Baron Actual Property Earnings Fund Q2 2022 Shareholder Letter

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Tinnakorn Jorruang

Pricey Baron Actual Property Earnings Fund Shareholder:

Baron Actual Property Earnings Fund (the “Fund”) declined 18.43% (Institutional Shares) within the second quarter of 2022, modestly underperforming its major benchmark, the MSCI US REIT Index (the “REIT Index”), which declined 17.16%.

Within the first six months of 2022, the Fund declined 20.79%, according to the efficiency of the REIT Index which declined 20.71%.

A number of components weighed on efficiency within the first six months of 2022. Whereas we’re disenchanted with the difficult begin to the 12 months, we stay optimistic concerning the prospects for the Fund. The basics of lots of the companies we personal stay sturdy. We’ve been benefiting from the sharp corrections within the share costs of many companies to put money into and add to high quality REITs and different income-oriented actual property firms, lots of that are buying and selling at enticing valuations.

We’re happy to report that as of June 30, 2022, the Fund has maintained its:

  • 5-Star General Morningstar Score
  • Prime2%ratingamongstallactualpropertyfundsforits3-yearefficiency

As of 6/30/2022, the Morningstar Rankingshave been primarily based on 229 share courses for the 3-year and General durations. The Baron Actual Property Earnings Fund acquired 5 Stars for each durations. The Morningstar Rankingsare for the Institutional Share Class solely; different courses could have completely different efficiency traits. The Morningstar Rankings are primarily based on the Morningstar Danger-Adjusted Return measures.

As of 6/30/2022, the Morningstar Actual Property Class consisted of 249 and 229 share courses for the 1- and 3-year durations. Morningstar ranked Baron Actual Property Earnings Fund within the 88th and 2nd percentiles for the 1- and 3-year durations, respectively.

Morningstar calculates the Morningstar Actual Property Class Common efficiency and rankings utilizing its Fractional Weighting methodology. Morningstar rankings are primarily based on whole returns and don’t embrace gross sales fees. Complete returns do account for administration, administrative, and 12b-1 charges and different prices robotically deducted from fund belongings.

The Morningstar Scorefor funds, or “star ranking”, is calculated for managed merchandise (together with mutual funds, variable annuity and variable life subaccounts, change

traded funds, closed-end funds, and separate accounts) with at the least a three-year historical past. Change-traded funds and open-ended mutual funds are thought-about a single inhabitants for comparative functions. It’s calculated primarily based on a Morningstar Danger-Adjusted Return measure that accounts for variation in a managed product’s month-to-month extra efficiency, putting extra emphasis on downward variations and rewarding constant efficiency.

The Morningstar Score doesn’t embrace any adjustment for gross sales hundreds. The highest 10% of merchandise in every product class obtain 5 stars, the subsequent 22.5% obtain 4 stars, the subsequent 35% obtain 3 stars, the subsequent 22.5% obtain 2 stars, and the underside 10% obtain 1 star. The General Morningstar Score for a managed product is derived from a weighted common of the efficiency figures related to its three-, five-, and 10-year (if relevant) Morningstar Score metrics.

The weights are: 100% three-year ranking for 36-59 months of whole returns, 60% five-year ranking/40% three-year ranking for 60-119 months of whole returns, and 50% 10-year ranking/30% five-year ranking/20% three-year ranking for 120 or extra months of whole returns. Whereas the 10-year general star ranking components appears to provide essentially the most weight to the 10- 12 months interval, the newest three-year interval truly has the best affect as a result of it’s included in all three ranking durations.

© 2022 Morningstar. All Rights Reserved. The knowledge contained herein: (1) is proprietary to Morningstar and/or its content material suppliers; (2) will not be copied or distributed; and (3) just isn’t warranted to be correct, full or well timed. Neither Morningstar nor its content material suppliers are accountable for any damages or losses arising from any use of this data. Previous efficiency isn’t any assure of future outcomes.

We are going to handle the next subjects on this letter:

  • Our present top-of-mind ideas
  • A REIT market replace
  • Portfolio composition
  • Examples of attractively valued REITs and different income-oriented actual property firms
  • A evaluate of current exercise managing the Fund
  • Concluding ideas on the prospects for actual property and the Fund

Baron Actual Property Earnings Fund Efficiency

Desk I: Efficiency For durations ended June 30, 2022

Baron Actual Property Earnings Fund Retail Shares[1],[2]

Baron Actual Property Earnings Fund Institutional Shares1,2


Three Months3




Six Months3




One Yr




Three Years




Since Inception (December 29, 2017)




Since Inception (December 29, 2017) (Cumulative)3




Efficiency listed within the above desk is internet of annual working bills. Annual expense ratio for the Retail Shares and Institutional Shares as of December 31, 2021 was 1.42% and 1.08%, respectively, however the internet annual expense ratio was 1.05% and 0.80% (internet of the Adviser’s payment waivers), respectively. The efficiency information quoted represents previous efficiency. Previous efficiency isn’t any assure of future outcomes. The funding return and principal worth of an funding will fluctuate; an investor’s shares, when redeemed, could also be price kind of than their authentic value.

The Adviser reimburses sure Baron Fund bills pursuant to a contract expiring on August 29, 2032, except renewed for one more 11-year time period and the Fund’s switch company bills could also be diminished by expense offsets from an unaffiliated switch agent, with out which efficiency would have been decrease. Present efficiency could also be decrease or larger than the efficiency information quoted. For efficiency data present to the newest month finish, go to or name 1-800-99BARON.

1The MSCI US REIT Index is a free float-adjusted market capitalization index that measures the efficiency of all fairness REITs within the US fairness market, apart from specialty fairness REITs that don’t generate a majority of their income and revenue from actual property rental and leasing operations. MSCI is the supply and proprietor of the logos, service marks and copyrights associated to the MSCI Indexes. The index and the Fund embrace reinvestment of dividends, internet of withholding taxes, which positively affect the efficiency outcomes. The index is unmanaged. Index efficiency just isn’t Fund efficiency; one can’t make investments instantly into an index.

2The efficiency information within the desk doesn’t replicate the deduction of taxes {that a} shareholder would pay on Fund distributions or redemption of Fund shares.

3Not annualized.


We stay conscious of the explanations to be cautious and perceive that shares could go decrease within the months forward.

