Baron Real Estate Income Strategy | Q1 2025

The Strategy’s select REIT categories (data centers, office, and malls) and non-REIT cyclically oriented real estate-related holdings (travel-related and real asset alternative asset managers) weighed on first quarter performance. For our more complete thoughts on this topic please see the “Portfolio Construction” section later in this letter. In the first quarter, the Strategy declined 0.91%, underperforming the MSCI US REIT Index (the REIT Index), which increased 0.76%.

We are cognizant that the economic outlook may deteriorate further in the months ahead, which could result in slower growth, higher inflation, and lower valuation multiples. Our real estate team remains razor focused on monitoring company-level developments and speaking to and meeting with management teams.

We remain steadfast in our view that:

1. Investors should have exposure to public real estate.
2. Valuations are attractive.
3. Baron Real Estate Income Strategy is a compelling real estate option for those seeking exposure to real estate.

For our more complete thoughts on “1” and “2” above, please see the following sections later in this letter: “Our current top-of-mind thoughts” and “Examples of best-in-class real estate companies that are attractively valued.” For “3” above, we elaborate on the investment case for the Strategy in the last section of this letter – “Concluding thoughts on the prospects for real estate and the Strategy.”

Despite the challenging first quarter, the Strategy has maintained its strong long-term performance, and we are optimistic we will turn things around as we have done in the past.

We will address the following topics in this letter:

• Our current top-of-mind thoughts
• Examples of best-in-class REITs and non-REIT real estate companies that are attractively valued
• Portfolio composition
• Top contributors and detractors to performance
• Recent activity
• Concluding thoughts on the prospects for real estate and the Strategy

OUR BOTTOM-LINE VIEW:

Though we are mindful of the reasons to be cautious, we believe return expectations for real estate and the Strategy have become attractive. The sharp correction in several REIT and non-REIT real estate companies in the first quarter of 2025 (and early in April) has presented several highly compelling investment opportunities.

We remain convinced that investors should have exposure to public real estate.

The foundation for our constructive real estate outlook is based on the following considerations:

1.    Real estate should benefit from the eventual resumption of cyclical tailwinds of economic growth.

Though the sequencing of the new administration’s policies is likely to damper near-term economic growth (e.g., the implementation of higher tariffs, less immigration, and less fiscal support before the goal of introducing lower taxes, less regulation, lower fiscal deficits, and perhaps lower interest rates), we believe the cyclical tailwinds of economic growth will re-emerge.

As economic growth reaccelerates, we believe the Strategy’s portfolio of well-located real estate in supply constrained markets – multi-family, single family homes for rent and sale, industrial warehouses, senior housing facilities, hotels, offices, malls, and data centers – will benefit as demand, occupancy, rents, cash flow, and real estate values increase.

2.    Real estate is benefiting from secular tailwinds that should be enduring for years to come.

• Multi-family, single-family rental homes, and manufactured homes: Affordability advantages versus the for-sale housing market
• Industrial real estate: The move to e-commerce and supply chain logistics
• Senior housing facilities: Aging baby boomers and the 80-plus population which are among the fastest growing aging groups
• Hotels: The increase in spending on travel as a percentage of wallet share
• Data centers: Rising data consumption, cloud computing, IT outsourcing, and AI

3.    Investor sentiment is extremely poor.

Investor sentiment appears to have swung from overly optimistic at the beginning of 2025 to overly pessimistic today. In fact, short positioning in the broader equity markets is as high as it has been in years – larger than during COVID and larger than 2022 when the Federal Reserve (the Fed) embarked on an aggressive rate hike cycle. In the cycle of stock market emotions, we believe that the best time to buy stocks to help generate maximum returns occurs when sentiment is poor, although we cannot guarantee this will be the case.

4.    Additional reasons to be optimistic.

• Demand conditions are mostly favorable against a backdrop of muted new real estate supply.
• Balance sheets are generally in solid shape.
• Debt capital is widely available.
• Substantial capital (private equity, sovereign wealth funds, pension funds, endowments, and others) is in pursuit of real estate ownership and may step in and capitalize on the opportunity to buy quality real estate at depressed prices. This “embedded put” should limit downside valuation and pricing.
• Much of public real estate has been re-priced for a higher cost of capital.
• There is the possibility that the Fed may lower interest rates in 2025 should economic growth deteriorate, unemployment increase, and/or inflation moderate. Goldman Sachs is now forecasting three consecutive interest rate cuts, beginning in July with the potential increase in the unemployment rate as the key justification for the rate cuts.

