Baron Real Estate Fund: Latest Insights and Commentary

U.S. equities delivered a steady finish to an otherwise turbulent year in the fourth quarter of 2025, with moderate gains across most indexes amid easing economic pressures and holiday-season stability. Multiple record highs were reached during the quarter, with the S&P 500 Index and Dow Jones Industrial Average peaking on December 24, the NASDAQ Composite reaching several all-time highs earlier in the quarter. Volatility spikes in mid-October and mid-November proved short-lived, and the CBOE Volatility Index reached a 2025 low by late December, supported by resilient economic data.

Fourth-quarter gains were underpinned by moderating tariff impacts, robust corporate earnings, and continued monetary easing. Following a 25-basis-point rate cut in September, the Federal Reserve lowered rates twice more during the quarter, with additional 25-basis-point cuts in October and December. While a prolonged government shutdown introduced some uncertainty, resilient labor market conditions and the absence of major inflation spikes helped support the rally.

While real estate again lagged the broader market during the quarter, we continue to see improving prospects for the sector ahead. Demand conditions across most property types remain steady, with expectations for an acceleration in growth over the next several years. Importantly, new competitive supply has collapsed—often by more than 50% from peak 2022 levels—a dynamic we believe is underappreciated by the market. As a result, growth may rebound more quickly than in prior cycles, as the sector is not burdened by excess supply or depressed occupancy levels. Real estate equities have reset to reflect a higher cost of capital, leaving public real estate attractively valued relative to private markets in many cases. We believe this valuation gap could drive increased private equity acquisition activity targeting select public real estate companies. Balance sheets and real estate credit markets are strong. Looking ahead, moderating shelter inflation and potential productivity gains from AI could place downward pressure on long-term interest rates, which would represent a meaningful catalyst for the sector. In our view, a favorable combination of cash flow growth, dividends, and the potential for valuation improvement positions real estate to generate attractive total returns over the years ahead.

As we look toward what could be a pivotal period for the sector in 2026 and beyond, we remain focused on identifying best-in-class, competitively advantaged real estate companies with compelling long-term growth and share price appreciation potential, structured to capitalize on high-conviction investment themes. We believe the benefits of our flexible approach, which allows us to invest in a broad array of real estate companies including REITs and non-REIT real estate-related companies, will shine even brighter in the years ahead, in part due to the rapidly changing real estate landscape which, in our opinion, requires more discerning analysis.

CONTRIBUTORS

• Prologis, Inc. is the largest industrial REIT in the world. Shares rose during the fourth quarter after the company reported strong third-quarter financial results and provided an optimistic outlook. We view Prologis as a competitively advantaged business with attractive multi-year growth prospects, supported by a favorable demand, supply, and rent growth environment, significant embedded growth from in-place rents that are generally more than 20% below market and approximately 40% below replacement levels, multiple secular demand tailwinds (e-commerce, supply chain logistics, increased inventory safety stock, and nearshoring/onshoring trends), as well as a growing pipeline of lucrative data center development opportunities.

• Shares of global hotelier Hyatt Hotels Corporation increased during the quarter as the company delivered strong revenue per available room and unit growth despite concerns around a weakening macroeconomic environment. Hyatt also reached an agreement with Chase to extend its credit card partnership on improved economic terms, reflecting continued growth in World of Hyatt membership. The company continues to sell owned assets at accretive rates and is redeploying the proceeds through share repurchases. Hyatt maintains an investment-grade balance sheet, with approximately 90% of earnings generated from fees, yet the stock trades at a discount to peers despite a comparable growth profile and business mix. We believe this valuation gap should narrow over time as investors gain greater confidence in the durability and resilience of Hyatt’s business model.

DETRACTORS

• CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell as the company’s net new sales came in below expectations. The stock has been weighed down by significant growth investment in CoStar’s residential product, where sales performance has remained modest. That said, we are encouraged by improving momentum as the company builds out its dedicated residential sales force, enhances its customer targeting, and potentially benefits from changes in Multiple Listing Service practices. We also expect growth in CoStar’s non-residential business to accelerate as sales productivity ramps and the sales team refocuses on core offerings, a trend likely to be amplified by 20% sales force growth in 2025 alone. We believe the value of CoStar’s core non-residential business exceeds the current share price of the stock, suggesting that investors are ascribing little value to the long-term residential opportunity.

