Baron Real Estate Fund: Latest Insights and Commentary

U.S. equity markets were volatile during the quarter, as strong early-year performance was offset by AI-related disruption fears and geopolitical tensions. Large caps declined while small and mid caps generated positive returns at a level of relative outperformance not seen since the COVID period in 2020–2021. 

We believe this evolving environment is increasingly favorable for asset-intensive sectors with durable cash flows and tangible value. Public real estate is a key beneficiary. After several years of underperformance, many real estate companies now trade at attractive valuations, reflecting a reset in the cost of capital rather than deterioration in fundamentals. 

Fundamentally, real estate conditions remain constructive. Demand across most property types has been stable, while new supply has fallen to decade lows, supporting occupancy gains, rent growth, and cash flow expansion. Balance sheets remain strong, with prudent leverage and well-laddered maturities. Should interest rates gradually ease, supported by moderating inflation and AI-driven productivity gains, financing costs could decline and further support property values and transaction activity. 

We also see real estate benefiting from a rotation toward sectors perceived as more resilient to AI disruption. As investors reassess earnings durability, tangible asset sectors offer greater visibility and stability. Public real estate continues to trade at meaningful discounts to private market values in many cases, creating potential for incremental private capital interest. Looking ahead, we remain focused on companies with strong balance sheets, durable competitive advantages, and attractive long-term growth prospects. 

CONTRIBUTORS

• Equinix, Inc. is a premier global operator of 270 network-dense, carrier-neutral colocation data centers across 36 countries and six continents. After lagging for much of 2025, shares rose during the quarter, supported by solid overall quarterly results, robust bookings growth, and a strong 2026 outlook that exceeded investor expectations. We retain long-term conviction in Equinix as it continues to benefit from several powerful secular trends, including rising internet traffic, IT outsourcing, cloud computing, AI adoption, and increased mobility.
• Welltower Inc. operates senior housing, life science, and medical office real estate properties. Shares rose on robust cash flow growth in the company’s senior housing portfolio, driven by continued strong occupancy and rent trends supporting bottom-line growth, along with a strong initial full-year 2026 outlook and continued execution on accretive external growth opportunities. The company also announced additional initiatives to drive asset-light earnings growth. We are optimistic about the prospects for both cyclical and secular growth in senior housing demand against a backdrop of muted supply, which we believe will support several years of favorable growth. Welltower is a “best-in-class” operator with a luxury portfolio, well positioned to capture outsized organic and inorganic growth opportunities. We retain conviction in the company given its high-quality real estate portfolio, conservative balance sheet, prudent capital allocation, and compelling multi-year earnings growth story.

DETRACTORS

• CoStar Group, Inc. is the leading provider of information and marketing services to the commercial and residential real estate industries. Shares fell due to multiple compression driven by rising AI fears. The market has come to view AI as an existential risk for a growing number of industries—including software, business services, information services, and video games—despite no evidence of any fundamental impact to these sectors. This “shoot first and ask questions later” dynamic has resulted in meaningful share price declines. We continue to own CoStar given its differentiated data assets and significant growth opportunities in providing enhanced real estate information, analytics, and marketplace offerings. CoStar boasts an enviable business model with high levels of recurring revenue and meaningful cash flow generation potential. While near-term cash flow is obscured by elevated investment in Homes.com, we expect spending to moderate and cash flow to improve over the next several years. The company also maintains a substantial cash balance, which we are hopeful will be used to aggressively repurchase shares at current depressed valuation levels.

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 5.39% (Institutional Shares) in the first quarter, trailing the MSCI US REIT Index by 991 basis points as the Fund’s unique exposure to non-REIT real estate-related companies, primarily those in the real estate service, real estate operating, and building product/services categories, weighed heavily on relative performance. The Fund also underperformed the more comparable MSCI USA IMI Extended Real Estate Index (the Index) by 443 basis points due to active real estate category exposures and, to a lesser extent, disappointing stock selection. 