Nonetheless, we consider the shares of a number of REITs and different revenue oriented actual property firms and the Fund could profit from asymmetrical returns within the subsequent two to a few years with considerably larger upside.

Our expectation for 2022 being a difficult 12 months has been unfolding.

In our year-end 2021 shareholder letter, we said that we believed 2022 can be arduous to navigate partially as a result of prospects of a extra hawkish Federal Reserve, larger rates of interest, and the potential for moderating progress and valuation compression in some segments of business and residential actual property.

We didn’t anticipate the Russia/Ukraine struggle and the spillover results of even larger inflation (meals, wheat, crude oil, pure fuel), additional COVID-19-related lockdowns in China and ongoing supply-chain bottlenecks, and multi-decade excessive inflation–a portion of which can stay elevated for an prolonged interval.

The aforementioned components have led to an unusually difficult funding setting within the first six months of 2022 leading to simultaneous and sharp declines in shares, bonds, and most investable belongings.

Wanting ahead, we consider there’s motive to be optimistic.

We acknowledge there are legitimate causes to stay involved concerning the outlook. The potential for a chronic struggle in Ukraine, persistently excessive meals and power costs, additional COVID-19-related financial lockdowns, and an financial slowdown resulting in a recession are a sampling of the explanations to be apprehensive.

At this stage, we don’t consider we’re being pollyannish by having a extra “glass half full” perspective.

Causes for optimism embrace:

  • Actual property share costs have corrected sharply within the first six months of 2022–in some instances by 20% to 60%–a lot of the dangerous information has been priced in.
  • Enterprise fundamentals stay sturdy for a lot of firms, although we do anticipate progress to reasonable within the months forward.
  • Company and client steadiness sheets are wholesome.
  • Credit score markets are functioning nicely.
  • Employment stays a silver lining–there are twice as many job openings because the variety of folks unemployed.
  • Parts of inflation have begun to reasonable (e.g., the price of vehicles, televisions, houses, and airline tickets).
  • The majority of the transfer to larger rates of interest could have already occurred. In truth, long-dated yields have declined in the previous couple of weeks.
  • The struggle in Ukraine will ultimately finish which ought to result in decrease meals and power costs.
  • China is now rebounding from its current COVID-19 lockdowns and financial progress could speed up within the second half of 2022.
  • Investor money balances are at file highs and destructive bets on the inventory market (“shorting”) are at ranges not seen since 2008 (Supply: J.P. Morgan).
  • Investor sentiment seems to be fearful and despondent–usually, a harbinger for sturdy potential funding returns.

We consider the Fund is chock filled with actual property shares which can be unsustainably low-cost.

Within the first six months of 2022, valuation multiples have compressed sharply. The S&P 500 Index P/E a number of has compressed from 22 to fifteen instances earnings and the true property equal of a P/E a number of–Funds from Operations (“FFO”)–has compressed from 25 to 18.

Many REIT and different income-producing actual property firms at the moment are buying and selling at enticing valuations.

For our extra full ideas on the valuations of actual property shares, please check with “Examples of attractively valued REITs and different revenue oriented actual property firms” later on this letter.

If the financial downturn results in a recession, actual property can be ranging from a very good place.

We all the time have our antenna up for actual property warning indicators.

Whereas this 12 months’s spike in rates of interest and widening credit score spreads are headwinds for business and residential actual property, we consider actual property, for essentially the most half, is in a very good place relative to prior financial slowdowns and recessions.

Most actual property enterprise fundamentals stay sturdy and don’t portend a recession.

Each business and residential actual property just isn’t overbuilt. Expectations for building exercise are modest, partially, because of elevated land, materials, and labor prices and expectations for a slowdown in financial progress. If a recession unfolds, we count on declines in business occupancy and rents and residential dwelling costs to be modest and brief lived.

Company steadiness sheets are liquid with applicable ranges of leverage, mounted fee debt, and staggered debt maturities.

Sure segments of actual property can increase costs to offer partial inflation safety–well-located actual property in supply-constrained markets, actual property with short-lease durations, and leases with contractual annual hire escalators.

For a number of actual property firms, dividend yields proceed to develop and are supported by sturdy money flows.

Actual property must be a part of a well-diversified funding portfolio.

We consider actual property ought to all the time be part of a well-diversified portfolio of equities, bonds, and varied various investments.

Along with near-term funding deserves, the long-term case for actual property stays compelling.

Over time, actual property tends to offer diversification advantages because of low correlations to equities and bonds, inflation safety, and powerful longterm return potential.

We consider the Fund–with the demonstrated deserves of our actively managed REIT and income-oriented funding method–is a compelling actual property mutual fund alternative.


Within the first six months of 2022, we’ve remained busy attending actual property conferences and conferences with firms. The updates from actual property firms encompassing most actual property classes stay broadly encouraging.

Although we’re conscious of the unusually difficult funding setting–multi-decade excessive inflation, aggressive central financial institution tightening, China lockdowns, struggle in Ukraine, recession fears–we consider the prospects for REITs and a number of other non-REIT actual estate-related firms are enticing.

Enterprise fundamentals are, normally, stable.

Ought to a recession come up, we consider a number of REITs could maintain up nicely given the contracted nature of money flows, compelling dividend yields, and enticing valuations.

Please see the “PORTFOLIO COMPOSITION” part later on this letter for our abstract evaluate of the varied REIT classes.

REIT progress prospects are encouraging.

We consider REITs, on common, will develop earnings roughly 10% in 2022, excess of their 15-year common of roughly 4%.

Development must be fueled by broadly bettering demand, constrained provide, and acquisitions, improvement, and redevelopment.

Concerning the demand outlook, business occupancy and rents, normally, stay sturdy towards a backdrop of modest stock ranges.

Concerning the availability outlook, we aren’t witnessing warning indicators of extra stock and sharp will increase in new building.

Industrial actual property building exercise and stock ranges stay modest due, partially, to elevated building prices and labor shortages.

Steadiness sheets are sturdy.

Most REITs are sustaining sturdy and liquid steadiness sheets and usually are not utilizing debt excessively relative to company-generated money move.

Many REITs stay on sale within the public markets.

We famous firstly of this 12 months that we anticipated a shift from a number of growth or cap fee compression to earnings progress as the important thing driver of REIT returns going ahead. Nevertheless, following the sharp correction in a number of REITs and non-REIT actual estate-related firms within the first six months of 2022, valuations in a number of instances at the moment are discounted and provide prospects for cap fee compression and progress.

