Review and Outlook

as of 03/31/24

Investors entered the new year optimistic that a soft landing was in store for the economy, in which a recession would be avoided, inflation would continue to dissipate, and the Fed would start cutting interest rates in March. The economy has not only avoided recession, but it has been stronger than market forecasts. Meanwhile, inflation has again turned sticky, and Fed rate cuts have been delayed to at least June. The return to “higher for longer” rate concerns was a headwind for real estate equities, as the market views this category as a beneficiary of lower rates.

Against this backdrop, Baron Real Estate Fund increased. Investments within the homebuilders & land developers, building products/services, and casinos & gaming operators categories contributed the most. No category detracted. With all three top contributors within the category, homebuilders & land developers had a robust quarter. All seven building products/services holdings appreciated as residential real estate continued to show strength. Wynn Resorts, Limited led gains within casinos & gaming operators, as shares rose on quarterly results across its portfolio that beat consensus. Its Macau asset showed signs of rebounding to pre-pandemic levels while its Las Vegas and Boston assets continued to take share.

The last few years have been unusually challenging for real estate. Much of real estate has had to absorb a hurricane of headwinds including COVID-19, the most aggressive Federal Reserve rate tightening campaign in decades, a spike in mortgage rates from 3% to 8%, fears of a commercial real estate crisis, a tightening of credit availability, multi-decade high inflation, and supply chain challenges. We are encouraged by the strong performance of real estate equities in the most recent quarter and believe many of the challenges of the last few years are subsiding. Though we expect market volatility at various points in the year ahead, we believe brighter prospects for real estate are on the horizon. We also believe the narrative about a commercial real estate crisis is hyperbole and unlikely to materialize. Public real estate generally enjoys favorable demand versus supply prospects, maintains conservatively capitalized balance sheets, and has access to credit.

We have assembled what we think is a portfolio of competitively advantaged real estate companies with compelling long-term growth and share price appreciation potential. We have structured the portfolio to capitalize on high conviction investment themes. Valuations and return prospects are attractive. We believe the benefits of our broader and more flexible approach, which allows us to invest in both REITs and non-REIT real estate-related companies, will shine even brighter in the years ahead.

Top Contributors/Detractors to Performance

as of 03/31/24

Contributors

  • Toll Brothers, Inc. is a leading U.S. homebuilder. Positive performance was driven by continued signs of resilience and improvement in the U.S. homebuilding industry, strong results, and management's rosy business outlook. New single-family home construction activity in the U.S. remains below the levels needed to meet demand following a decade of under-building. Toll is a differentiated homebuilder with a niche focus on high-end homes and an excellent management team. We think Toll Brothers is well positioned to benefit from housing growth through its sizable land bank, healthy balance sheet, and market share gains against smaller players.
  • Lennar Corporation is one of the largest U.S. homebuilders in the country. Shares increased during the quarter due to continued signs of resilience and improvement in the U.S. homebuilding industry, strong business results, and management’s commitment to unlocking shareholder value through several strategic initiatives. We remain shareholders. New single-family home construction activity in the U.S. remains below the levels needed to meet current and pent-up demand following a decade of under-building. As a leading U.S. homebuilder, Lennar is well positioned to benefit from end-market growth and market share gains.
  • Installed Building Products, Inc. is a leading distributor and installer of insulation and complementary building products for residential and commercial end markets in the U.S. Shares rose on improving industry conditions, particularly in the new single-family residential construction market, which drives approximately 60% of the company’s revenue. Installed Building Products’ excellent execution across various strategic initiatives continues to generate growth from other construction end markets, including multifamily construction, light and heavy commercial construction, and remodeling. We believe the company also stands to benefit from pricing and profitability improvements and attractive tuck-in acquisition opportunities.

Detractors

  • American Tower Corporation is a REIT that owns and operates 220,000 cell phone towers, with 40,000 in the U.S. and 180,000 internationally. The stock gave up some gains following a rebound in the prior quarter, as shares of higher valued companies were impacted by the increase in interest rates during the first quarter. In addition, uncertainty around the timing and ultimate financial impact of American Tower’s sale of its India business, combined with lower overall spending by wireless carriers, weighed on shares. We remain investors given durable demand drivers in data growth and video, accelerating growth, and the company’s ability to grow its portfolio and return excess capital to shareholders.
  • Caesars Entertainment, Inc. is a casino company with destination properties in Las Vegas and regional properties across the U.S. Shares fell on financial results that missed Street estimates due to poor weather across the U.S. and lower hold rates in Las Vegas. We retain conviction. Caesars continues to generate strong free cash flow, enabling it to pay down debt and refinance some debt at more attractive rates. We anticipate growth in the company’s regional portfolio, with the launch of new projects coming online in 2024, and in Las Vegas, driven by a robust event calendar and sustained high levels of visitation and spending. We believe this growth will strengthen Caesars’s balance sheet over the next 18 to 24 months, resulting in multiple expansion and solid performance.
  • Rexford Industrial Realty, Inc. is a high-growth industrial warehouse REIT focused exclusively on the attractive Southern California infill market. Shares detracted on softer business conditions in certain sub-markets. We believe these headwinds will be short-lived and poised to improve soon, and we remain excited about Rexford's growth prospects over the next several years.

Investors should consider the investment objectives, risks, and charges and expenses of the investment carefully before investing. The prospectus and summary prospectuses contain this and other information about the Funds. You may obtain them from the Funds’ distributor, Baron Capital, Inc., by calling 1-800-99BARON or visiting www.BaronFunds.com. Please read them carefully before investing.

The performance data quoted represents past performance. Past performance is no guarantee of future results. The investment return and principal value of an investment will fluctuate; an investor's shares, when redeemed, may be worth more or less than their original cost. The Fund’s transfer agency expenses may be reduced by expense offsets from an unaffiliated transfer agent, without which performance would have been lower. Current performance may be lower or higher than the performance data quoted.

Risks:All investments are subject to risk and may lose value.

The discussion of market trends is not intended as advice to any person regarding the advisability of investing in any particular security. The views expressed on this page reflect those of the respective writer. Some of our comments are based on management expectations and are considered “forward-looking statements.” Actual future results, however, may prove to be different from our expectations. Our views are a reflection of our best judgment at the time and are subject to change at any time based on market and other conditions and Baron has no obligation to update them

Portfolio holdings are subject to change. Current and future portfolio holdings are subject to risk.

The index performance is not fund performance; one cannot invest directly into an index.