Meaningfully higher exposure to lagging real estate service companies accounted for around three-quarters of the relative losses in the period, as fears about AI-driven disruption weighed on the category. The market has come to view AI as an existential risk for a growing number of industries—including commercial real estate services businesses (Jones Lang LaSalle Incorporated (JLL) and CBRE Group, Inc.) and real estate information and marketing services providers (CoStar Group, Inc.)—despite no evidence of any fundamental impact to these segments. This “shoot first and ask questions later” dynamic resulted in meaningful share price declines across the category. Despite these AI concerns, we retain long-term conviction in JLL and CBRE because their business fundamentals and outlooks remain strong, and we believe that advancements in AI will ultimately benefit these companies by further reinforcing their scale, capabilities, and cost advantages relative to smaller peers.

We decided to sell CoStar, a global leader in the digitization of real estate, due to concerns that the company’s residential platform, Homes.com, will require substantial ongoing investment and is unlikely to achieve profitability until 2030. We also see the potential for increased competitive pressures across both CoStar’s commercial and residential segments over time. In addition, we were disappointed by management’s decision to revise its reporting structure in a way that reduces transparency into the underlying business. The new framework combines Homes.com with Apartments.com under a single “Residential” segment, effectively obscuring the performance of the Homes.com platform. Further, the company will no longer disclose net new bookings for Homes.com—previously a key metric used by investors to assess the platform’s traction and progress.

Adverse stock selection associated with the Fund’s real estate operating companies was another source of weakness, overshadowing gains from being overexposed to this better-performing category. Blackstone Inc. and Brookfield Corporation were the largest detractors due to investor concerns that weighed on alternative asset managers broadly, including higher interest rates that could impede monetizations and real estate values for investments held on the balance sheet as well as fears about private credit exposure. We sold Blackstone during the quarter, but continue to own Brookfield given the company’s strong asset management platform, which offers high earnings visibility, along with its global capital deployment capabilities.

Underexposure to better performing infrastructure-related companies and poor stock selection in building products/services (CRH public limited company) also hampered relative performance.

Failing to offset the above was strong stock selection in the REITs, hotels & leisure, and casinos & gaming categories. Strength in REITs was driven by data center operator Equinix, Inc. and Welltower Inc., which operates senior housing, life science, and medical office real estate properties. Equinix’s shares rose during the quarter, supported by solid overall quarterly results, robust bookings growth, and a strong 2026 outlook that exceeded investor expectations. Welltower’s stock was lifted by robust cash flow growth in the company’s senior housing portfolio, driven by continued strong occupancy and rent trends supporting bottom-line growth, along with a strong initial full-year 2026 outlook and continued execution on accretive external growth opportunities. The company also announced additional initiatives to drive asset-light earnings growth. 

Within hotels & leisure, solid performance from hotel company Hilton Worldwide Holdings Inc. coupled with lower exposure to this lagging category added value. Hilton’s shares rose in response to robust quarterly results, driven by strong consumer travel trends and a solid full-year 2026 outlook. We retain conviction in Hilton given its seasoned executive team led by long-time Chief Executive Officer Chris Nassetta (who has been in the role for over 16 years), compelling unit growth across both new and existing brands, and asset-light business model that supports significant cash returns to shareholders.

Casino and hospitality company Caesars Entertainment, Inc. led the way in casinos & gaming, helping overcome weakness from being overexposed to this underperforming category, which was down more than 25% in the Index. Caesars shares rose following the announcement of a proposed buyout of the company by Tilman Fertitta. Caesars is in active exclusive negotiations to sell at $32 per share, implying an equity value of approximately $6.5 billion and enterprise value of roughly $31.5 billion—a 60% premium to the stock’s pre-announcement price. Fertitta secured a 45-day exclusivity window, which is expected to expire between late April and early May 2026. Fundamentals were better than feared. Las Vegas revenue improved sequentially, from down 10% year over year in the third quarter to down 3% in the fourth quarter as group mix strengthened. Regional properties delivered 4% revenue growth despite a roughly $10 million weather headwind in late December. The digital segment accelerated sharply, generating 39% revenue growth and a 20% EBITDA margin. Management also outlined a credible path to continued growth, including developments at its Windsor property in the first quarter, a large State Farm agents’ conference in the second quarter, and a Tahoe expansion planned for the third quarter. We remain investors.