For our extra full ideas on attractively valued actual property, please see “Examples of attractively valued REITs and different income-oriented actual property firms” later on this letter.

Ought to inflation proceed to rear its head, some REITs and different income-oriented actual property firms could function a partial hedge and supply inflation-protection traits resembling annual hire escalators, short-lease durations, and pricing energy inside provide constrained markets.

Substantial non-public capital remains to be in pursuit of actual property possession supported by extensively accessible debt capital at low rates of interest.

We proceed to consider that actual property merger and acquisition exercise will stay sturdy.

We estimate that greater than $300 billion of capital has been raised by non-public fairness sources to put money into actual property, which equates to roughly $1 trillion of whole actual property buying capability, assuming typical 70% financing!

We anticipate that enormous quantities of capital from non-public fairness buyers resembling Blackstone (BX) and Brookfield Asset Administration (BAM), sovereign wealth funds, endowments, pension funds, and others will proceed to step in and capitalize on the chance to purchase high quality public actual property when it’s valued at a reduction relative to personal actual property. This embedded put state of affairs ought to restrict the draw back for public valuations and inventory costs.

And, so, we’re bullish.


As of June 30, 2022, the Baron Actual Property Earnings Fund’s internet belongings have been composed as follows: REITs (83.2%), non-REIT actual estate-related firms (14.0%), and money (2.7%). The Fund at present has investments in 13 REIT classes. Our publicity to REIT and non-REIT actual property classes is predicated on our analysis and evaluation of alternatives in every class on a bottom-up foundation (See Desk II beneath).

Desk II: Fund investments in REIT classes as of June 30, 2022

% of Internet Belongings



Multi-Household REITs


Information Middle REITs


Wi-fi Tower REITs


Self-Storage REITs


Industrial REITs


Single-Household Rental REITs


Well being Care REITs


Manufactured Housing REITs


Triple Internet REITs


Lodge REITs


Different REITs


Procuring Middle REITs


Pupil Housing REITs


Non-REIT Actual Property Firms


Money and Money Equivalents




*Particular person weights could not sum to the displayed whole because of rounding.

Because the starting of 2020, we’ve structured the Fund to benefit from three actual estate-related themes. They’ve been:

  • COVID-19 restoration beneficiaries
  • Residential-related actual property
  • The intersection of know-how and actual property

Starting with this letter, we’ve chosen to retire COVID-19 restoration beneficiaries as an funding theme.

Because the early days of COVID-19, firms that we characterised as “epicenter firms” or “COVID-19 restoration beneficiaries” have been a key funding theme. These firms are each REITs and different actual estate-related companies that depend on the meeting of individuals and have been severely impacted by COVID-19 as they have been pressured to close down all or a big a part of operations.

Examples embrace a number of REIT classes (e.g., workplace, lodge, well being care, mall, buying heart, and gaming REITs) and non-REIT actual estate-related companies (timeshare, gaming, and leisure firms, and business actual property companies firms). The share costs of many of those firms declined sharply early in 2020 and introduced extremely compelling return prospects.

Because the onset of the pandemic, the Fund’s investments in COVID-19 restoration beneficiaries have been a supply of sturdy returns for the Fund.

Now that a lot of the international economic system has re-opened, enterprise exercise has improved, and it seems that the tip of the worldwide pandemic has been achieved given broad inhabitants immunity and new therapeutics, evidently is it the suitable time to retire “COVID-19 restoration beneficiaries” as an funding theme.

The opposite two funding themes that we’ve prioritized are “residential associated actual property” and “the intersection of know-how and actual property”. They continue to be vital parts of the Fund however will now be mentioned as a part of our evaluate of varied REIT classes (e.g., multi-family, single-family rental, manufactured housing, information facilities, and wi-fi tower REITs) and non-REIT actual property firms fairly than as separate funding themes.

Our abstract observations and publicity to varied REIT classes and non-REIT companies are as follows:

We stay optimistic concerning the prospects for residential-related REITs that target rental residences, single-family houses, and the land for reasonably priced manufactured houses. As of June 30, 2022, 25.0% of the Fund’s internet belongings have been invested in residential-related REITs.

Multi-Household REITs (12.1%): The Fund’s multi-family REITs–Fairness Residential (EQR), AvalonBay Communities, Inc. (AVB), Camden Property Belief (CPT), and NexPoint Residential Belief, Inc. (NXRT) –have been producing sturdy occupancy, hire, and money move progress. We count on in-place rents, which stay beneath market rents, to be a supply of ongoing sturdy money move progress within the close to time period.

We additionally count on rental residences to proceed to profit from homeownership affordability challenges. Presently, the Fund’s investments in multi-family REITs present partial inflation safety to offset rising prices because of leases that may be reset at larger rents, in some instances, yearly. Valuations are enticing at 5% capitalization charges and stay at reductions to current non-public market multi-family transactions which have been valued at excessive 3% to low 4% capitalization charges.

Single-Household Rental REITs (7.8%): We’re bullish concerning the Fund’s investments in single-family rental REITs Invitation Properties, Inc. (INVH) and American Properties 4 Lease (AMH). Demand circumstances for rental houses are enticing because of a decline in dwelling buy affordability, the propensity to hire, and the sturdy need by households to hire houses in suburbs fairly than hire residences in cities.

Concerning new building exercise, there’s a restricted provide of single-family rental houses within the U.S. housing market, more and more constrained by rising building prices. Restricted stock mixed with sturdy demand is resulting in strong hire progress.

Each Invitation Properties and American Properties 4 Lease have a possibility to partially offset inflation provided that in-place annual leases are considerably beneath market rents. Valuations are compelling at lower than $400,000 per dwelling and at 5% capitalization charges.

Manufactured Housing REITs (5.1%): We’re bullish concerning the long-term prospects for the Fund’s investments in manufactured housing REITs, Fairness Life-style Properties, Inc. (ELS) and Solar Communities, Inc. (SUI)

Fairness Life-style Properties and Solar Communities are a part of a distinct segment actual property class that we count on to proceed to profit from favorable demand and provide dynamics. Each firms are the beneficiaries of sturdy demand from budget-conscious dwelling patrons resembling retirees and millennials, and negligible new stock because of excessive improvement boundaries. Demand for reasonably priced out of doors holidays (leisure automobiles) additionally stays sturdy.