5.    Valuations are reasonable (and, in some cases, cheap).

We believe the valuations of numerous REITs and non-REIT real estate-related companies are cheap relative to their historical valuations and future growth prospects. Please see “Examples of best-in-class real estate companies that are attractively valued” below.

6.    The long-term case for real estate remains firmly in place.

Well-located and competitively advantaged real estate tends to offer partial inflation protection characteristics, diversification benefits versus equities and bonds, and strong long-term returns.

EXAMPLES OF BEST-IN-CLASS REAL ESTATE COMPANIES THAT ARE ATTRACTIVELY VALUED

The Strategy is chock full of best-in-class real estate companies that are on sale relative to history and relative to private real estate alternatives (even when factoring in the possibility of slower growth in 2025 and lower valuation multiples) and offer prospects for strong returns in the years ahead.

In our judgment, characteristics of a “best-in-class” real estate company are:

• Owns unique and well-located real estate assets in markets with high barriers to entry combined with attractive long-term demand demographics
• Enjoys strong long-term growth prospects together with a leading competitive position
• Maintains a conservative and liquid balance sheet
• Employs an intelligent and motivated management team that is an excellent allocator of capital and has interests aligned with shareholders

Examples of the Strategy’s best-in-class real estate companies that are attractively valued include:

REITs

Equinix, Inc. is the premier global carrier and cloud-neutral data center operator with 270 data centers in 74 metropolitan areas and 35 countries.

Equinix is currently valued at only 20 times 2025 estimated cash flow versus private market data center transactions that have occurred at 25 to 30 times cash flow. The shares are valued at a small premium to REITs, despite superior and more durable cash flow growth prospects.

American Tower Corporation is the leading global mobile tower operator with 150,000 sites globally, with demand underpinned by the increasing secular growth in mobile data.

American Tower currently trades at 20 times cash flow for high single-digit underlying growth, which is a 3 multiple point discount versus history and 1.5 multiple point discount to REITs broadly (which are growing mid-single digit and trading at 21.5 times cash flow) for more durable and secular growth.

Equity Residential is one of the largest U.S. apartment REITs with 80,000 high-quality apartment units concentrated in coastal markets with strong barriers to entry, compelling resident income/demographics, and high-cost home ownership. The company maintains a strong and liquid balance sheet.

It is valued at a 6.1% implied capitalization rate representing a discount to private market transactions in the high 4% to 5% capitalization range. At its public market implied valuation of only $410,000 per apartment, the shares are valued at a 20% discount to private market values and a much larger discount to replacement cost.

American Homes 4 Rent is the second largest single-family home rental company with a portfolio of 60,000 single-family homes available for rent located across a diverse set of more than 30 markets with attractive renter demographics via above average incomes and employment growth.

It is valued at an implied capitalization rate of 5.9% versus private market transactions in the 5% range. The public market implied valuation of its owned homes is only $320,000 per home versus the average cost of an existing single-family home in the U.S. of approximately $410,000.

Vornado Realty Trust owns a portfolio of premier office and street retail properties largely concentrated in New York City.

The company’s implied cap rate for its New York City office portfolio is 10.5% and only $500 per square foot. The company’s real estate portfolio is being valued at a meaningful discount to private market transactions at capitalization rates in the 5% to 6% range and replacement cost well more than $1,000 per square foot.

The Macerich Company is a REIT that owns a portfolio of exceptionally high-quality malls in the U.S. Under a new management team, the company is undergoing a business transformation to improve portfolio quality, growth potential, and balance sheet health, which we believe will ultimately translate into an improved valuation multiple for the company.

It is valued at less than 10 times forward earnings (Funds from Operations or FFO), on depressed earnings, which is a discount to its historical norm of 15 to 17 times FFO.

Independence Realty Trust, Inc. owns 33,000 apartment units that cater to a more affordable income demographic across the Sunbelt and Midwest markets.

It is valued at a 6.2% implied capitalization rate representing a discount to private market transactions in the high 4% to 5% capitalization range. At its public market implied valuation of only $200,000 per apartment, the shares are valued at a 25% discount to private market values.

Invitation Homes Inc. is the largest institutional owner of single-family rental homes with 110,000 owned and managed homes that are concentrated across high-growth markets and in-fill neighborhoods with access to good schools, transportation corridors, and robust employment opportunities.

It is valued at an implied capitalization rate of 6.0% versus private market transactions in the 5% range. The public market implied valuation of its owned homes is only $330,000 per home versus the average cost of an existing single-family home in the U.S. of approximately $410,000.

First Industrial Realty Trust, Inc. is an industrial REIT that owns a portfolio of bulk and regional warehouse properties.

