property Group, Inc., another high-quality mall REIT, is trading at a valuation below its historical norms.
• Data Centers: Equinix, Inc. and Digital Realty Trust, Inc. are leading global data center operators, currently trading at multiples well below those seen in recent private market transactions, which have ranged from 25 to 30 times cash flow. Despite their superior and more resilient cash flow growth prospects, these companies are valued only at a modest premium to other REITs.
• Wireless Towers: Valuations of companies like American Tower Corporation are at multi-year lows, trading at just 15 to 16 times cash flow compared with historical averages of 20 to 25 times.
• Multi-Family: Currently trading at implied capitalization rates of around 6.5% to 7%-plus, compared with approximately 5% in the private market.
• Single-Family Rental: Currently trading at implied capitalization rates of 7.5%, versus roughly 5% in the private market, and priced below $270,000 per home compared with the average home purchase price of over $400,000.
• Hotels: Several hotel REITs are trading at under 10 times cash flow, representing a 40% to 50% discount to replacement cost.
• Iron Mountain Incorporated: This document storage and data center REIT is valued below peers yet is expected to grow cash flow faster than most REITs (10% versus 4%).
• Office: Most office REITs are deeply discounted relative to recent private market transactions and replacement cost, often by 50%.
• Mortgage: Blackstone Mortgage Trust, Inc. trades at 0.9 times book value versus its historical range of 1.1 to 1.3 times and offers an annual dividend of approximately 10%.
• Timber: Weyerhaeuser Company, a timber REIT, is valued at a historically inexpensive 40% discount to net asset value and is well positioned to potentially benefit from an eventual recovery in the U.S. housing market.
• Triple Net: Essential Properties Realty Trust, Inc. is valued at a 2 times discount to its historical average.
• Note: Across multiple REIT categories – including multi-family/apartments, single-family rentals, hotels, strip centers, office, life sciences, cold storage, self-storage, and timber – valuations are 10% to 50% below replacement cost or recent private market transaction values.
• Favorable Arbitrage: Many REITs are “on sale” in the public market relative to private market values, and we see a possibility of take-private transactions by private equity.
   

Examples of non-REIT real estate companies that are cheap

• Vail Resorts, Inc.: The owner and operator of premier mountain resorts, trading at 8.4 times 2027 estimated cash flow versus a long-term average of roughly 15 times and offers a dividend yield of 7%.
• Marriott Vacations Worldwide Corporation: The leading provider of vacation ownership experiences is trading at only 7 times 2027 estimated cash flow versus a historical valuation range of 6 to 10 times cash flow and offers a dividend yield of 4.8%.
• Brookfield Corporation: This global owner and operator of real assets trades at $40 per share, well below management’s estimated liquidation value of $67 per share - approximately 68% higher than the current share price.
• CRH public limited company: This top building materials company trades at 9.5 times 2027 estimated cash flow, versus our view of a warranted 12 to 13 times multiple.
• Wynn Resorts, Limited: A premier luxury global owner and operator of integrated resorts (hotels and casinos), valued at 8 times 2027 estimated cash flow compared with its long-term average of 13 to 15 times.
• GDS Holdings Limited: A leading Asian-focused data center developer and operator, trading at 13.5 times 2027 estimated cash flow versus 20 to 30 times for comparable public and private peers.
   

Baron Real Estate Income Fund® offers a compelling way to access the long-term return potential of the real estate sector

We believe our approach to embracing and structuring a more expansive and diversified real estate income fund where we invest primarily in REITs (at least 75% to 80% of net assets) but also have the optionality to invest up to 20% to 25% in non-REIT real estate companies (primarily dividend paying 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.