Fairness Life-style Properties and Solar Communities have sturdy long-term money move progress prospects and low capital expenditure wants. If the macroeconomic setting worsens, we count on enterprise outcomes to be resilient because of every firm’s give attention to reasonably priced housing and reasonably priced out of doors holidays.

We’re bullish on the prospects for firms that embrace the intersection of know-how and actual property. These embrace datacenter REITs and wi-fi tower REITs. As of June 30, 2022, 21.3% of the Fund’s internet belongings have been invested in information heart and wi-fi tower REITs.

Information Middle REITs (11.4%): In the newest quarter, we elevated the Fund’s investments in information heart REITs Equinix, Inc. (EQIX) and Digital Realty Belief, Inc. (DLR), as a result of we consider demand prospects are notably bettering (bookings of recent leases and the pricing of rents), building is moderating because of larger prices, and valuations are discounted versus current information heart acquisitions.

Long run, each firms are poised to profit from the secular progress tailwinds resembling outsourcing of data know-how, elevated cloud computing adoption, and progress in U.S. cellular information and web site visitors.

The speedy transition to a world of pc display screen conferences and conferencing must also profit information facilities as a result of have to retailer a larger library of knowledge to conduct and help these digital on-line conferences.

For our extra full ideas on information heart REITs, please see “A evaluate of current exercise managing the Fund” later on this letter.

Wi-fi Tower REITs (10.0%): Following sharp declines within the share costs of wi-fi tower REITs within the first six months of 2022, we added to the Fund’s funding in American Tower Corp. (AMT) and re-initiated a place in SBA Communications Corp. (SBAC) Ought to financial progress proceed to reasonable, we consider tower REIT money move won’t solely be resilient however could speed up in 2023.

The long-term prospects for tower REITs stay encouraging given sturdy secular progress expectations for cellular information utilization, 5G know-how, and linked houses and vehicles, all of which would require elevated wi-fi bandwidth and elevated spending by cellular carriers.

For our extra full ideas on wi-fi tower REITs, please see “A evaluate of current exercise managing the Fund” later on this letter.

Self-Storage REITs (9.9%): In the previous couple of years, enterprise fundamentals have been remarkably sturdy for self-storage REITs, partially because of energy within the housing market and sustained new customers from COVID-19 (e.g., elevated mobility because of pandemic-induced relocations and hybrid work and decluttering efforts for dwelling workplaces).

Occupancy has reached an all-time excessive and move-in rental charges have accelerated. Elevated building prices have been constraining new building. Month-to-month leases present a possibility for landlords to extend rents and fight inflation. Self-storage services don’t require vital ongoing capital expenditures and enterprise fundamentals have traditionally held up nicely throughout financial downturns.

Although there’s a lot to love about self-storage companies, we’re conscious that rents and general money move progress could reasonable. We’re managing the Fund’s investments in self-storage REITs Public Storage Included (PSA) and Further Area Storage Inc. (EXR), with this chance in thoughts.

Industrial REITs (9.6%): Sturdy enterprise fundamentals fueled by progress in on-line gross sales as companies and customers relentlessly search quicker supply bodes nicely for the continuation of wonderful tenant demand and powerful hire will increase for industrial REITs.

With business emptiness estimated at lower than 4%, and rents on in-place leases at roughly 50% beneath market rents, we consider the Fund’s investments in industrial warehouse REITs Prologis, Inc. (PLD), Duke Realty Company (DRE), and Rexford Industrial Realty, Inc. (REXR), have compelling multiyear money move progress runways.

Regardless of our long-term optimism, we’re conscious of the potential for a slowdown in tenant demand, new provide, and rising rates of interest and financing prices and the implications for acquisitions and firm valuations. We could regulate our investments in industrial REITs with these issues in thoughts.

Well being Care REITs (6.4%): Following COVID-19-related operational challenges in 2020 and 2021, well being care actual property fundamentals at the moment are bettering. Lease will increase and occupancy positive factors are on the right track for the Fund’s investments in senior housing REITs Ventas, Inc. (VTR) and Welltower Inc. (WELL)

Muted provide progress within the subsequent two to a few years, because of growing financing and building prices and supply-chain challenges, ought to amplify the restoration in fundamentals. The long-term demand outlook is favorable, pushed partially by our ageing inhabitants, which is predicted to speed up within the years forward.

Triple Internet REITs (3.7%): We stay optimistic concerning the Fund’s triple internet gaming REIT funding in Gaming and Leisure Properties, Inc. (GLPI) The corporate owns high quality on line casino and gaming actual property properties. It has a horny 6.2% dividend yield that’s nicely coated, accretive acquisition progress alternatives, and is, in our opinion, attractively valued.

We’ve lately begun to accumulate shares in Netstreit Corp. (NTST), a triple internet REIT that acquires, owns, and manages a diversified portfolio of single tenant, internet lease retail business actual property with excessive credit score high quality tenants. We’ve a good view of administration and its plan to proceed to develop the corporate quickly by accretive acquisitions.

We stay conscious of the rising rate of interest setting and the likelihood that larger debt prices and decrease fairness costs may negatively affect the power for internet lease REITs to put money into an accretive style.

Lodge REITs (3.5%): Exceptionally sturdy leisure demand and the resumption of enterprise journey are contributing to strong enterprise fundamentals for the Fund’s lodge REIT investments in Pebblebrook Lodge Belief (PEB) and Sunstone Lodge Traders, Inc. (SHO)

On condition that financial worries have now emerged, we’re carefully monitoring enterprise fundamentals and our lodge REIT investments. At their present share costs, nevertheless, we consider each firms are valued at steep reductions to substitute value and our evaluation of intrinsic worth.

Different REITs (1.5%): Following an almost 35% lower in its share worth within the first six months of 2022, we lately started buying further shares of Alexandria Actual Property Equities, Inc. (ARE), the life science business chief and sole publicly traded life science pure play REIT. The corporate has acquired and developed an irreplaceable life science portfolio and has vital tenant relationships.

Chairman and co-founder Joel Marcus has assembled a deep and skilled administration staff. Alexandria has been benefiting from a rise in funding for well being care drug improvement, which has been contributing to demand for all times science buildings that continues to exceed provide, leading to sturdy enterprise fundamentals in key geographic markets. We consider the present valuation of Alexandria is compelling.