It is valued at over an 8% capitalization rate based on stabilized cash flow, representing a discount to private market transactions in the low to mid-5% capitalization range.

Kilroy Realty Corporation is a REIT that owns a portfolio of high-quality office properties concentrated in U.S. West Coast markets including San Francisco, San Diego, Los Angeles, and Seattle.

It is valued at a 10% implied capitalization rate, representing a discount to private market transactions in the 5% to 6% capitalization range. The company also trades at a meaningful discount to certain publicly listed peers who trade at 6.5% to 7.5% capitalization rates, whereas Kilroy historically traded at similar valuations as these peers.

American Healthcare REIT, Inc. is a diversified health care REIT with over 25,000 beds catering to senior housing and related health care services. We believe the company is being painted with a “broad brush” given its different business segments across senior housing, medical office, skilled nursing, and triple net portfolio. We estimate the business is trading at a 25% discount to its spot sum-of-the-parts valuation with strong underlying prospects for future growth over the next several years.

Healthpeak Properties, Inc. is a health care REIT that owns a high quality portfolio of life science, medical office, and CCRC properties.

It is valued at a 7.4% implied capitalization rate, representing a discount to recent dispositions in the mid-6% capitalization range.

Simon Property Group, Inc. is a “blue chip” REIT that owns a large portfolio of highly productive malls and outlets in the U.S. and globally.

It is valued at 12 times FFO, which is a discount to its historical norm of 15 to 17 times.

Weyerhaeuser Company is one of the world’s largest owners of timberlands with approximately 10.5 million acres in the U.S. and an additional 14 million acres that are licensed in Canada. It is also one of the largest manufacturers of wood products such as lumber, OSB, plywood, and other building materials that are used in new housing construction and repair and remodel projects. The company is currently trading at a 28% discount to NAV, which is well above its mid-teens historical average. At certain times in the past when the lumber and wood products markets have been especially strong, Weyerhaeuser has traded as high as a mid-teen premium to NAV (this last happened in the 2021 post-COVID housing boom). We believe support from recent lumber capacity curtailments, upward pricing momentum (from Canadian duties and potential tariffs), and an eventual pickup in new housing construction and repair and remodel activity could result in this type of attractive environment in the future.

Non-REIT Real Estate Companies

Wynn Resorts, Limited is the preeminent luxury global owner and operator of integrated resorts (hotels and casino resorts). We are bullish on the prospects for the company’s development of the Wynn Al Marjan Island in the UAE (expected to open early in 2027). We believe the UAE is the most exciting new market for integrated resort developments in decades.

At its recent price of only $70 per share, the shares are valued at less than 7.2 times 2025 estimated cash flow versus a long-term average multiple of 13 to 15 times cash flow. We believe Wynn is trading at an unrealistic discounted multiple with very little value being ascribed to Wynn’s Macau operating assets and its UAE development project Wynn’s management agrees as they have been buying back shares as has Tilman Fertitta, a highly successful hotel, casino, and entertainment executive, who has acquired more than $1 billion of Wynn shares and is now the largest shareholder of Wynn with a 12% stake in the company.

Brookfield Corporation is a leading global owner and operator of real assets such as real estate and infrastructure. We believe the company’s global reach, capital, and the synergies among its businesses provide significant opportunities for growth.

At its recent price of only $46 per share, we believe the shares are unsustainably cheap. Brookfield’s management team, who in our opinion is credible and conservative, believes the company is worth $100 per share today and believes the shares will reach $176 in five years.

GDS Holdings Limited is a leading data center operator in Tier 1 cities in China as well as a growing Pan-Asia data center platform. At its recent price of $20, the company’s China data center business is valued at less than 7.5 times 2026 estimated cash flow versus global data center peers that are valued at more than 20 times cash flow. Furthermore, the company illustrated embedded value by recently selling assets with limited future growth in a REIT transaction to one of China’s largest insurance companies at 13.5 times cash flow. We believe the company will carry out several more of these transactions. Applying a similar multiple to the balance of the business (with much higher growth), we believe the shares are worth $60-plus over the next two years or approximately 200% upside. Should valuation improve slightly, we believe there is even further potential upside beyond this.

As of March 31, 2025, we invested the Strategy’s net assets as follows: REITs (84.3%), non-REIT real estate companies (9.1%), and cash and cash equivalents (6.5%). We currently have investments in 12 REIT categories. Our exposure to REIT and non-REIT real estate categories is based on our research and assessment of opportunities in each category on a bottom-up basis (See Table III below).

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

Notable changes to the Strategy’s portfolio since December 31, 2024

We were busy managing the Strategy in the first quarter of 2025.

