Baron Funds, an investment management company, released its “Baron Real Estate Fund” first quarter 2025 investor letter. A copy of the letter can be downloaded here. In Q1 2025, stocks were sold due to economic growth slowdown, inflation, and policymaking issues, including Baron Real Estate Fund®, without considering value. The fund declined 6.69% (Institutional Shares) in the quarter compared to a 3.11% decline for the MSCI USA IMI Extended Real Estate Index (the MSCI Real Estate Index) and a 0.76% gain for the MSCI US REIT Index (the REIT Index). In addition, please check the fund’s top five holdings to know its best picks in 2025.
In its first-quarter 2025 investor letter, Baron Real Estate Fund highlighted stocks such as Digital Realty Trust, Inc. (NYSE:DLR). Digital Realty Trust, Inc. (NYSE:DLR) is a real estate investment trust that provides data center, colocation, and interconnection solutions. The one-month return of Digital Realty Trust, Inc. (NYSE:DLR) was 9.90%, and its shares gained 14.30% of their value over the last 52 weeks. On May 14, 2025, Digital Realty Trust, Inc. (NYSE:DLR) stock closed at $165.67 per share with a market capitalization of $56.848 billion.
Baron Real Estate Fund stated the following regarding Digital Realty Trust, Inc. (NYSE:DLR) in its Q1 2025 investor letter:
“Global data center REIT Digital Realty Trust, Inc. (NYSE:DLR), also detracted from performance in the quarter due to normalization of valuation from outsized absolute and relative levels, lower new bookings from an elevated high water mark achieved in 2024, and a more tempered outlook for the continued need of outsized capital investment spend from the global cloud providers on the back of the AI wave (i.e., digestion period). In addition, Microsoft, a top customer of Digital Realty’s at over 10% of annualized rent, was rumored to be incrementally cancelling certain leases it had signed globally. While this was not specific to Digital Realty given the company’s iron-clad lease agreements and likely included Microsoft specific considerations (e.g. capacity for Azure cloud versus incremental capacity earmarked for OpenAI), this development surfaced questions about the level of future incremental demand.
The Fund also trimmed its investment in Digital Realty. As discussed earlier, our views on the risk/reward opportunity for the shares became more tempered early in 2025 due to an outsized valuation premium (sector leading both on historical basis and absolute level) combined with concerns regarding slowing demand from all-time highs, especially for larger footprint incremental new leasing. While we do not foresee a risk to bottom-line earnings over the next two years, the shares were pricing in elevated levels of new leasing, which we do not believe is sustainable. At recent trading levels, shares of Digital Realty have become more attractively valued and we may revisit our investment in the coming quarters. As always, we will review our investment through the lens of our capital allocation framework of identifying companies with the best risk-adjusted return prospects.”
A close-up view of a technician installing a server in the data center facility, representing the reliable services provided by the company.
Digital Realty Trust, Inc. (NYSE:DLR) is not on our list of 30 Most Popular Stocks Among Hedge Funds. As per our database, 47 hedge fund portfolios held Digital Realty Trust, Inc. (NYSE:DLR) at the end of the fourth quarter which was 52 in the previous quarter. While we acknowledge the potential of Digital Realty Trust, Inc. (NYSE:DLR) as an investment, our conviction lies in the belief that AI stocks hold greater promise for delivering higher returns, and doing so within a shorter timeframe. If you are looking for an AI stock that is as promising as NVIDIA but that trades at less than 5 times its earnings, check out our report about the undervalued AI stock set for massive gains.
In another article, we covered Digital Realty Trust, Inc. (NYSE:DLR) and shared the list of best REIT stocks to buy according to billionaires. In addition, please check out our hedge fund investor letters Q1 2025 page for more investor letters from hedge funds and other leading investors.
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Disclosure: None. This article is originally published at Insider Monkey.