In our opinion, our highly differentiated real estate fund enjoys several attractive attributes compared to:

• Actively managed REIT funds: The Fund benefits from a broader investment universe and reduced reliance on the debt markets. Since inception on December 29, 2017, the Fund has increased 8.67% on an annualized basis versus the REIT Index, which increased 4.61%.
• Passive/ETF real estate funds: The Fund has the flexibility to be selective, emphasizing companies with attractive long-term prospects rather than broadly replicating the index and owning both higher- and lower-quality real estate businesses. Since inception on December 29, 2017, the Fund has increased 8.67% annually versus the Vanguard Real Estate ETF, which increased 4.76%.*
• Non-traded REITs and private real estate: The Fund provides enhanced liquidity, diversification, valuation transparency, lower fees and strong performance over the long term.

As of March 31, 2026, the Fund’s net assets were allocated as follows: REITs (81.7%), non-REIT real estate companies (13.5%), and cash and cash equivalents (4.8%). We maintain exposure across 12 distinct REIT categories.

Our allocations to both REIT and non-REIT real estate categories are driven by bottom-up fundamental research and our assessment of relative opportunities within each segment, as discussed in detail below.

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

In the first quarter, several REIT categories delivered strong results — including health care, industrial, data centers, and hotels. Performance was partially offset by select non-REIT real estate holdings, which faced headwinds from housing affordability pressures, AI disruption concerns, software sector exposure, and the structural dynamics of private credit and semi-liquid vehicles. We have made some changes to the portfolio structure and believe the Fund is well placed for improved performance ahead.

The outlook for REITs remains compelling, underpinned by a convergence of favorable factors:

• Relative underperformance creates opportunity. REITs have lagged broader markets, leaving valuations attractive on both an absolute and relative basis.
• Demand/supply dynamics favor rent growth. Constrained new supply across key property types, combined with resilient demand, sets the stage for sustained rent increases.
• Cyclical and secular tailwinds are aligning. REITs stand to potentially benefit from both a cyclical upturn in the economy and long-term structural growth themes.
• AI is a meaningful tailwind, not a headwind. Many REITs, as asset-intensive businesses, are more insulated from AI.
• Financial strength supports shareholder returns. Most REITs carry solid balance sheets, are growing dividends, and offer built-in inflation protection through lease structures.
• The return opportunity is compelling. Taken together, these factors support an attractive multi-year return outlook for REITs.

Summary REIT and Non-REIT Category Commentary

Health Care REITs (19.3%)

• We remain constructive on the multi-year outlook for senior housing and continue to favor Welltower Inc., Ventas, Inc., American Healthcare REIT, Inc., and Janus Living, Inc.
• We believe the sector is well positioned to benefit from both cyclical recovery and durable secular tailwinds. Operating fundamentals are improving, with rent growth and rising occupancy, while new supply remains constrained due to elevated construction costs and restrictive financing conditions. Longer term, demand should be supported by favorable demographic trends, including the aging of the baby boomer cohort and accelerating growth in the population aged 80 and older (Sources: Organization for Economic Co-operation and Development and U.S. Census Bureau). Expense pressures, particularly labor-related, have largely moderated. We also see the potential for attractive, accretive acquisition opportunities, especially for Welltower given its cost of capital advantage.
• In the most recent quarter, the Fund initiated a position in Janus Living, Inc., a $4 billion portfolio of senior living assets. We are optimistic about the company’s long-term prospects and will discuss the company in more detail in future shareholder letters.

Industrial REITs (14.4%)

• In 2024, we took a cautious stance on industrial REITs due to several near-term headwinds: demand normalization to pre-pandemic levels (including slower corporate decision-making), elevated new supply deliveries in the first half of the year, moderating rent growth in select markets, inventory de-stocking reducing immediate warehouse needs, and relatively high headline valuations versus other REIT categories.
• Despite these near-term challenges, we maintained a long-term positive view on industrial REITs and indicated the potential to increase exposure in 2025. This inflection occurred in Q1 2025, when we re-initiated positions in Prologis, Inc., EastGroup Properties, Inc., and Terreno Realty Corporation.
• Looking ahead, we remain constructive on the Fund’s industrial REIT holdings, driven by a favorable multi-year outlook for demand, supply, and rent growth. We see significant embedded growth potential from in-place rents that generally sit 20% to 30% below market levels, as well as secular tailwinds including e-commerce expansion, supply chain logistics, “just-in-time” inventory strategies, and nearshoring/onshoring trends. For a further discussion on Prologis, see the “Top Contributors” section later in this letter.

