Baron Real Estate Income Fund | Q3 2026

Baron Real Estate Income Fund^® (the Fund) decreased 7.58% (Institutional Shares) in the third quarter, underperforming the MSCI US REIT Index (the REIT Index), which decreased 6.33%.

The Fund’s long-term performance remains strong. As of September 30, 2026, Morningstar ranked the Fund #1 among 186 funds in the Real Estate category since its inception on December 29, 2017. 

Latest Thoughts

Our real estate team recently presented our top-of-mind thoughts to the Baron portfolio managers and research analysts. Our key messages were as follows:

1. 2026 has been uniquely challenging—some of the Fund's holdings and investment themes have faced headwinds, pressuring valuations across the board.
2. As a result, we believe much of public real estate now trades at compelling valuations.
3. Our optimism about public real estate and the Fund's long-term prospects remains firm, supported by compelling valuations and other favorable factors.

Please see the “Our Current Top-of-Mind Thoughts” section for our more detailed thoughts on this topic.

As of September 30, 2026, the Fund’s net assets were allocated as follows: REITs (85.0%), non-REIT real estate companies (10.6%), and cash and cash equivalents (4.4%). 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.
 

We continue to believe the outlook for REITs remains compelling, underpinned by a convergence of favorable factors:

• Attractive valuations. REITs have lagged broader markets, leaving them attractively priced on both an absolute and relative basis—a gap we expect to close.
• Favorable supply/demand dynamics. Constrained new supply across key property types, combined with resilient demand, sets the stage for sustained rent growth.
• Aligning tailwinds. REITs stand to potentially benefit from both a cyclical economic upturn and durable long-term structural growth themes.
• AI as an asset, not a liability. As asset-intensive businesses, many REITs are more insulated from AI disruption—and in many cases stand to potentially benefit directly from it.
• Financial strength. Most REITs carry solid balance sheets, growing dividends, and built-in inflation protection through lease structures.
• A compelling return outlook. Taken together, these factors support an attractive multi-year return opportunity for patient investors.
   

Summary REIT and Non-REIT Category Commentary

Health Care REITs (17.8%)

• We remain constructive on the multi-year outlook for senior housing.
• We believe the sector is well positioned to benefit from a 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 over. Expense pressures, particularly labor-related, have largely moderated. We also see the potential for attractive, accretive acquisition opportunities, especially for Welltower Inc. given its cost of capital advantage.
• The Fund maintains investments in Welltower, Janus Living, Inc., Ventas, Inc., and American Healthcare REIT, Inc.

Industrial REITs (17.0%)

• We remain constructive on the Fund’s industrial REIT holdings, Prologis, Inc., EastGroup Properties, Inc., and our most recent addition, First Industrial Realty Trust, Inc., 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 approximately 20% below market levels, as well as secular tailwinds including e-commerce expansion, supply chain logistics, “just-in-time” inventory strategies, and nearshoring/onshoring trends.

Data Center REITs (15.0%)

• We remain encouraged by the long-term growth prospects for data centers. The Fund holds data center REIT positions in Equinix, Inc. and Digital Realty Trust, Inc.
• Data center landlords are benefiting 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 (7.4%)

• 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 2026, we re-initiated positions in Public Storage and CubeSmart. The Fund also maintains its position in Extra Space Storage Inc.

Multi-Family REITs (7.3%)

• The Fund maintains exposure to multi-family REITs Vivmark Residential, Essex Property Trust, Inc., and UDR, Inc. While multi-family REITs have been “cheap” for some time, we are finally seeing early signs of an improvement in business fundamentals that could continue over the next several years given the highly favorable supply/demand backdrop combined with strong growth in “laggard markets” such as San Francisco.
• 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 had been cautious, we have become a bit more constructive on multi-family REITs 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 and other REIT categories.

Mall REITs (7.1%)

• We remain positive about 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 remain optimistic about the two- to three-year prospects for Macerich. Continued engagement with CEO Jackson Hsieh reinforces our confidence that the company can create meaningful long-term value through initiatives such as divesting non-core properties, reducing debt, improving the mix of tenants, and acquiring value-added mall properties at attractive prices.

Office REITs (3.7%)

• In 2024 and 2025 we were bullish on select office REITs, while remaining generally cautious on broader office real estate due to both cyclical and secular headwinds that we expected would persist.
• Entering 2026 we exited our office REIT investments over concerns pertaining to AI adoption, anemic job growth, disappointing earnings growth outlooks, and “as good as it gets” leasing volumes.
• In the second quarter, we reacquired shares of BXP, Inc. (formerly known as Boston Properties), a blue-chip office REIT that owns a portfolio of premier office properties in coastal U.S. markets including Boston, New York City, San Francisco, Washington, D.C., Los Angeles, and Seattle, following a share price correction in the first quarter. We believe the company’s growth prospects are likely to accelerate in late 2026 and 2027 and its valuation is compelling relative to replacement cost and private market valuations.