• Iron Mountain Incorporated is a leading global provider of information management, storage, and related services, recognized as a trusted guardian of its clients’ most important records. Shares fell after the company reported another disappointing quarter of new business bookings within its higher-growth data center segment. In addition, a short report presented at an investor conference raised questions around Iron Mountain's accounting adjustments and overall leverage levels, creating an additional overhang on the shares. While we disagreed with the conclusions of the short report and viewed the company’s growth and valuation as compelling, ongoing execution concerns led us to harvest losses, exit the position, and reallocate capital to higher-conviction opportunities. We may revisit the investment at a later date.

• GDS Holdings Limited is a leading developer and operator of high-performance data centers, operating in key Tier 1 cities across China and expanding rapidly across Asia. After strong performance throughout the first nine months of the year, shares detracted from performance during the quarter as investors weighed the timing of an expected step-up in new business bookings and the associated capital investment required. We continue to see increasing evidence that the AI wave is approaching an inflection point, alongside further progress toward easing chip supply constraints in China that have previously limited data center leasing volumes. We retain long-term conviction in GDS due to its undemanding valuation, blue-chip customer base, scarce and valuable capacity in Tier 1 markets, and the embedded value of its international business, as demonstrated by recent private capital raises backed by highly regarded investors.

When reviewing performance attribution on our portfolio, please be aware that we construct the portfolio from the bottom up, one stock at a time. Each stock is included in the portfolio if it meets our rigorous investment criteria. To help manage risk, we are aware of our sector and security weights, but we do not include a holding to achieve a target sector allocation or to approximate an index. Our exposure to any given sector is purely a result of our stock selection process.

Baron Real Estate Fund (the Fund) fell 1.32% (Institutional Shares), yet outperformed the MSCI US REIT Index by 67 basis points as the Fund benefited from its unique exposure to non-REIT real estate-related companies, such as those in hotel & leisure and real estate service categories. The Fund also outperformed the more comparable MSCI USA IMI Extended Real Estate Index (the Index) by 213 basis points due to strong stock selection and, to a lesser extent, active real estate category exposures. 

Stock selection was positive across most real estate categories, with real estate service companies, homebuilders & land developers, and the hotels & leisure categories contributing the vast majority of stock-specific gains (+259 basis points).  Performance in real estate services was largely driven by commercial real estate service provider Jones Lang LaSalle Incorporated (JLL). Shares of JLL rose during the fourth quarter as the company continued to deliver strong business performance amid a favorable environment across both its cyclical and more resilient business lines. With a leading brand, global platform, and strong balance sheet, we believe JLL is well positioned for outsized growth over the next several years.

Champion Homes, Inc., one of America’s largest manufacturers of factory-built housing, was responsible for most of the stock-specific strength in the homebuilders & land developers category.  Shares increased during the quarter on strong operating results, driven by growth in housing units sold and higher selling prices, as Champion Homes sold a greater mix of larger, multi-section homes. Gross margins also exceeded expectations, supported by a higher proportion of sales through the company’s owned retail stores versus lower-priced wholesale channels, which resulted in improved profitability and earnings growth. We remain excited about our investment in Champion Homes and believe manufactured housing could play an important role in addressing housing affordability challenges for consumers over the coming years

Positive stock selection in the hotels & leisure category, led by global hotelier Hyatt Hotels Corporation, was somewhat offset by higher exposure to this lagging group. Hyatt delivered strong revenue per available room and unit growth despite concerns around a weakening macroeconomic environment. The company also reached an agreement with Chase to extend its credit card partnership on improved economic terms, reflecting continued growth in World of Hyatt membership. The company continues to sell owned assets at accretive rates and is redeploying the proceeds through share repurchases. Hyatt maintains an investment-grade balance sheet, with approximately 90% of earnings generated from fees, yet the stock trades at a discount to peers despite a comparable growth profile and business mix. 

Lower exposure to the building products/services group along with gains from building materials company CRH public limited company and plastic pipe manufacturer Advanced Drainage Systems, Inc. also added value in the period.

Somewhat offsetting the gains above was lack of exposure to the better performing senior housing operators & health care facilities category, and unique exposure to the data center category through the Fund’s investment in GDS Holdings Limited, a leading developer and operator of high-performance data centers in Asia. After strong performance throughout the first nine months of the year, shares detracted from performance during the quarter as investors weighed the timing of an expected step-up in new business bookings and the associated capital investment required. We continue to see increasing evidence that the AI wave is approaching an inflection point, alongside further progress toward easing chip supply constraints in China that have previously limited data center leasing volumes. We retain long-term conviction in GDS due to its undemanding valuation, blue-chip customer base, scarce and valuable capacity in Tier 1 markets, and the embedded value of its international business, as demonstrated by recent private capital raises backed by highly regarded investors.