Data Center REITs (13.8%)

• We remain confident in the long-term growth prospects for data centers. The Fund holds data center REIT positions in Equinix, Inc. and Digital Realty Trust, Inc.
• Please note that the Fund maintains additional data center exposure through its investments in other REITs such as Prologis, Inc. and Iron Mountain Incorporated, both of which have data center businesses, and in non-REIT data center company GDS Holdings Limited.
• We believe data center landlords benefit from low vacancy, strong demand relative to supply, constrained power availability, rising rental rates, and significant pre-leasing prior to large-scale expansions – an improvement over the historical norm. Several secular trends support robust fundamentals globally, including IT outsourcing, rising cloud adoption, growing mobile and internet traffic, and AI-driven data demand. As data continues to grow exponentially, the need to process, transmit, and store it underpins long-term demand for data center space. Early adoption of enterprise AI is just beginning to emerge and may further accelerate existing trends by driving additional digital transformation investments as costs decline.

Self-Storage REITs (6.5%)

• In the last few years, we have been cautious about self-storage REITs due to several years of flat to negative growth. In 2025, our outlook became moderately more positive, as our research suggested a potential inflection point, with growth possibly reaccelerating in 2026 and 2027.
• Over the long term, we continue to view self-storage as an attractive business that has a long history of generating solid growth with strong inflation protection characteristics and comparatively low capital intensity.
• In the first quarter, we initiated a position in Public Storage Incorporated (please see “Top net purchases”) and CubeSmart. The Fund also maintains its position in Extra Space Storage Inc.

Mall REITs (6.0%)

• We remain positive on mall REITs, particularly The Macerich Company and Simon Property Group, Inc. The fundamentals for high-quality mall and outlet assets remain supportive: tenant demand is strong, high occupancy and limited new developments create scarcity, favorable supply/demand dynamics enable rent growth, and valuations remain attractive.
• We are particularly optimistic about the two- to three-year prospects for Macerich. Continued engagement with CEO Jackson Hseih reinforces our confidence that the company can create meaningful long-term value through initiatives such as divesting non-core properties, reducing debt, and improving lease terms with tenants.

Hotel REITs (5.6%)

• We believe hotel REITs are well positioned to benefit from a favorable “trifecta” of cyclical, secular, and 2026-specific tailwinds, which should support strong fundamentals and share price performance.
• The Fund maintains a position in Host Hotels & Resorts, Inc., the world’s largest lodging REIT. We view the company favorably due to its portfolio of premier hotels in attractive locations, which we expect to generate strong growth over time, combined with a strong, liquid investment-grade balance sheet. Current valuations appear compelling.
• The Fund initiated a position in Pebblebrook Hotel Trust, a leading owner of 44 luxury and upper-upscale lifestyle hotels across 13 urban and resort markets.

Triple Net REITs (4.9%)

• We remain optimistic about the long-term prospects for certain triple net REITs.
• In the most recent quarter, we initiated a position in Essential Properties Realty Trust, Inc., a triple net lease REIT that owns a portfolio of approximately 2,300 properties across the U.S. Please see “Top net purchases” for our thoughts on the company.
• The Fund also maintains a position in Agree Realty Corporation. The company’s investment case is supported by its high-quality retail real estate portfolio, an investment-grade tenant base, a cost of capital advantage that positions it to pursue accretive acquisitions, and an excellent founder-led management team who are prudent allocators of capital. We also see a meaningful opportunity for portfolio expansion, with the potential to significantly scale from current levels.