Procuring Middle REITs (1.3%): Latest leasing exercise has been sturdy for the Fund’s investments in buying heart REITs Kite Realty Group Belief (KRG) and RPT Realty (RPT) and we consider the valuations of each firms are compelling.

Given the slowdown in financial exercise, we’re carefully monitoring retail gross sales, retailer opening and shutting plans, and client spending and the doable implications for the Fund’s investments in buying heart REITs.

Pupil Housing REITs (0.9%): Within the second quarter, American Campus Communities, Inc., the only real publicly traded scholar housing REIT, entered into an settlement with Blackstone to be acquired in a $12.8 billion all money transaction at what we consider is a good valuation. We can be exiting the Fund’s funding within the firm.

Non-REIT Actual Property Firms (14.0%): The Fund prioritizes REITs, which generally are at the least 80% of the Fund’s internet belongings, however has the flexibleness to put money into non-REIT actual property firms that we are likely to restrict to not more than 15% to twenty% of the Fund’s internet belongings. At instances, a number of the Fund’s non-REIT actual property firms could current superior progress, dividend, valuation, and share worth appreciation potential than many REITs.

We’re bullish concerning the prospects for the Fund’s non-REIT actual property investments. They embrace the next firms: Brookfield Infrastructure Companions L.P. (BIP), Las Vegas Sands Company (LVS), Brookfield Asset Administration Inc., Blackstone Inc., Vail Resorts, Inc. (MTN), MGM Resorts Worldwide (MGM), and Pink Rock Resorts, Inc. (RRR)


Following sharp share worth declines within the first six months of 2022, we consider a number of REITs and different income-oriented actual property firms are attractively valued relative to their historic ranges and are on sale relative to personal actual property options.

We consider a number of public REITs and different income-oriented actual property firms provide extremely compelling two- to three-year return prospects that, in some instances, could embrace a trifecta mixture of progress, dividends, and an enchancment in valuation.

Examples of REITs and different income-oriented actual property firms which can be attractively valued

Ventas, Inc. (VTR) is a number one well being care REIT that owns a $35 billion portfolio of senior housing, medical workplace, hospitals, and life science properties.

We consider the shares are attractively valued at a ten% low cost to internet asset worth, a 5.5% capitalization fee, and a big low cost to a key public competitor.

Invitation Properties, Inc. is a REIT and is the biggest single-family dwelling rental firm within the U.S.

Regardless of expectations for continued sturdy enterprise outcomes, the corporate’s shares declined roughly 21% within the first six months of 2022. We consider Invitation Properties shares are low-cost. The corporate is at present valued at an implied capitalization fee foundation of 5.2% versus non-public market transactions within the 4% capitalization vary. The general public market implied valuation of its owned houses is barely $350,000 per dwelling versus acquisition prices of greater than $400,000.

Alexandria Actual Property Equities, Inc. is a REIT and is the main landlord and developer to the life science business.

Alexandria’s shares have been down practically 35% within the first six months of 2022. We consider the corporate’s actual property is attractively valued at roughly $600 per sq. foot versus non-public market transactions for all times science actual property within the $1,000 to $1,500 per sq. foot vary. The shares are additionally valued at a reduced 6% capitalization fee though the corporate has lately bought actual property within the 4% to five% capitalization vary.

Pebblebrook Lodge Belief is a premier lodge REIT with 55 resorts throughout 16 city and resort markets.

At its current share worth of solely $17, the corporate is valued at greater than a 40% low cost to administration’s estimate of the low finish of the corporate’s internet asset worth which is $30.

We’ve excessive regard for CEO Jon Bortz. On June 29, Jon acquired shares within the firm at comparable ranges to the present worth.

Digital Realty Belief, Inc. is a premier international information heart REIT with greater than 290 information facilities and greater than 4,000 clients. It maintains an funding grade steadiness sheet.

The corporate is at present valued at solely 20 instances money move (EBITDA) versus a number of current non-public information heart transactions that have been accomplished at 25 instances to 30 instances money move. QTS Realty Belief was acquired at 25 instances money move, CoreSite Realty Company at 27 instances, and Swap, Inc. (SWCH) at 30 instances.

Fairness Residential is the biggest U.S. condominium REIT and maintains a powerful and liquid steadiness sheet.

The corporate is at present valued at a 25% low cost to internet asset worth and a 5.2% capitalization fee.

NexPoint Residential Belief, Inc. is a sunbelt-focused condominium REIT.

It’s at present valued at a 30% low cost to our evaluation of internet asset worth.

Gaming and Leisure Properties, Inc. is a gaming REIT that owns geographically diversified on line casino gaming belongings.

The corporate is at present valued at a 6.2% dividend yield and at a big low cost to the non-public market worth for its actual property belongings.

Brookfield Asset Administration Inc. is a number one various asset supervisor that is without doubt one of the largest house owners and operators of actual property and infrastructure belongings on this planet.

On the firm’s September 2021 investor day, the administration staff laid out a multi-year progress plan with expectations for its shares to extend from its current worth of solely $45 to greater than $150 over the subsequent 5 years. Administration has a observe file of underneath promising and over delivering.

Brookfield is planning to spin off 25% of its asset administration enterprise by the tip of 2022 at an $80 billion valuation. This compares to the corporate’s general market capitalization of $73 billion. When accounting for Brookfield’s investments in different publicly listed firms, the general public market is at present valuing Brookfield’s asset administration enterprise at solely $26 billion versus the corporate’s $80 billion evaluation of its worth.

Las Vegas Sands Company is the worldwide chief within the improvement and operation of luxurious on line casino resorts in Macau and Singapore and maintains a liquid and funding grade steadiness sheet.

The corporate is at present valued at a big low cost to our evaluation of substitute value, and its Macau operations are valued at solely 7 instances estimated money move.

Vail Resorts, Inc. has the main actual property portfolio of mountain resorts that features marquee resorts resembling Vail, Beaver Creek, Breckinridge, Park Metropolis, Whistler Blackcomb, and Keystone.

Vail’s shares have declined greater than 40% from a peak of $376 in November 2021 to a current worth of solely $220 and are at present valued at solely 12 instances money move versus its long-term common a number of of roughly 15 instances money move.

MGM Resorts Worldwide is the main international on line casino and leisure firm.