Wireless Tower REITs (3.0%)

• 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 and DISH), uninspiring U.S. wireless carrier new leasing activity, lower expectations for growth, and evolving competitive dynamics, particularly from low-earth-orbit satellite providers such as Starlink, whose direct-to-cell ambitions could reduce carriers' reliance on ground-based infrastructure over time. Currently, the Fund maintains a position in American Tower Corporation.
• We may become more constructive over time if the long-term growth outlook for wireless tower REITs improves. Specifically, we are watching for: a resumption of carrier capital spending growth, improving tenancy ratios on existing towers, and greater clarity on the economics of satellite-to-device competition. We would also expect support from 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 Internet of Things devices—everyday objects like thermostats, security cameras, cars, and appliances that connect to wireless networks—in homes and vehicles. These trends are expected to drive continued demand for wireless bandwidth and higher spending by mobile carriers.

Hotel REITs (2.8%)

• We continue to believe hotel REITs are well positioned to benefit from cyclical and secular 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 according to the company’s website. 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.
• In 2026, the Fund re-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 (1.7%)

• We are generally cautious on triple net REITs, in part due to the compression in acquisition investment spreads.
• We maintain a position in Blackstone Digital Infrastructure Trust Inc., an IPO that was priced in May. We believe the company, which is supported by the same team at Blackstone that built out its broader data center platform, has a first mover advantage in institutionalizing the “stabilized” segment of the data center market. We believe there is a highly compelling external growth opportunity combined with potential cap rate compression/multiple expansion that will lead to strong future shareholder returns.

Single-Family Rental REITs (1.2%)

• We have been cautious on single-family rental REITs given a confluence of headwinds: persistent rate and financing sensitivity, localized oversupply in several Sun Belt build-to-rent markets, and cost inflation (insurance, taxes, maintenance) that has compressed margins even where top-line rent growth held up.
• We remain long-term bullish because of the chronic housing undersupply, a widening affordability gap between renting and owning, a desire for flexibility and not to be burdened by mortgages, and durable demographic demand for single-family living continue to support the sector's fundamentals, and current valuations—which trade at a discount to estimated NAV.
• The Fund maintains a position in American Homes 4 Rent.

Shopping Center REITs (1.0%)

• The Fund maintains a position in Curbline Properties Corp., a shopping center REIT that owns a portfolio exclusively concentrated on convenience properties located on the curbline of well-tracked intersections and vehicular corridors in highly desirable markets. We believe Curbline checks all the boxes that we seek in our investments: a differentiated strategy, competitive advantages, repeatable double-digit annual growth prospects through organic growth and accretive acquisitions, healthy balance sheet (very little debt), and a proven management team with incentives aligned with shareholders.

Non-REIT Real Estate Companies (10.6%)

• 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 AAON, Inc., Marriott Vacations Worldwide Corporation, Meritage Homes Corporation, Hyatt Hotels Corporation, Vail Resorts, Inc., Red Rock Resorts, Inc., and Brookfield Infrastructure Corporation.

Shares of Welltower Inc. demonstrated resilience in the quarter, making modest gains against a challenging backdrop in which most real estate securities declined, extending what had already been very strong performance in the first half of the year. Welltower is a leading owner and operator of senior housing communities across the U.S., Canada, and the U.K., and is the largest health care REIT by market capitalization. The company continued to execute well, delivering robust cash flow growth driven by strong occupancy gains, healthy rent growth, and ongoing margin expansion—all of which reflect the powerful demographic tailwinds underpinning demand for senior housing as the U.S. population ages.

We initiated a position in AAON, Inc., following a disappointing second quarter earnings result. AAON designs and manufactures commercial and industrial heating, ventilation, and air conditioning (HVAC) equipment.

After very strong first quarter results, in which the company raised sales growth guidance to 40% to 45% from 18% to 20% previously (at a slightly lower gross margin outlook), on the back of enormous BasX data center growth of over 100%, AAON's second quarter was more mixed. Management raised full-year growth guidance further, to 55% to 60%, but gross margin missed expectations, declining 230 basis points year-over-year as the company absorbed the costs of scaling capacity so quickly. Though there has been a pattern of extreme volatility in results relative to expectations quarter to quarter, we have spent time with management and are hopeful they will begin to deliver with fewer negative surprises going forward.

We see near-term upside given a depressed valuation—near its lowest level in over five years — alongside what we believe is conservative guidance amid excellent top-line growth expectations and margin pressures that should, in part, be addressed through straightforward actions already underway. The price-cost dynamic should improve as price increases already taken flow through, with line of sight to backlog converting at higher margins into 2027.

We believe revenue growth will remain robust, and with steadier, improving margin performance, we see attractive near-term upside in the shares—perhaps 40% to 50%—on a reasonable multiple of roughly 15 times cash flow, well below the company's 5-year average forward multiple of 20 times, applied to 2028 estimates.

Terreno Realty Corporation, an industrial REIT focused on high-quality coastal properties, was a strong contributor in the third quarter. The underlying portfolio continues to perform well, and management is observing broad-based improvement across the industrial warehouse market: demand is accelerating, new supply is falling sharply—down 50% to 75%, vacancy rates are tightening, and rent growth is picking up across most markets after several years of declines. Against this favorable backdrop, Terreno has been able to generate high single-digit organic cash flow growth, driven by the meaningful gap between in-place rents and current market rents. Beyond organic growth, management has a strong track record of deploying capital accretively through acquisitions and select development opportunities, providing an additional avenue for value creation.