Multi-Family REITs (3.7%)

• In 2025, we maintained a cautious view on multi-family REITs due to modest near-term growth prospects, influenced by factors such as job losses, younger renters opting to stay at home or “double up,” and elevated apartment inventory.
• Though we remain near-term cautious, we are constructive on multi-family REITs over the long term, supported by rental affordability versus for-sale housing (with move-outs to purchase remaining at historic lows), a favorable supply outlook through 2027, partial inflation hedging through annual leases, strong rent-to-income ratios among employed renters, and attractive public market valuations relative to private markets.

Timber REITs (2.8%)

• We are optimistic about the prospects for the Fund’s timber REIT position in Weyerhaeuser Company, one of the world’s largest owners of timberlands with approximately 10 million acres in the U.S. and an additional 13 million acres that are licensed in Canada. Weyerhaeuser is also a major manufacturer of wood products – including lumber, OSB, plywood - used in new housing construction and remodeling projects. We view the shares as historically inexpensive and well positioned to benefit from an eventual recovery in the U.S. housing market.

Other REITs (2.2%)

• We are optimistic about the prospects for Iron Mountain Incorporated. The company offers records storage management along with an evolving fast-growing data center segment. We are encouraged by the company’s prospects to grow overall cash flow by approximately 10% over the next several years. Growth is underpinned by predictable and stable growth in its core records management business while outsized growth is driven by its data center business, which has visibility to more than triple operational capacity from today’s in-place base.

Mortgage REITs (1.6%)

• The Fund continues to have a favorable view of Blackstone Mortgage Trust, Inc., which specializes in real estate credit investments. The company benefits from several competitive advantages, including sponsorship by Blackstone Inc., a global platform providing access to a diversified pipeline of real estate credit opportunities, and a strong, liquid balance sheet. With a nearly 10% dividend yield, a valuation below book value, and improving business prospects, we view Blackstone Mortgage Trust as a compelling investment for the Fund.

Wireless Tower REITs (2.9%)

• We have been cautious about the prospects for wireless tower REITs despite historically low valuation multiples because of several tenant site-decommissioning events (e.g., Sprint, DISH, and others), uninspiring U.S. wireless carrier new leasing activity, lower expectations for growth, and evolving competitive dynamics, including the potential impact of Starlink on long-term growth.
• We may become more constructive over time if the long-term growth outlook for wireless tower REITs improves and is supported by secular tailwinds such as rising mobile data usage, 5G spectrum deployment and network densification (with 6G on the horizon), edge computing (which may create opportunities for mini data centers near towers), and the growing number of connected IoT devices in homes and vehicles. These trends are expected to drive continued demand for wireless bandwidth and higher spending by mobile carriers.
• For our thoughts on American Tower Corporation, please see “Top detractors” later in this letter.

Non-REIT Real Estate Companies (13.5%)

• While the Fund emphasizes REITs, we retain flexibility to invest in non-REIT real estate companies, which we typically limit to approximately 25% of net assets. At times these investments may offer more attractive growth, income, valuation, and share price appreciation potential relative to traditional REITs.
• Current non-REIT holdings include Marriott Vacations Worldwide Corporation, GDS Holdings Limited, Wynn Resorts, Limited, CRH public limited company, Brookfield Corporation, and Vail Resorts, Inc.

After underperforming for much of 2025, shares of Equinix, Inc. rebounded strongly during the quarter, driven by solid operating results, robust bookings growth, and a 2026 full-year outlook that exceeded investor expectations. Equinix is a leading global operator of 270 highly interconnected, carrier-neutral colocation data centers spanning 36 countries across six continents. For further detail, please refer to our “Top net purchases” section.