Increases: We significantly increased the Strategy’s allocation to wireless tower and industrial REITs. We modestly increased the Strategy’s already large allocation to health care REITs. We added to the Strategy’s allocation to single-family rental REITs and timber REIT, Weyerhaeuser Company. We initiated a position in self-storage REIT, Extra Space Storage Inc.

Decreases: We sourced the first quarter increases in the Strategy with decreases to the Strategy’s positions in the following REIT categories: data centers, office, malls, hotels, and multi-family. We also decreased the Strategy’s exposure to non-REIT real estate-related companies.

An explanation of the changes in each of the REIT categories and the non-REIT real estate-related portion of the Strategy can be found below.

Summary REIT and Non-REIT Category Commentary

Health Care REITs (18.4%)

• We maintain a favorable view of the multi-year prospects for senior housing and remain bullish on the outlook for Welltower Inc., Ventas, Inc., and American Healthcare REIT, Inc.
• Following our purchases in the first quarter (an increase in the Strategy’s allocation to health care REITs from 15.6% to 18.4%), health care REITs are the Strategy’s largest REIT allocation.
• We believe senior housing real estate is likely to benefit from favorable cyclical and secular growth opportunities in the next few years. Fundamentals are improving (rent increases and occupancy gains) against a backdrop of muted supply growth due to punitive financing and elevated construction costs. The long-term demand outlook remains favorable, driven in part by an aging population (baby boomers and the growth of the 80-plus population), which is expected to accelerate in the years ahead. Expense pressures (labor shortages/other costs) have largely abated, and we believe highly accretive acquisition opportunities may surface, particularly for Welltower given its cost of capital advantage. The Strategy also maintains an investment in Healthpeak Properties, Inc.

Wireless Tower REITs (14.6%)

• We have been tactically cautious on wireless tower REITs beginning in late 2022, 2023, and for much of 2024 given our expectation of forthcoming headwinds that would weigh on bottom-line earnings growth while the stocks were still trading at premium valuation levels and market expectations remained elevated. We concluded the risk/reward setup was poor and exited the stocks despite having a favorable outlook on the underlying tower business models and returns on capital the companies can generate. These unfavorable developments materialized, and growth fell sharply. Headwinds included significantly higher financing costs for upcoming debt maturities, dampened growth in certain geographic markets, foreign exchange instability, and a reduction in mobile carrier activity from elevated levels after the initial 5G spectrum deployment period.
• We have maintained our long-term optimism for tower companies, particularly American Tower Corporation, and indicated that we may reacquire wireless tower shares should valuations become more attractive given the compelling long-term secular growth prospects. In the first quarter, we reacquired shares in American Tower (please see “Top net purchases” for a more detailed discussion on this purchase), and acquired shares in SBA Communications Corp. and Crown Castle Inc.

Industrial REITs (14.4%)

• For the last year, we had been cautious on business prospects for industrial REITs due to demand normalization to pre-pandemic levels (elongated corporate decision making), elevated supply deliveries in the first half of 2024, moderating rent growth in certain geographic markets, inventory de-stocking, driving less need for warehousing space shorter term, and pricey headline valuations relative to other REIT categories.
• We also reaffirmed that we are long-term bullish on industrial REITs and indicated that we may become more positive on the group at some point in 2025. This positive inflection occurred in the first quarter when we re-acquired shares in Prologis, Inc., EastGroup Properties, Inc., and First Industrial Realty Trust, Inc.
• For our more complete thoughts on industrial REITs and our first quarter purchases, please see “Top net purchases” later in this letter.

Multi-Family REITs (11.6%)

• We remain optimistic due to the rental affordability advantages versus for-sale housing (move-outs to buy remain at all-time lows), an attractive supply outlook in 2025 to 2027, the benefits of a partial inflation hedge given annual leases, strong rent-to-income ratios from a well-employed renter demographic, and public market valuation discounts relative to private market valuations.

Single-Family Rental REITs (5.5%)

• Though we have been cautious in part due to the onset of elevated supply in a few key geographic markets, we increased the Strategy’s exposure to single-family rental REITs because valuations became more compelling as the shares underperformed and we remain long-term bullish on single-family rentals due to favorable demand/supply prospects, homeownership affordability challenges, and tenants’ desire for flexibility afforded with a “mortgage-free” lifestyle. These multi-faceted tailwinds should lead to strong long-term rent growth prospects and the continued ability of landlords to increase rents.

