Baron Real Estate Fund (BREIX)
Portfolio Management
Jeffrey Kolitch
Fund Manager since 2009
View All Commentary by JeffreyFund Description
Baron Real Estate Fund invests in securities of real estate and real estate related companies of all sizes.
Fund Resources
Jeff Kolitch on his approach to investing in real estate.
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Three Year Performance
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Portfolio Commentary
Institutional PerformanceReview and Outlook (for quarter ended 3/31/2013)
The broad stock market performed strongly in the first quarter, buoyed by a combination of aggressive interventionist policies of the world’s central banks, the continuation of positive economic performance, most notably in the U.S., and the perceived lower risk of significant sovereign systematic risks.
We continue to advocate a broad and balanced approach to investing in real estate. We believe our hotel & leisure investments are well positioned due to their attractive valuations, low supply forecasts, and solid demand expectations. If economic growth continues to mend, hotels, in our opinion, should perform well. In the most recent quarter, we added to all of our hotel investments including Starwood Hotels and Resorts Worldwide, Inc., Hyatt Hotels Corp., Wyndham Worldwide Corp., Sunstone Hotel Investors, Inc., Ashford Hospitality Trust, Inc., LaSalle Hotel Properties, and Strategic Hotels & Resorts, Inc. It is our view that all of our hotel investments trade at discounts to their intrinsic value.
We continue to believe that the most notable development in real estate is the rebound in the U.S. housing market. We believe we are in the early stages of what will be a multi-year recovery for housing. The Fund continues to increase its exposure to companies that we believe will benefit from the rebound in the homebuilding market, including building products/services companies, such as Lowe’s Companies, Inc., senior housing operators, homebuilders, and land developers.
We believe that many of the Fund’s casino and gaming investments have real estate value that is not being reflected in their share prices. In the fourth quarter of 2012, Penn National Gaming announced its intention to separate its real estate assets from its operating assets. In other words, the company plans to transform itself into the first gaming-focused REIT. Its shares have appreciated strongly since that announcement, and we think the shares continue to offer attractive return potential from the current price. We believe our other casino and gaming investments also have the potential to unlock real estate value and should perform well if economic growth accelerates.
Finally, we remain optimistic about the growth prospects for real estate service companies because we believe they have superior and more open-ended growth potential and more attractive valuations than most REITs. Our current real estate services investments include CBRE Group, Inc., Jones Lang LaSalle, Inc., Kennedy-Wilson Holdings, Inc., and RealPage, Inc.
We have continued to lower our non-hotel REIT exposure. We believe more attractive valuation and growth prospects exist in most other non-REIT real estate categories.
Top Contributors/Detractors to Performance
Contributors (for quarter ended 3/31/2013)
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Capital Senior Living Corp. increased 41.4% in Q1. Capital Senior Living is the 9th largest senior housing operator in the U.S. The shares continued to perform well in Q1 due to solid operating performance in its business and its favorable valuation. Strong demographics, growth in the company’s operating portfolio, a rebound in the homebuilding market, acquisition opportunities, a quality balance sheet, and an attractive valuation support our favorable view of the company.
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Caesarstone Sdot-Yam Ltd. contributed positively to performance in Q1, with the stock price rising 65.1%. CaesarStone is a leading global manufacturer of quartz surfaces for kitchens and bathrooms. Performance was driven by continued strong earnings growth, as quartz continues to take market share from other countertop materials, such as granite and marble.
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Shares of Norwegian Cruise Line Holdings, Ltd., an operator of cruise ships, increased 56.1% in its first months as a public company. The company has significant growth plans for its fleet over the next few years and a unique way of cruising with its freestyle concept. In addition, Norwegian’s ships are younger than those of its competitors, and many see improved pricing for that attribute, which should drive higher margins and strong cash flow.
Detractors (for quarter ended 3/31/2013)
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Pinnacle Entertainment, Inc., an operator of regional casinos in the United States, was a detractor in Q1. The company had a big run in Q4 when it announced the acquisition of Ameristar Casinos, Inc. During Q1, the stock pulled back amid fears the deal would be voted down by shareholders. We believe there are synergies to be gained in a merger between Pinnacle and Ameristar, and we like the long-term prospects of such a combination.
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Orient-Express Hotels Ltd., a global operator of hotels and safaris, was a detractor in Q1. The stock price jumped on a recent bid to acquire the company; however, the stock pulled back as investors realized the company was not likely to accept the bid. We were disappointed the company did not accept the bid, as we believed it would have enhanced shareholder value. We sold our position.
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PATRIZIA Immobilien AG detracted slightly from performance in Q1. PATRIZIA is a leading residential and commercial property owner and manager based in Germany. We decided to exit our position early in the quarter, after re-thinking our valuation target for the company and concluding that there were better opportunities elsewhere.
Quarterly Attribution Analysis (for quarter ended 3/31/2013)
This Fund does not have a Quarterly Attribution Analysis for period ending March 31, 2013
Invest In Baron Funds TodayThe 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.