Shares of Welltower Inc., a leading operator of senior housing real estate, continued to perform well during the quarter, supported by strong cash flow growth in its senior housing portfolio. This performance was driven by sustained occupancy gains, rent increases, and margin expansion, resulting in outsized bottom-line earnings growth. The company also issued a solid initial full-year 2026 outlook and continues to execute on accretive external growth opportunities.

In addition, Welltower is advancing initiatives to enhance asset-light, recurring earnings streams, highlighted by the announcement of its first customer partnerships to license and monetize its proprietary data analytics platform.

Welltower remains well positioned to benefit from both cyclical recovery and long-term secular demand growth, supported by constrained new supply. We maintain a positive outlook, underpinned by the company’s high-quality, luxury-focused portfolio and disciplined capital allocation, which we believe position it to capitalize on both organic and external growth opportunities.

Prologis, Inc., the pre-eminent global industrial REIT, was a top contributor in the first quarter. A strong fourth quarter financial report, constructive full-year 2026 guidance, and management's confident multi-year outlook all contributed to the positive share price momentum.

The quarter's performance reflects a thesis that has been building for some time. As we outlined early last year, we believed leasing activity was stabilizing and poised to reaccelerate — a view that played out through 2025 and carried into the first quarter. The underlying investment case remains as compelling as ever: a favorable demand/supply/rent growth backdrop, significantly embedded upside from in-place rents that sit more than 20% below market and roughly 40% below replacement cost, and a set of durable secular tailwinds — e-commerce penetration, supply chain reconfiguration, inventory safety stock rebuilding, and nearshoring/onshoring. A growing pipeline of data center development opportunities adds another lucrative dimension to the growth story.

We continue to see meaningful appreciation potential in Prologis shares. The runway for cash flow and earnings growth over the next several years is long, and the valuation remains undemanding relative to that opportunity.

Jones Lang LaSalle Incorporated (JLL) was a detractor in the first quarter — not on any fundamental news, but on an abrupt market concern that AI could eventually disrupt certain of the company's business lines. The share price fell approximately 20% in two days.

We think the market has this wrong. Business fundamentals remain excellent, with broad-based strength across segments and a healthy management outlook. More importantly, we view JLL as an AI winner. The company has been an early and deliberate adopter of AI — deploying it to sharpen competitive advantages and accelerate market share gains rather than waiting to see how the technology develops.

The structural case is unchanged. JLL operates in a large, fragmented market and continues to benefit from two durable long-term trends: the outsourcing of commercial real estate services and the growing institutionalization of the asset class. We also believe we are in the early stages of a recovery in commercial real estate transaction and leasing activity — a tailwind that should become increasingly visible in JLL's results over the next several years.

Against that backdrop, the valuation is difficult to ignore. The stock trades at less than 14 times our earnings estimate — a modest multiple for a business we believe can compound earnings per share at a mid-to-high-teens rate over the next few years.

Shares of UWM Holdings Corporation detracted from performance during the period, reflecting investor concerns that rising mortgage rates could pressure origination volumes and lead to lower profitability amid heightened competitive intensity. We were also surprised by management’s decision not to take analyst questions on its most recent earnings call, particularly given the elevated level of market uncertainty. As a result, we exited the position and redeployed the capital into higher conviction opportunities.

Despite valuation levels approaching historical lows, shares of American Tower Corporation underperformed during the quarter, primarily due to rising long-term interest rates, which pressured valuation multiples for companies with long-duration contracted cash flows. Performance was further weighed down by uncertainty surrounding the company’s legal dispute with DISH related to unpaid rent, as well as increasing investor concern over evolving competitive dynamics, including the potential impact of Starlink on long-term growth.

American Tower, a global owner of approximately 150,000 wireless communications sites with a strong presence in developed markets, continues to benefit from durable data demand trends. While we have reduced our position and reallocated capital toward higher-conviction ideas, we would consider revisiting the name as the competitive and legal landscape becomes clearer, particularly given its ability to invest in its portfolio while returning capital to shareholders through dividends and share repurchases.