Mall REITs (4.5%)

• Though we lowered our allocation to mall REITs following strong 2024 share price performance for both The Macerich Company and Simon Property Group, Inc., we remain optimistic about the prospects for both mall companies. The fundamental backdrop for high-quality mall and outlet real estate remains favorable: (i) tenant demand remains robust; (ii) there is a shortage of desirable retail space (occupancy is high and there is a dearth of new mall developments); (iii) the favorable demand/supply imbalance is enabling landlords to raise rents; and, (iv) valuations are attractive.
• We continue to be optimistic about the two-to-three-year prospects for the shares of Macerich following the appointment of highly regarded CEO Jackson Hsieh who came in as an outsider and is undertaking a highly analytical review of the company’s real estate portfolio with a fresh perspective. We believe he will unlock significant value in the company by selling non-core properties and repaying debt.

Data Center REITs (4.1%)

• Following strong share price performance in the last few years, we decreased the Strategy’s large allocation to data center REITs Equinix, Inc. and Digital Realty Trust, Inc. (and non-REIT data center company GDS Holdings Limited) due to elevated valuations and investor expectations alongside evolving concerns for the broader data center sector (e.g., Microsoft cancelling select leases, press releases announcing tens of billions of dollars earmarked for new development, lower cost AI models like DeepSeek potentially changing capital investment plans or, most recently, the Chairman of Alibaba raising red flags about speculative data center development globally).
• We maintain conviction in the multi-year favorable prospects for data centers. Data center landlords such as Equinix and Digital Realty are benefiting from record low vacancy, demand outpacing supply, more constrained power availability, rising rental rates, and significant levels of pre-leasing before capital is spent for larger footprint data centers (had not been the case historically). Several secular demand vectors, which are currently broadening, are contributing to robust fundamentals for data center space globally. They include the outsourcing of information technology infrastructure, increased cloud computing adoption, the ongoing growth in mobile data and internet traffic, and AI as a new wave of data center demand. Put simply, each year data continues to grow exponentially, and all of this data needs to be processed, transmitted, and stored – supporting increased demand for data center space. In addition, while it is still early innings, we believe AI could not only provide a source of incremental demand but also further accelerate existing secular trends by driving increased prioritization and additional investment in digital transformation among enterprises. We are just beginning to see early signs of enterprise AI adoption, which could be further unlocked with costs coming down.
• Please see “Top detractors” and “Top net sales” for our more complete thoughts on data centers.

Office REITs (3.5%)

• We are selectively bullish on office REITs. While we have remained generally cautious on broader office real estate for several years due to both cyclical and secular headwinds that we expected would persist, we have been able to identify certain geographic markets (New York City) and other well-located, high quality portfolios of modern office properties (New York City and parts of the West Coast) that we believe are poised to gain market share and outperform as market conditions improve. We believe there is a segment of office REITs that is trading at a significant discount to both the private market value and the replacement cost of their respective portfolios, while also trading at a meaningful discount relative to certain publicly traded peers. In the first quarter, however, we lowered the Strategy’s investment in New York centric Vornado Realty Trust following the 35% gain in its shares in 2024 and the Strategy’s investment in West coast centric Kilroy Realty Corporation given our expectation for a slower than expected recovery in business fundamentals.

Timber REITs (3.0%)

• We increased the Strategy’s exposure to timber REIT, Weyerhaeuser Company, in the first quarter of 2025. We are optimistic about the near-term prospects for timber REITs and have a favorable view of Weyerhaeuser. Weyerhaeuser is one of the world’s largest owners of timberlands and one of the largest manufacturers of wood products such as lumber, OSB, plywood, and other building materials that are used in new housing construction and repair and remodel projects. The company is currently trading at a mid-20% discount to its net asset value, which is well above its historical average. Weyerhaeuser’s stock price typically tracks the price of lumber, and at certain times in the past when lumber and wood products markets have been especially strong, it has traded as high as a mid-teen premium to NAV (this last happened in the 2021 post-COVID housing boom). We believe there are several factors that now support potentially higher lumber and wood products prices that could result in this type of attractive environment in the future. Beginning in the third quarter of last year, approximately 10% of U.S. lumber capacity was curtailed, which reduced the supply of lumber that is being produced. Additionally, duties on the 25% of lumber that is imported from Canada into the U.S. are set to rise from 14% to 30% to 35% this coming fall, which would likely support higher lumber prices as well. While lumber appears to be exempt from tariffs for now, additional trade restrictions are still possible and would be on top of the higher Canadian duties. Finally, any pickup in repair and remodel activity and new housing construction would represent an increase in demand and further support higher lumber prices.

