Baron Real Estate Income 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.

• Ventas, Inc. is a REIT that owns and operates a diversified portfolio of senior housing communities, life science properties, and medical office buildings. Shares rose due to continued growth in cash flow and occupancy, margin expansion, and an upward revision to the company’s full-year 2025 outlook. Ventas also demonstrated progress toward accelerating accretive external growth, completing more than $1 billion in incremental investments during the quarter (versus $200 million in the prior quarter), and continued to articulate a compelling opportunity going forward. We retain long-term conviction in the company, supported by the quality and scale of its $35 billion-plus portfolio.

DETRACTORS

• 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.

• American Tower Corporation is a leading global REIT owning more than 150,000 wireless communication tower sites, with a heavy emphasis on developed markets. The stock declined amid concerns around the contractual commitments of a smaller customer, DISH, and the potential timing and impact of churn following the U.S. spectrum divestiture by its parent company, EchoStar. During the quarter, American Tower disclosed that it received a letter from DISH asserting that it was excused from any remaining contractual payment obligations following the transaction. In response, American Tower filed a lawsuit to enforce its contractual rights. We reduced our position but remain constructive over the long term, supported by durable demand drivers tied to data and video, accelerating growth, and the company’s ability to expand its portfolio and return excess capital to shareholders.

• 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.