Yearly Attribution Analysis (for year ended 12/31/2025)

Baron Real Estate Fund (the Fund) increased 5.19% (Institutional Shares) and outperformed the MSCI US REIT Index, which increased 1.68%, by 351 basis points thanks to gains from the Fund’s non-REIT real estate-related investments. The Fund modestly outperformed the more comparable MSCI USA IMI Extended Real Estate Index (the Index) by 31 basis points, which was up 4.88% for the year as positive stock selection more than offset the negative impact of relative category exposures. 

Unique exposure to the data centers category along with real estate service company investments lifted relative results.  Within real estate service companies, higher exposure to this outperforming category along with gains from commercial real estate companies Jones Lang LaSalle Incorporated (JLL) and CBRE Group, Inc. added value. Shares of JLL performed well in the fourth quarter as the company continued to deliver strong business performance amid a favorable environment across both its cyclical and more resilient business lines.

Positive stock selection in casinos & gaming operators also added significant value for the year, bolstered by share price increases from global luxury resort operator Wynn Resorts, Limited and Las Vegas Locals-focused casino operator Red Rock Resorts, Inc. Wynn’s shares rose sharply following a strong earnings release that showed better-than-expected performance in Las Vegas and signs of accelerating growth in Macau. After years of stagnation, Macau is experiencing renewed visitation from higher-end VIP players, positioning Wynn as a key beneficiary given its premium offering and potential for EBITDA expansion in the region. The company is demonstrating strong momentum across all markets and operates the most differentiated property on the Las Vegas Strip, where we believe the outlook is set to improve in 2026. We also expect the Wynn Al Marjan development to be a major success and to gain increasing attention from the investment community as it progresses toward completion in 2026.

Similarly, Red Rock’s stock rose in response to solid operating results, with investors reacting positively to incremental visitation from new customers and accelerating spend-per-visit trends, despite concerns about a market slowdown. The company continues to report strong visitation and robust slot and table game play, along with improving activity from uncarded and non-rewards customers. Red Rock is regaining business at its flagship resort following some initial cannibalization from the opening of its Durango property, with management expecting a full recovery next year and trends already improving faster than anticipated. The new property is generating robust returns, and performance across the company’s six core casinos has strengthened as the Las Vegas Locals market absorbs Durango and returns to its historical low-single-digit growth rate. Given the strength of the market, management continues to ramp up capital investment, which we believe should support ongoing revenue and EBITDA growth over the next several years.

Lastly stock selection in homebuilders & land developers aided performance thanks to outperformance from luxury homebuilder Toll Brothers, Inc. and premier insulation installer Installed Building Products, Inc. (IBP). Toll Brothers stock rose on better-than-feared quarterly results, despite ongoing challenges in the U.S. housing market. We believe Toll Brothers is well positioned for long-term growth, supported by its premium product offerings, extensive upgrade options, and scale advantages. Shares of IBP increased after the company reported strong quarterly results and provided an optimistic outlook for the remainder of 2025. We remain shareholders, as we believe IBP will continue to outperform the broader housing market through share gains, cross-selling initiatives, and accretive acquisitions. 

Largely offsetting the gains above was lower or lack of exposure to the strong performing infrastructure related and senior housing operators & health care facilities categories, which both increased 40.2% as a group in the Index.  Additionally, adverse stock selection in REITs and investments in hotels & leisure also hampered relative results. 

Stock-specific weakness in REITs was due to data center REIT Equinix, Inc. and office REIT Vornado Realty Trust. Shares of Equinix detracted from performance for the year due to the company providing an updated five-year earnings growth outlook that was below investor expectations at its investor day in June. We attended Equinix’s bi-annual investor day at the end of June and came away encouraged by the expanding growth drivers for the company’s business over the next five years. While topline growth is encouraging, the company is ramping up capital investments over the next several years, which will dampen per share cash flow growth over the next two years in particular. This led to a material initial sell-off in the shares. While disappointing near-term and below our expectations as well, we believe the company is taking the right steps to position the business for higher growth ahead. Underperformance of Vornado was driven by several transitory headwinds that negatively impacted management's outlook for earnings growth, notwithstanding a backdrop of robust tenant demand for Vornado's office and retail real estate. We exited our investment late in the year to reallocate to other investment opportunities.

Underperformance stemming from the hotels & leisure category was driven by a combination of lower exposure to this outperforming category and adverse stock selection. Stock-specific weakness came from global online travel agency Expedia Group, Inc. Shares of Expedia detracted from performance due to emerging unknown business model risks in a potential agentic AI world. We reallocated capital to higher conviction ideas but may revisit Expedia in the future given our optimism for the compelling long-term secular growth in travel as well as the business transformation initiatives which are starting to pay dividends within the organization.