At its current worth of solely $30 per share, we consider MGM is valued at a big low cost to our cheap $50 per share estimate of the sum-of-the-parts worth of its enterprise. Additional, the corporate’s home operations are valued at a 18% free-cash-flow yield. Paul Salem, Chairman of the Board, lately acquired shares.


Latest Exercise

Within the second quarter, we maintained our lively method managing the Fund because of:

  • The emergence of tailwinds and headwinds in sure segments of actual property
  • Firm-specific issues
  • Unusually elevated inventory market volatility

We consider our motion steps proceed to place the Fund for sturdy longterm efficiency.

Desk III: Prime internet purchases for the quarter ended June 30, 2022

Quarter Finish

Market Cap




(tens of millions)

Digital Realty Belief, Inc.



Equinix, Inc.



Further Area Storage Inc.



Prologis, Inc.



Duke Realty Company



Whereas we’re optimistic concerning the longer-term prospects for information heart REITs, the Fund had solely modest publicity to the group because of elevated valuations ranges and near-term company-specific points that we believed may pose headwinds to the shares. Within the second quarter, we elevated our positions when valuations turned extra cheap (greater than discounting the potential near-term headwinds) and we gathered incremental proof by our analysis that enterprise fundamentals remained strong and in some instances have been bettering.

We consider that secular progress is underpinned by: i) firms outsourcing their data know-how since it’s extra capital environment friendly, usually cheaper, simpler to take care of, and permits improved technological efficiency; and ii) enterprises placing extra information and functions within the Cloud versus operating them domestically on their servers and more and more utilizing hybrid and multi-cloud for various organizational wants. Given extra employees’ means to work from anyplace and their necessities to entry information and recordsdata from anyplace, Cloud adoption is changing into a should have not a good to have.

Digital Realty Belief, Inc. is a world information heart operator with 290 information facilities throughout North America, EMEA, APAC, and Latin America. Over the previous couple of years, the corporate has been present process a enterprise transformation, which accelerated after its acquisition of Interxion in March 2020, a pure-play European network-dense information heart operator. The corporate has been shedding non-core slower progress belongings, investing and increasing in Europe, and rising its retail colocation enterprise.

We’ve spent a big period of time with CEO Invoice Stein and CFO Andy Energy through the years and consider the investments the corporate has made are on the cusp of bearing fruit and can pay dividends for years to return. As well as, we consider the basics in its core enterprise are at an inflection level with strong demand/bookings, pricing energy, hyperscale cloud gamers outsourcing extra, and restricted accessible aggressive capability. We consider these components will result in progress within the enterprise in 2023 and are optimistic on the long-term prospects for the corporate.

Equinix, Inc. is a community dense international information operator of over 240 information facilities in 69 metros and 30 international locations. Its clients place excessive worth on the ecosystem of shoppers that Equinix has curated inside its information facilities over a few years in order that they can interconnect throughout the information heart facility as a substitute of getting information journey by the general public web (latency delicate functions in addition to information safety issues). Clients worth the worldwide community with 90% of shoppers in a number of metropolitan areas and 75% in a number of geographic areas.

Equinix has a various however worthwhile buyer base with no single buyer larger than 2.6% of recurring month-to-month revenues. COVID-19 has accelerated digital transformation priorities for a lot of organizations, and we consider that Equinix can be poised to profit from: i) natural progress by new bookings and pricing energy (nearly all of incremental bookings are from present clients); ii) progress of excessive margin cross-connect income (roughly 20% of whole); and iii) continued geographic growth by improvement and choose M&A.

We consider the mixture of those components will enable the corporate to develop annual money move within the excessive singledigit vary.

Following a pointy correction in its share worth through the second quarter, we acquired shares in Further Area Storage Inc. This REIT has assembled the second-largest self-storage portfolio within the nation and has the biggest portfolio of third-party managed self-storage services.

In our opinion, Further Area’s administration staff is great. Over the past decade, administration has delivered sturdy occupancy positive factors, hire progress, and expense management that has led to a price of capital benefit relative to its friends. Administration has capitalized on its value of capital benefit by tripling its owned self-storage depend since 2010. We consider the long-term progress alternative for the corporate stays sturdy.

Within the second quarter, the shares of Prologis, Inc., the world’s largest industrial REIT, declined 29% as its valuation was reset for the upper rate of interest setting and the potential for nonetheless sturdy however maybe moderating hire progress. Then again, the shares of Duke Realty Company, a $25 billion industrial REIT, declined solely 7% within the second quarter, largely as a result of the corporate agreed to merge with Prologis at a 30% premium. We acquired further shares in each firms in the newest quarter.

We’re optimistic concerning the prospects for the mixed Prologis/Duke Realty entity. Prologis is merging with its largest REIT competitor in Duke Realty. Duke’s industrial portfolio is among the many finest in industrial actual property. The corporate has a superb observe file in improvement and building. We consider the merger has strategic and monetary deserves together with buying a high-quality portfolio in largely comparable or enticing actual property markets and the probability of realizing each further income and price financial savings. We may have extra to say on Prologis/Duke Realty in future shareholder letters.

Desk IV: Prime internet gross sales for the quarter ended June 30, 2022

Market Cap

When Offered




(tens of millions)

Vornado Realty Belief (VNO)



Boyd Gaming Company (BYD)



Journey + Leisure Co. (TNL)



Park Motels & Resorts Inc. (PK)



Marriott Holidays Worldwide Corp. (VAC)



In the newest quarter, we exited the Fund’s funding in Vornado Realty Belief, a REIT that owns a high-quality portfolio of workplace and road retail belongings concentrated in New York Metropolis. Although we’ve excessive regard for administration and consider the shares are attractively valued, we stay cautious of the operational headwinds for workplace actual property and consider there are superior long-term enterprise prospects for different segments of actual property.

We additionally exited the Fund’s travel-related investments in Boyd Gaming Company, Journey + Leisure Co., Park Motels & Resorts Inc., and Marriott Holidays Worldwide Corp.

As famous earlier on this letter, we lowered the Fund’s publicity to journey associated firms as a result of struggle in Ukraine, a spike in inflation (larger fuel/ gas costs, airline tickets, lodge room costs, meals costs, housing), and the potential for a pointy financial slowdown, which can negatively affect leisure and enterprise journey within the subsequent 12 to 18 months.

The shares of a number of travel-related actual property firms have corrected sharply, and valuations have develop into extra compelling. We could look to extend the Fund’s publicity sooner or later.