As outlined in our Q2 and Q4 2025 shareholder letters, shares of Equinix, Inc. underperformed for much of 2025, primarily due to slower near-term earnings growth. At the time, we viewed Equinix as a clear fit within the Baron investment framework – a competitively advantaged business willing to accept short-term earnings pressure in exchange for enhanced long-term growth. Specifically, the company increased capital investment to extend its growth runway, even at the expense of near-term profitability.

As the shares became increasingly discounted, we added to our long-term position, reflecting greater conviction in the company’s growth trajectory. This was supported by emerging inference AI use cases, which we believe will be a meaningful tailwind, as well as strong execution by management in improving cash flow conversion (i.e., shortening the “book-to-bill” cycle) and securing capital at a lower cost than initially underwritten.

During the quarter, we initiated a position in Essential Properties Realty Trust, Inc., a triple net lease REIT that owns a portfolio of approximately 2,300 properties across the U.S. The company leases properties primarily to middle-market businesses operating in service-oriented or experienced-based industries, including car washes, auto services, medical and dental offices, education, restaurants, entertainment and more. Approximately 90% of its business is comprised of sale-leaseback transactions.

We are excited about our investment in Essential Properties for several reasons:

1. Well-diversified, high-quality portfolio: Essential Properties maintains a well-diversified property portfolio with only one tenant representing more than 2% of annualized rent. This has produced credit metrics on par with industry leaders, despite Essential Properties’ portfolio consisting predominantly of non-investment grade rated tenants. We believe the quality of Essential Properties’ portfolio is often overlooked by investors who favor competitors with more investment grade tenant exposure, despite portfolio-level metrics that indicate the company’s underlying credit quality is comparable to peers.
2. Differentiated strategy targeting an underserved segment of the market: Essential Properties focuses on small transactions ($3 million average per property) with middle-market, service-oriented and experienced-based businesses, a segment that is largely ignored by peers who compete for larger, investment grade corporate sale leasebacks. This creates a meaningful competitive moat, while also enabling the company to potentially achieve higher yields without sacrificing portfolio quality.
3. Best-in-class earnings growth: We believe the company is well-positioned to sustain high-single-digit earnings growth, which is best-in-class among triple net lease peers, driven by i) strong built-in organic growth, with contractual rent escalators averaging over 2% per year and resulting in predictable same-store growth, and ii) the ability to consistently execute a high volume of accretive property acquisitions at attractive yields ($1.3 billion in 2025), supported by its focus on middle-market sale leasebacks with non-investment grade rated tenants as mentioned above.
4. Attractive total return profile: The company pays a 4% dividend yield which, combined with high-single-digit earnings growth, should generate double-digit total annual returns for investors.
5. Proven management team: We view management favorably, particularly CEO Pete Mavoides, who has an excellent track record going back to the company’s 2018 IPO and prior to that at Spirit Realty.

At the time we acquired shares, Essential Properties was valued at approximately 15 times our estimate of next year’s cash flows, which represents a discount to its historical average trading multiple of approximately 17 times. The stock was also trading at a roughly 0.5 times premium to its triple net lease peers, which is below the approximate 1.5 to 2 times premium it has historically commanded due to its best-in-class growth profile.

During the quarter, we reestablished a position in Public Storage Incorporated, the best-in-class self-storage REIT with a portfolio of more than 3,500 U.S. properties. We had been cautious about self-storage for several years, given a prolonged period of flat-to-negative growth. Our view has shifted. Recent due diligence suggests a fundamental inflection may be approaching — one where stabilizing demand and rents, combined with declining new supply, could drive a reacceleration in growth beginning in 2026.