Triple Net REITs (2.5%)

• We remain optimistic about the long-term prospects for triple-net REIT Agree Realty Corporation. Investment merits include its high quality retail real estate portfolio and tenant base, the company’s investment grade portfolio, a cost of capital advantage to pursue accretive acquisitions, an opportunity to triple the size of the current portfolio. Agree Realty is a founder-led firm with insider ownership and shareholder interests aligned. We believe Agree Realty could be an outsized beneficiary of a decline in interest rates given its ability to drive earnings growth via accretive acquisitions and the long duration nature of its cash flows.

Self-Storage REITs (1.5%)

• We have been cautious on self-storage REITs due to a two-year period of flat to negative growth.
• In the first quarter, we became incrementally bullish with our recent purchase of self-storage REIT, Extra Space Storage Inc.
• Based on our due diligence, we concluded that a positive fundamental inflection is on the horizon for self-storage REITs and growth may reaccelerate in 2026. Long-term, we believe self-storage is a highly attractive business.

Mortgage REITs (0.6%)

• Following an encouraging meeting with the management team of Blackstone Mortgage Trust, Inc., we began to acquire shares in this commercial mortgage REIT that is focused on real estate credit investments in North America and Europe. We believe the company benefits from several favorable attributes including its sponsorship by Blackstone Inc., the largest owner of commercial real estate globally, the company’s global platform which provides access to a global pipeline of real estate credit, and the company’s strong and liquid balance sheet.

Non-REIT Real Estate Companies (9.1%)

• We emphasize REITs but have the flexibility to invest in non-REIT real estate companies. We tend to limit these to no more than approximately 25% of the Strategy’s net assets. At times, some of our non-REIT real estate holdings may present superior growth, dividend, valuation, and share price appreciation potential than some REITs. Though we decreased the Strategy’s non-REIT holdings in the most recent quarter by trimming the Strategy’s exposure to GDS Holdings Limited (see “Top net sales” for more on GDS) and making additional adjustments, we remain optimistic about the Strategy’s prospects for its non-REIT real estate holdings.

Shares of Welltower Inc. continued to significantly outperform both the REIT and broader equity indexes. We believe Welltower offers both “offensive” and “defensive” investment attributes in the current uncertain macroenvironment. Welltower is an operator of senior housing, life science, and medical office real estate properties. Given most of the company’s cash flows are derived from senior housing, “defensive” characteristics are underpinned by a “needs based” service offering. Welltower owns senior housing properties in some of the best micro-markets with substantial pricing power given the company serves a higher net worth demographic.

We remain optimistic about the prospects for both cyclical growth (a recovery from depressed occupancy levels following COVID-19) and secular growth (seniors are the fastest growing portion of the population and people are living longer) in senior housing demand against a backdrop of muted supply that will lead to many years of compelling organic growth. Several of these characteristics were on display in the most recent quarter as Welltower continued to report above industry rent and occupancy growth. We regard management as highly astute capital allocators, which was further cemented with the recently announced C$4.6 billion acquisition of Amica, an ultra-luxury irreplaceable portfolio in Canada, which was accretive to existing shareholders, acquired well-below replacement cost, and enhanced the overall quality of the portfolio.

Shares of American Tower Corporation performed well in the quarter due to accelerating carrier bookings activity and management’s solid outlook for underlying 2025 financials. Once the broader market processed the 2025 outlook, which admittedly had several moving pieces, investors concluded that the prospects for the “clean” American Tower post its exit of India and capital allocation prioritization into developed markets would position the company to drive highly predictable and recurring earnings growth with less volatility going forward. We agree – please see our “Top net purchases” section for further thoughts on American Tower.

Shares of Ventas, Inc., a senior housing focused health care REIT, performed well in the quarter due to robust top-line and occupancy growth, margin expansion, and a strong 2025 initial outlook. The company also demonstrated progress toward accelerating accretive external growth ($1.4 billion in the fourth quarter of 2024 alone versus $2 billion for the full year 2024) and articulated a growing opportunity going forward. Ventas owns a more than $30 billion portfolio across senior housing, medical office, hospitals, and life science properties.

Over the last few years, we have relayed our optimism for data centers over a multi-year period given secular growth, favorable supply/demand dynamics, continued pricing power driven by low vacancy, limitations on available power infrastructure and highly attractive returns on capital.