Shares of Blackstone Digital Infrastructure Trust Inc. declined in the quarter, reflecting investor uncertainty stemming from a prolonged absence of an inaugural deal announcement and interest rate volatility. We remain constructive on the long-term opportunity, as management reaffirmed the six-month deployment timeline remains on track with a growing actionable pipeline, and we believe the first deal announcement will serve as an important catalyst to close the current valuation discount. The company is a newly formed, Blackstone-sponsored vehicle focused on acquiring stabilized, fully leased data centers underpinned by long-term, non-cancellable leases with the world's largest hyperscalers.

Meritage Homes Corporation, a U.S. homebuilder, was a detractor in the third quarter, giving back some of its strong second quarter gains when the share price surged more than 27%. The pullback reflects a broader slowdown in U.S. residential construction, as rising U.S. 10-year Treasury rates have driven mortgage rates higher and caused many prospective buyers to sit on the sidelines. This has weighed on residential-related stocks broadly, Meritage included. While we expect softer industry conditions to pressure revenue and margins in the near term, we believe the stock's depressed valuation—approximately 80% of tangible book value—already prices in much of this pain, and we continue to expect book value to compound over time. Looking further out, we remain confident in the multi-year growth runway for U.S. housing and Meritage's focused strategy of serving first-time homebuyers. For additional detail, please see the "Recent Purchases" section of the Q2 Baron Real Estate Income Fund shareholder letter.

The Macerich Company, a high-quality retail mall REIT, was a detractor in the third quarter, giving back a portion of its strong second-quarter gains when the share price appreciated 35%. Despite the quarterly pullback, management continues to execute well, tracking ahead of targets on leasing, occupancy, space buildouts, select dispositions, and debt paydown.

As previously outlined, we remain optimistic about Macerich's prospects over the next several years. The fundamental backdrop for high-quality mall real estate is favorable: tenant demand is robust, desirable retail space is scarce—occupancy is high with little new supply coming to market—and the resulting demand/supply imbalance is giving landlords meaningful pricing power. We continue to engage with CEO Jackson Hsieh, a well-regarded outsider bringing a fresh, analytical lens to the company's portfolio. We believe he will continue to unlock significant value by divesting non-core assets, reducing debt, and pursuing accretive acquisition opportunities. Our conviction has grown that Macerich can generate over $2.00 in FFO within the next couple of years, which we believe would be a meaningful catalyst for share price appreciation from current levels.

We added to our position in Digital Realty Trust, Inc. during the quarter. Digital Realty is a leading global owner and operator of data centers, providing colocation and interconnection solutions to hyperscalers, cloud providers, and enterprise customers across more than 50 metro areas worldwide. Our increased investment was underpinned by a favorable multi-year industry supply/demand backdrop for data center capacity—the best we have seen in years, driven in large part by surging demand for AI infrastructure—alongside a durable and improved double-digit bottom-line earnings growth outlook for the company over the next several years.

We re-initiated a position in American Tower Corporation in the quarter, taking advantage of valuation levels near all-time lows. American Tower is a global leader in communications infrastructure, owning and operating approximately 150,000 wireless tower sites across the U.S., Latin America, Europe, and Africa, with an additional data center platform in major U.S. markets through its CoreSite subsidiary. We believe the market has overestimated the competitive threat from satellite-based alternatives, which we view as complementary to, rather than displacing, traditional tower infrastructure. The company benefits from secular long-term demand drivers in mobile data growth, underpinned by multi-year lease structures and high switching costs for its carrier tenants. At current valuation levels, we believe the risk/reward is compelling for a high-quality, long-duration cash flow stream, with meaningful upside as investor concerns around satellite displacement, trough carrier spending, and interest rate sensitivity normalize.

We also added to our senior housing theme by purchasing additional shares of Ventas, Inc., an operator of senior housing, life science, and medical office properties, taking advantage of a pullback in the shares during the quarter. We were encouraged by the company's robust fundamental results, a growing external investment pipeline, and increasing willingness to shed slower-growth assets to redeploy into higher-growth opportunities. We believe shares remain attractively valued for approximately 10% underlying earnings per share growth alongside declining leverage and a compelling external growth opportunity.

In the most recent quarter, we exited the Fund's investments in Alexandria Real Estate Equities, Inc., a life science REIT focused on collaborative office and laboratory campuses for biotechnology and pharmaceutical tenants, and Weyerhaeuser Company, a timber REIT and one of the largest private owners of timberlands in North America. We reallocated the capital to other REITs and non-REIT real estate-related companies that we believe offer superior total return prospects over the next few years.

We also trimmed the Fund's position in Blackstone Digital Infrastructure Trust Inc., a newly listed, externally managed REIT focused on acquiring stabilized data center properties leased to investment-grade hyperscale tenants but remain bullish about the company's long-term business prospects.

Our real estate 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,