Baron Real Estate Fund: Latest Insights and Commentary

The Review and Outlook for period ending June 30, 2024, is not yet available.

CONTRIBUTORS

• Equity Residential operates 80,000 apartment units in high barrier-to-entry coastal locations. Shares increased on strong operating updates, an improved full-year growth outlook and faster-than-expected improvement in the company’s West Coast markets. Longer term, we retain conviction given the company's premier asset base in desirable locations, attractive valuation, lack of housing supply relative to population growth, increasing construction and financing costs limiting new supply, and well-regarded management team.
• Welltower Inc. is an operator of senior housing and life science and medical office properties. The company was a contributor during the quarter on strong cash flow growth in its senior housing portfolio, an improved full-year outlook, and execution on highly accretive capital deployment opportunities. We are optimistic about the prospects for both cyclical and secular growth in senior housing demand against a backdrop of muted supply. Welltower is a best-in-class operator with a high-quality curated portfolio, a conservative balance sheet, and astute capital allocators who have been successful in capturing outsized organic and inorganic growth opportunities.
• Digital Realty Trust, Inc. is a global provider of data center services to enterprises, cloud service providers, network providers, financial services, media, and other customers. Shares increased on record quarterly new leasing results, pricing power on new and renewal leases, improving capital structure, and evolving AI demand for its data center facilities. We visited Digital’s headquarters in Texas earlier this year to meet with CEO Andy Power. The visit strengthened our belief in Digital’s ability to perform well due to improving growth and pricing power, existing and newly developed data center capacity in supply-constrained markets, fully secured pipeline of power and key infrastructure components, and greater focus on delivering bottom-line growth while balancing investing for the future. We retain conviction due to the strong secular tailwinds in cloud adoption and IT sourcing and further scaling of Digital's retail colocation business.

 

DETRACTORS

• CoStar Group, Inc. is a provider of marketing and data analytics services to the real estate industry. Shares detracted from performance in the quarter along with the broader software sector. Most software companies experienced a slowdown in new sales activity in early 2024, leading to guidance reductions and multiple compression. We believe CoStar shares were also impacted by concerns that the company’s second quarter financial results will show a deceleration in net new sales of its residential product following outstanding first quarter performance. We remain encouraged by traction in CoStar’s residential offering although recognize that progress may not be linear. CoStar began to monetize its new Homes.com platform in February. We believe early momentum can be amplified by the recent NAR class action settlement, which has the potential to disrupt the residential brokerage industry and enhance the return on investment for brokers advertising on Homes.com.
• Prologis, Inc. is the largest global REIT and owner of industrial warehouse real estate. Shares detracted from performance during the quarter. On its first quarter earnings call, the company provided an incrementally cautious outlook on near-term business trends and modestly lowered full-year guidance, both of which weighed on the stock. We view the current business headwinds as transitory and at least partly reflected in the current share price. We remain excited about the company's multi-year growth prospects.
• D.R. Horton, Inc. is the largest U.S. homebuilder. Shares fell on investor concerns that U.S. housing construction activity levels would slow, due to the diminished ability of consumers to afford down payments and monthly mortgage payments, both of which are significantly higher than they were several years ago. We remain confident in D.R. Horton's long-term prospects, as the U.S. housing market continues to grow, and the company continues to gain share from less well-capitalized local and regional homebuilders.