Our views became more tempered in early 2025 as our multi-year investment thesis was pulled forward over a much shorter time horizon, valuation levels of public data center stocks became stretched on an absolute and relative basis, and we were identifying superior risk/reward opportunities in other sectors/companies where valuation was still depressed, and growth was inflecting. We acknowledge there is a lot of “noise” in the market. Not a week went by in the first quarter of 2025 when we did not read about evolving concerns for the data center sector broadly – whether it was Microsoft cancelling select leases, press releases announcing tens of billions of dollars earmarked for new development (including the $500 billion Stargate project), lower cost AI models like DeepSeek potentially changing capital investment plans or, most recently, the Chairman of Alibaba raising red flags about speculative data center development globally. While we can debate what is “signal” versus “noise,” the cumulative developments certainly did not help investor sentiment on the sector that was trading at a premium valuation. Most importantly, we do not base any of our investment decisions on headlines, but rather a rigorous assessment of business fundamentals (in addition to forming a mosaic of key learnings from our industry contacts), absolute and relative valuation levels, risk/reward skew, and potential alternative investment opportunities.

In the most recent quarter, shares of Equinix, Inc., the premier global operator of network-dense, carrier-neutral data centers, declined following two years of robust absolute and relative performance. Underperformance was driven by discrete earnings headwinds that dampened reported growth, normalization of valuation levels, evolving concerns of customer bookings trajectory given the uncertain macroenvironment and signs of a “pause” in certain customers’ underlying new business trends (e.g. bookings for enterprise software companies).

Global data center REIT Digital Realty Trust, Inc. also detracted from performance in the quarter due to normalization of valuation from outsized absolute and relative levels, lower new bookings from an elevated high water mark achieved in 2024, and a more tempered outlook for the continued need of outsized capital investment spend from the global cloud providers on the back of the AI wave (i.e., digestion period). In addition, Microsoft, a top customer of Digital Realty’s at over 10% of annualized rent, was rumored to be incrementally cancelling certain leases it had signed globally. While this was not specific to Digital Realty given the company’s iron-clad lease agreements and likely included Microsoft specific considerations (e.g. capacity for Azure cloud versus incremental capacity earmarked for OpenAI), this development surfaced questions about the level of future incremental demand.

Following a 35% increase in its stock in 2024, the shares of Vornado Realty Trust, a REIT that owns a portfolio of premier office and street retail properties concentrated in New York City, declined in the first quarter. We chose to book profits and reallocated capital to other REIT segments that did not perform well last year. We suspect the market is also waiting for the expected positive inflection in earnings which may occur later in 2026 and 2027.

We remain optimistic about our investment in Vornado because office leasing activity has improved in New York City, prospects are bright for the company’s PENN 2 redevelopment project, buyer interest in best-in-class street retail properties in New York City (17% of total cash flow) has improved, and management is well positioned to capitalize on any distressed real estate opportunities that may arise given its strong balance sheet and liquidity position.

We exited our investment in American Tower Corporation in 2024 due to fair to full valuation relative to the company’s growth prospects, though we maintained our favorable view of the business model, secular growth, and superior management team. The opportunity to re-enter the position presented itself sooner than anticipated. In the first quarter, we re-acquired shares of American Tower at more attractive valuation levels combined with higher earnings visibility.

American Tower is a global owner of 150,000 wireless tower communication sites with a heavy emphasis on developed markets. We remain optimistic about the long-term growth prospects for American Tower given strong secular growth expectations for mobile data usage, 5G spectrum deployment and network densification (with 6G around the corner), edge computing (possible requirement of mini data centers next to a tower presents an additional revenue opportunity), and growth in connected IoT devices (e.g. homes and cars), which will require more wireless bandwidth usage and continued increased spending by the mobile carriers. In our view, shares of American Tower remain attractively valued on an absolute basis and relative to other data infrastructure companies, bookings activity is accelerating, and we believe the company will be able to deliver underlying per share organic earnings growth in the high single-digit range (with upside optionality through capital allocation opportunities such as share repurchases).

During the quarter we re-acquired shares of two best-in-class industrial REITs: Prologis, Inc. and EastGroup Properties, Inc.

For the last year we have been cautious on industrial REITs, as the companies were facing several near-term headwinds that included demand normalizing to pre-pandemic levels (elongated corporate decision making), elevated supply deliveries in 2024, moderating rent growth in most geographic markets, inventory de-stocking, and pricey headline valuations relative to other REIT categories. As we noted at the time, we were likely to revisit industrial REITs at a later point given our optimism on the multi-year prospects for industrial REITs. Our optimism remains predicated on a compelling multi-year outlook for demand/supply/rent growth, significant embedded growth potential from in-place rents that are generally 30% below market rents, and several secular demand tailwinds (e-commerce, supply chain logistics, more inventory safety stock, near-shoring/onshoring).