Desk V: Prime contributors to efficiency for the quarter ended June 30, 2022

Quarter Finish

Market Cap


% Influence

American Campus Communities, Inc.

$ 9.0


American Tower Corp. (AMT)



Gaming and Leisure Properties, Inc. (GLPI)



Americold Realty Belief (COLD)



In the newest quarter, the shares of American Campus Communities, Inc., a REIT that’s the largest proprietor and supervisor of high-quality scholar housing communities within the U.S., elevated 15% as the corporate agreed to be acquired by Blackstone in a $12.8 billion all-cash transaction. We consider the provide worth is enticing at a 4.25% capitalization fee. We’ve begun the method of exiting the Fund’s funding in American Campus and reallocating the capital to different funding alternatives.

In the course of the second quarter, we took benefit of the broader market dislocation and indiscriminate promoting to extend the Fund’s publicity to wi-fi tower REITs and added to our place in American Tower Corp.

Wi-fi tower REITs

We’re optimistic on the long-term prospects for wi-fi tower operators for the next causes.

  • Secular Development Drivers:
  • Cell Information Development: The typical smartphone consumer within the U.S. consumed roughly 3.5 megabytes (“MB”) of knowledge per 30 days in 2016. As we speak, that very same consumer consumes 20 to 25 MB per 30 days with the proliferation of knowledge intensive functions resembling video streaming and gaming. Inside 5 years, business estimates count on this quantity to be over 50 MB per 30 days. With the addition of linked sensible gadgets, general cellular information progress is predicted to develop 25% per 12 months over the subsequent 5 years.
  • 5th Technology Cell Community (5G) Adoption: After the current record-setting spectrum airwave public sale, cellular carriers are in a race to deploy 5G throughout their networks. We’re nonetheless within the early innings of 5G adoption, which is able to allow future functions (e.g., autonomous vehicles, augmented actuality, 3D video) which can be much more information intensive than the functions that exist right this moment. Many business consultants consider the 5G funding cycle can be elongated and final over a interval of 10-plus years partially because of a vital system improve cycle.
  • Sturdy Margins with Excessive Return on Capital: On the unit degree, towers generate 80%-plus money move margins (relying on the variety of tenants). There may be little incremental value of including a further tenant with 90%-plus move by to the underside line. Whereas a tower with a single tenant generates roughly 3% return on funding, the return jumps to greater than 20% with three tenants. The towers underlying our investments are typically constructed to help anyplace from three to 5 tenants. We consider strong provider exercise each by “colocation” (resulting in extra tenants on the tower) and amendments (charges from altering out or including tools) will result in sturdy incremental money move era.
  • Sturdy Obstacles to Entry: There are a number of inhibitors for a competitor to construct a brand new tower close to an present website because of: i) allowing/ regulation and “not-in-my-backyard” (NIMBY) issues‘ ii) the U.S. tower business is consolidated with the three public firms proudly owning the overwhelming majority of conventional macro towers (with many incumbent towers internet hosting two to a few tenants already); and iii) there are solely 4 conventional U.S. wi-fi carriers and the most affordable/quickest path to market is to deploy tools on an present tower (a competitor has restricted means to win new enterprise given the consolidated nature of the wi-fi business right this moment versus 20 years in the past).
  • Secure and Predictable Money Flows: Tower lease contracts are underpinned by 5- to 10-year leases with mounted contractual annual escalators and predetermined prices for any modifications (e.g., swapping out radio tools). Prices are largely mounted as nicely (the biggest being floor hire that usually grows slower than the hire escalator). This results in a mannequin with excessive incremental margins (as famous above) and restricted volatility of money flows provided that any variability in new leasing inside a given 12 months won’t considerably transfer the needle on the established base over the close to time period.

American Tower is a number one international tower firm with 220,000 communication websites globally and over 40,000 within the U.S. We added to our place through the market dislocation and because it turned more and more clear that the corporate would put everlasting fairness financing in place at better-than-expected phrases for its beforehand introduced acquisition of CoreSite, thereby eradicating the “fairness overhang.”

As well as, the corporate stepped again from a big potential deal in Europe, which might have required vital incremental funding, because of unfavorable contract phrases and worth. This choice additional strengthened our confidence in administration’s capital allocation self-discipline, realizing that these have been extremely sought-after belongings.

We’re bullish on American Tower because of: i) accelerating progress after biking a one-time Dash churn occasion in 2022, which depressed progress briefly; ii) money move stability underpinned by core developed markets; iii) incomes outsized returns in larger progress rising markets which can be nonetheless transitioning from voice-centric to data-centric functions and lag the U.S. by 5 years; and iv) optionality concerning its acquisition of a network-dense information heart firm (CoreSite) as future community wants and structure evolve.

The shares of Gaming and Leisure Properties, Inc., a triple internet REIT, which owns 55 premier gaming and associated services and facilities carried out nicely in the newest quarter. Gaming and Leisure’s major enterprise consists of buying, financing, and proudly owning actual property property to be leased to gaming operators.

We’re optimistic about Gaming and Leisure as a result of the corporate owns a high-quality geographically diversified actual property portfolio that produces secure and predictable money flows given the long-term nature of its leases. The corporate may additionally complement its contracted 2% annual hire escalators with further progress if it have been to accumulate further gaming properties.

We consider the valuation of the shares is compelling. At its current worth of $46, the corporate’s shares provide a 6.2% dividend yield. This dividend yield compares favorably to the yield on its publicly traded bonds. Additional, the corporate’s 6.2% dividend yield exceeds a number of different publicly traded triple internet REITs which provide decrease dividend yields of roughly 4% to 4.5%, on common.

We’ve nice confidence that CEO Peter Carlino will generate glorious long-term returns for shareholders given his profitable observe file. He’s additionally a big shareholder of Gaming and Leisure. We’re happy that his pursuits are aligned with ours.

Following a chronic interval of share worth underperformance, we lately re-acquired shares in Americold Realty Belief, a REIT that focuses on proudly owning and working temperature-controlled warehouses, at what we consider is a horny worth. It seems the corporate’s means to rent labor at acceptable wages has begun to enhance which can translate to larger margins and occupancy ranges over time.

