Baron Real Estate Fund (BREIX)

Portfolio Management

Jeffrey Kolitch

Fund Manager since 2009

View All Commentary by Jeffrey

Fund Description

Baron Real Estate Fund invests in securities of real estate and real estate related companies of all sizes.


Portfolio Commentary

Institutional Performance

Review and Outlook (for quarter ended 3/31/2016)

The Review and Outlook for period ending March 31, 2016 is not yet available

Top Contributors/Detractors to Performance

Contributors (for quarter ended 3/31/2016)
  • Shares of InterXion Holding N.V. added to performance during Q1. Interxion provides network-dense, carrier-neutral colocation data center services across Europe. Performance was driven by strong secular tailwinds in cloud adoption and outsourcing, improving pricing and utilization trends, and continued strong customer demand as evidenced by the company’s announced 2016 expansion plan. Rumors that InterXion was an acquisition target given ongoing industry consolidation also helped boost the share price.

  • Shares of Digital Realty Trust Inc. added to performance during Q1. Digital Realty is a global provider of large-scale data center services. Performance was driven by strong leasing and occupancy trends, stable pricing, and robust demand as a result of increasing cloud adoption and IT outsourcing. In addition, Digital Realty’s integration of recent acquisition Telx is progressing well with cost synergies fully realized. Telx further differentiates Digital Realty from its competitors by offering colocation and interconnection services.

  • Martin Marietta Materials, Inc. saw its stock price rise during Q1. The company is a leading supplier of aggregate products for the construction industry. Strong performance resulted from Q4 results that were better than consensus estimates and upbeat 2016 guidance. We remain excited about the company's long-term prospects, as we believe it should benefit from a continued cyclical recovery across its end markets, coupled with an accretive acquisition strategy.

Detractors (for quarter ended 3/31/2016)
  • Jones Lang LaSalle, Inc. is a commercial real estate (CRE) services company with leading positions in all of its major businesses – leasing, investment sales, outsourcing, project and development services, advisory services, and CRE investment management. Shares fell as a result of disappointing Q4 earnings results. Concerns that capital markets activity would slow dramatically and the CRE cycle is nearing its peak also pressured shares. We believe the outlook for CRE is attractive and remain optimistic on the company’s long-term prospects.

  • CBRE Group, Inc. is a commercial real estate (CRE) services company with leading positions in all of its major businesses – leasing, investment sales, outsourcing, project and development services, advisory services, and CRE investment management. The stock price fell during Q1 over concerns that capital markets activity would slow dramatically and that the commercial real estate cycle is nearing its peak. We believe the outlook for CRE is attractive and remain optimistic on the long-term prospects for CBRE.

  • Shares of cruise ship operator Royal Caribbean Cruises, Ltd. fell in Q1 due to investor concerns over ongoing challenges with foreign exchange rates, higher interest rates, and the possibility of the U.S. going into a recession, which could potentially hurt pricing power on its ships. However, the company is not losing pricing power. While its bookings were flat versus this time last year, prices were up. Royal Caribbean continues to generate strong cash flow which it is using to pay down debt and buy back shares.

Quarterly Attribution Analysis (for quarter ended 3/31/2016)

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 fell 4.53% in the first quarter and trailed the MSCI USA IMI Extended Real Estate Index by 867 basis points. During the quarter, stock selection and, to a lesser extent, relative real estate category weights detracted from relative performance.

The data centers category contributed to relative performance as a result of the outperformance of the Fund’s only holding in the category, InterXion Holding N.V. The company, which provides network-dense, carrier-neutral colocation data center services across Europe, was the largest contributor on an absolute basis.

Real estate services, hotels & leisure, and building products/services were the largest detractors from relative performance. Within real estate services, larger exposure to this weak performing category, which declined 15.3% in the index, and underperformance of its three holdings in the category, Jones Lang LaSalle, Inc., CBRE Group, Inc., and Kennedy-Wilson Holdings, Inc., hurt relative results. Jones Lang and CBRE were the two largest detractors on an absolute basis. Shares of Kennedy-Wilson fell despite reporting strong Q4 results and management issuing an upbeat outlook for 2016. We suspect underperformance was due to concerns that 1) the commercial real estate cycle is in the late innings; 2) credit market volatility could hurt the profitability of asset management firms; and 3) complex, illiquid stocks like Kennedy-Wilson tend to suffer when macroeconomic conditions are uncertain. We believe any potential market dislocations could lead to attractive acquisition opportunities for Kennedy-Wilson, as the company has low leverage and a proven track record of making opportunistic acquisitions during times of distress.  Within hotels & leisure, underperformance of cruise line holdings Royal Caribbean Cruises Ltd. and Norwegian Cruise Line Holdings Ltd. and larger exposure to this lagging category detracted the most from relative performance. Royal Caribbean and Norwegian were pressured by investor concerns over the possibility of a U.S. recession. However, we believe booked positions for 2016 indicate these companies are not losing pricing power as feared. These companies also continue to generate strong cash flow, which is being used to pay down debt and buy back shares. Leisure company ClubCorp Holdings, Inc. and timeshare operator Diamond Resorts International, Inc. also weighed on performance. ClubCorp’s shares declined on concerns around lower oil prices hurting business at its golf clubs in Texas, which comprise 35% of EBITDA. Shares of Diamond Resorts were hurt by a negative news article questioning its sales practices. We exited our positions in ClubCorp and Diamond Resorts. Weakness in building products/services was mainly due to the underperformance of building products holdings CaesarStone Sdot-Yam Ltd., a leading global manufacturer of quartz surfaces, and Builders FirstSource, Inc., one of the largest suppliers and manufacturers of structural and related building products for new home construction. Caesarstone’s shares fell over concerns that a recently constructed manufacturing facility was taking longer than expected to ramp up production, while Builders FirstSource was sold in favor of higher conviction ideas.

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The prospective performance of the companies discussed herein is based on our internal analysis and reflect our opinions only. We cannot promise future returns and our opinions are a reflection of our best judgement at the time of publication. Our views are not intended as recommendations or investment advice to any person and are subject to change at any time based on market and other conditions and Baron has no obligation to update them. Investing in the stock market is always risky. Current and future portfolio holdings in the Fund are subject to risk.

Source: FactSet PA.