We began re-acquiring shares for four reasons. First, we recently observed a notable pick up in leasing activity, which gave us confidence that the industry is on better footing than one year ago. Second, we are encouraged by the sharp decline in supply deliveries forecast for 2025 (down 50-75% year-over-year). Third, we expect that improved demand and supply can support stabilizing rents in most markets over the next year. Fourth, valuation multiples for industrial REITs screened more favorable following a recent correction in their share prices.

Prologis owns a high-quality real estate portfolio that is concentrated in major global trade markets and large population centers across the Americas, Europe, and Asia. It has an unmatched global platform, strong competitive advantages (scale, data, and technology), an exceptional management team, and attractive embedded growth prospects. We continue to believe the appreciation potential for Prologis’ shares remains compelling given that the company’s rents on its in-place leases are more than 40% below current market rents, thus providing a strong runway for cash flow and earnings growth in the next several years.

EastGroup is a leading developer, acquirer, and operator of industrial properties in major Sunbelt markets throughout the U.S. The company has assembled a high-quality portfolio of smaller, “shallow bay” properties that benefit from diverse demand drivers and more muted supply growth. We believe in-place rents remain well below current market rents, thereby providing visibility into strong embedded growth potential. Management has a strong track record of deploying capital accretively through a captive development pipeline and select acquisitions.

We continued to actively manage the portfolio and materially reduced our investment in data center companies Equinix, Inc. and Digital Realty Trust, Inc. due to company specific reasons in combination with reallocating capital to companies/sectors with more attractive investment prospects.

In the most recent quarter, we reduced the Strategy’s exposure to Equinix. While we remain optimistic about the company’s ability to drive outsized bottom-line earnings growth through a combination of sales growth and operating leverage flow-through, the stock enjoyed two years of superior performance and valuation levels were no longer as compelling as other investment ideas we were surfacing. We may look to revisit the sizing of our investment should valuation levels relative to growth prospects become more attractive. Equinix is a blue chip data center operator with strong pricing power and the ability to drive outsized returns on capital.

The Strategy also decreased its investment in Digital Realty. As discussed earlier, our views on the risk/reward opportunity for the shares became more tempered early in 2025 due to an outsized valuation premium (sector leading both on historical basis and absolute level) combined with concerns regarding slowing demand from all-time highs, especially for larger footprint incremental new leasing. While we do not foresee a risk to bottom-line earnings over the next two years, the shares were pricing in elevated levels of new leasing, which we do not believe is sustainable. At recent trading levels, shares of Digital Realty have become more attractively valued and we may revisit our investment in the coming quarters. As always, we will review our investment through the lens of our capital allocation framework of identifying companies with the best risk-adjusted return prospects.

We first began to acquire shares of GDS Holdings Limited in early 2024 between $6 and $9 per share and continued to acquire shares as we got further proof points that our investment thesis was progressing. The stock closed out 2024 at $24 per share, representing a full year return of nearly 250%. While we remain optimistic regarding the multi-year growth prospects for the company and stock, we reduced our position due to risk management considerations given our investment in GDS grew to be an outsized position in the portfolio combined with several “needle moving” elements of our investment thesis playing out in a condensed timeframe. We always remain cognizant of the “unknowns” or risks that are harder to underwrite such as evolving geopolitical tensions, including the potential implementation of further restrictions to servers/chips, which is a consideration that informs position sizing despite the highly compelling risk/reward opportunity. While we do not conflate price volatility with risk, other considerations include still elevated debt levels to drive continued equity volatility, potential competition in international markets over the next few years, and the possibility for external capital needs to execute on a higher growth (and higher capex) business plan. That said, shares remain compelling at approximately 10 times cash flow when adjusting for the company’s now minority stake in GDS International (renamed DayOne) versus REIT transactions in China at 13 to 15 times cash flows.

We are mindful that the equity market environment may remain challenging in the months ahead given that economic growth is slowing, inflation is likely to increase on the heels of the implementation of tariffs, and consumer and corporate confidence is waning. In our view, however, a portion of these concerns are reflected in current share prices, and we are identifying attractively valued best-in-class real estate companies.

Taking a broader view, we believe market turmoil will pass. We also believe we have developed the right real estate product for long-term success. In our opinion, the merits of our income-oriented approach to investing in real estate, and our more comprehensive, flexible, liquid, and actively managed investment approach will shine even brighter in the years ahead because investing in real estate requires more discerning analysis (there are more “winners” and “losers”) than in the past.

We continue to believe that our highly differentiated real estate strategy enjoys, in our opinion, attractive attributes compared to actively managed REIT funds, passive/ETF real estate funds, non-traded REITs, and private real estate.

Our real estate team remains focused and committed to delivering strong results over the long term.