Our optimism rests on five pillars:

1. A more pronounced inflection than the industry. Beyond benefiting from a broader self-storage recovery, Public Storage is poised to lap several discrete headwinds that weighed on 2025 results — amplifying the potential earnings rebound. Ongoing acquisitions and development provide additional accretion.
2. An inherently attractive business model. Self-storage benefits from less cyclical demand — a meaningful portion is effectively nondiscretionary — combined with strong pricing power on existing customers (the hassle of moving outweighs the monthly cost of staying) and low capital intensity. These characteristics make it a durable compounder across cycles.
3. Scale advantages that compound over time. Large institutional operators like Public Storage command higher occupancy and rents than smaller competitors, driven by superior data analytics, technology, revenue management systems, and access to capital. We expect these advantages to widen as AI tools are applied across an increasing number of self-storage business functions.
4. PSA4.0 — a credible new chapter. Public Storage recently unveiled PSA4.0, framed as a new era of leadership, growth, and value creation. The initiative encompasses favorable leadership transitions, a data-sharing partnership with Welltower to sharpen capital allocation, and a headquarters relocation. We view each element constructively.
5. Valuation is compelling. The stock trades at a capitalization rate above 6% on what we consider depressed cash flow, against private market values in the low-5% range — a meaningful discount that we believe is unlikely to persist.

Near-term uncertainty may continue to weigh on the shares. But we believe the medium-term setup is attractive: a fundamental inflection, a refreshed strategic agenda, and a depressed valuation create the conditions for significant share price appreciation — driven by both earnings growth and potential multiple expansion.

We exited our Jones Lang LaSalle Incorporated position during the quarter. As discussed in the top detractors section, our conviction in the business and long-term outlook remains high. However, we acknowledge that AI-related sentiment may continue to weigh on the shares in the near term, and we chose to reallocate the capital in the near term.

During the quarter, we reduced our stake in Simon Property Group, Inc. after its impressive multi-year share price performance and rising valuation multiples. However, we remain optimistic about our investment in Simon for several reasons:

1. Strong Reputation: Simon is a blue-chip company with a proven history of both organic and external growth, complemented by a robust balance sheet and an experienced management team.
2. Favorable Market Conditions: The outlook for high-quality malls and outlets is encouraging, characterized by solid demand, limited supply, full occupancy, and increasing rents.
3. Attractive Dividend: Simon offers a well-supported and growing dividend with a yield nearing 5%.
4. Reasonable Valuation: The current valuation multiple is considered undemanding.

During the quarter, we decided to exit our position in Toll Brothers, Inc., a leading U.S. homebuilder. Recently, the outlook for the U.S. residential housing market has deteriorated further due to persistently high mortgage rates and home prices, along with ongoing macroeconomic challenges and consumer uncertainty, which have dampened homebuyer demand. Homebuilders are increasingly offering incentives to attract buyers, negatively affecting margins and cash flow.

However, we anticipate that Toll Brothers may be less affected than its peers, as it caters to more affluent consumers and has longer build times. As we mentioned earlier, we remain optimistic about the medium- and long-term prospects for the U.S. housing market and may consider revisiting this investment opportunity in the future.

Baron Real Estate Income Fund® Outlook

We remain optimistic about our differentiated approach: a diversified real estate income fund anchored in REITs (at least 75% of net assets), with the flexibility to invest up to 25% in high-quality, typically dividend-paying non-REIT real estate companies. We believe this structure is increasingly well-suited to today's rapidly evolving real estate landscape — one that demands more discerning analysis as tailwinds accelerate for some companies and headwinds persist for others. The portfolio is built around competitively advantaged real estate companies we expect to grow faster than the peer group. Valuations are attractive, and we believe the return outlook is compelling.

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

Our Core Real Estate Team

A special note of appreciation to our core real estate team – David Kirshenbaum (assistant portfolio manager), George Taras (senior analyst), and David Berk (analyst). Their dedication, work ethic, and passion for the business are truly impressive, and their deep knowledge of real estate is invaluable. Equally important, they are simply great people.

Our team and I remain fully committed and energized to delivering strong long-term results.

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

Sincerely,