Desk VI: Prime detractors from efficiency for the quarter ended June 30, 2022

Quarter Finish

Market Cap


% Influence

Prologis, Inc. (PLD)



Public Storage Included (PSA)



Pebblebrook Lodge Belief (PEB)



NexPoint Residential Belief, Inc. (NXRT)



AvalonBay Communities, Inc. (AVB)



Within the second quarter, the shares of Prologis, Inc., the world’s largest industrial REIT, declined 29% as its valuation was reset for the upper rate of interest setting and the potential for nonetheless sturdy however maybe moderating hire progress. We’re huge followers of CEO Hamid Moghadam and Prologis’ administration staff and stay optimistic concerning the firm’s long-term progress prospects. Encouragingly, in-place rents are roughly 50% beneath market rents and will function a supply of sturdy progress within the subsequent three to 5 years.

We’re optimistic concerning the deserves of the corporate’s current announcement to merge with its largest industrial REIT competitor, Duke Realty. We may have extra to say on Prologis in future shareholder letters.

Following sturdy efficiency within the first quarter of 2022, the shares of Public Storage Included, a REIT that’s the world’s largest proprietor, operator, and developer of self-storage services, declined 21% within the second quarter (an analogous decline to most different REITs).

We stay optimistic concerning the firm’s long-term prospects. Public Storage’s practically 2,500 self-storage services throughout the U.S. serve a couple of million clients. The corporate has achieved the #1 market place in 14 of its prime 15 markets.

We’re inspired concerning the firm’s prospects because of our expectations for the continuation of sturdy occupancy and hire traits, restricted new provide, mid-teens natural money move progress, the potential for mergers and acquisitions exercise partially as a result of firm’s well-capitalized and low leverage steadiness sheet, and the power to extend rents month-to-month to fight inflation headwinds. We consider Public Storage’s shares are at present valued at a reduction to personal market self-storage values and provide prospects for mid-teens whole returns within the subsequent few years.

Following sturdy share worth efficiency early in 2022, the shares of Pebblebrook Lodge Belief, a number one lodge REIT, declined sharply within the second quarter, together with different travel-related firms, because of considerations concerning the slowdown in financial progress and the potential for a recession and its destructive affect on journey demand.

Pebblebrook owns a novel, high-quality portfolio of 55 resorts (largely unbiased boutique belongings) throughout 16 city and resort markets. The corporate is led by its extremely succesful CEO Jon Bortz.

Although we’re conscious of the probability that enterprise prospects are more likely to reasonable within the months forward, we consider the shares provide compelling worth. At its current worth of solely $17, the corporate is valued at greater than a 40% low cost to administration’s estimate of the low finish of the corporate’s internet asset worth, which is $30. On June 29, Jon Bortz acquired shares within the firm at an analogous worth to the present worth. We consider Pebblebrook is a compelling acquisition candidate for personal fairness firms.

Regardless of sturdy quarterly outcomes and an encouraging replace from administration, the shares of NexPoint Residential Belief, Inc., a sunbelt targeted condominium REIT, declined in the newest quarter alongside most different REITs. At its current worth of solely $62, we consider the shares are valued at a big low cost to its non-public market worth and stay optimistic concerning the firm’s prospects.

NexPoint owns and operates roughly 15,000 condominium models throughout 10 geographic markets primarily geared towards workforce housing with common rents of $1,300 per 30 days. The corporate has substantial insider possession and has been one of the crucial profitable condominium operators by way of fairness worth creation amongst its friends.

We consider NexPoint will obtain above common natural progress and are optimistic concerning the prospects for the corporate because of: i) its favorable market publicity within the sunbelt (enticing job progress, family formation, internet migration, and growing value of possession); ii) a scarcity of reasonably priced housing broadly, which is extra acute within the sunbelt; iii) relative affordability each to different condominium or single-family rental choices and the price of dwelling possession; and iv) its means to deploy capital into enticing value-added alternatives resembling kitchen upgrades and washer/dryer installations at excessive returns on capital (round 20%) to enhance natural progress.

Lastly, we consider the NexPoint platform stays a horny acquisition candidate given current transactions. These transactions have been accomplished at extra enticing valuations than the place the corporate is at present buying and selling within the public markets.

Regardless of sturdy second quarter outcomes, the shares of AvalonBay Communities, Inc. declined in the newest quarter alongside most REITs. The corporate is a REIT that owns and operates a $43 billion portfolio of high-quality condominium belongings, positioned primarily within the East and West coast markets of the U.S. We consider its focus in excessive barrier-to-entry coastal markets and its mixture of city and suburban properties ought to result in sturdy money move progress over time.

AvalonBay’s funding grade ranking supplies it with a value of debt benefit in comparison with non-public builders. Administration has confirmed to be a succesful acquirer and developer of condominium belongings. We consider AvalonBay’s shares are buying and selling at a horny 25% low cost to its non-public market worth.


We’re conscious that the primary half of the 12 months has been disappointing.

We acknowledge that within the months forward elevated volatility could proceed. Financial progress is more likely to reasonable, and a number of other firms are more likely to decrease progress forecasts. We’re additionally conscious that decrease progress forecasts will not be totally mirrored within the valuations of sure actual property firms.

But, as detailed earlier on this letter, we consider there are legitimate causes for optimism for public REITs and different income-producing actual property firms and the Fund.

We’ve develop into incrementally optimistic, partially due to the sharp correction in share costs of a number of actual property firms. We consider a number of public REITs and different income-producing actual property firms provide compelling two-to-three-year return prospects that, in some instances, could embrace a trifecta mixture of progress, dividends, and an enchancment in valuation.

Desk VII: Prime 10 holdings as of June 30, 2022

Quarter Finish

Market Cap


Quarter Finish



(tens of millions)

% of Internet Belongings

American Tower Corp.




Equinix, Inc.




Public Storage Included




Digital Realty Belief, Inc.




Ventas, Inc.




Fairness Residential




Duke Realty Company




Invitation Properties, Inc.




Brookfield Infrastructure Companions L.P.




Further Area Storage Inc.




I’m a big investor within the Fund. I consider we’ve assembled a portfolio of best-in-class competitively advantaged firms with compelling long-term progress and share worth appreciation potential. I lately added to my funding and am optimistic concerning the Fund’s prospects within the subsequent few years.

I thanks, our loyal shareholders, and categorical my utmost gratitude on your previous and persevering with help of the Fund.


Jeffrey Kolitch, Portfolio Supervisor

Authentic Submit

Editor’s Be aware: The abstract bullets for this text have been chosen by Searching for Alpha editors.


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