A developer of time-share resorts. A maker of outdoor, non-wood building products for homes. A casino operator that caters to locals on the outskirts of Las Vegas, rather than tourists on the city’s famed Strip. According to Jeffrey Kolitch, portfolio manager of the Baron Real Estate Fund, these aren’t the kind of holdings found in traditional real estate funds that typically focus on real estate investment trusts. But they are part of his fund, and he says such companies help differentiate his product from competitors and have helped fuel the fund’s best-in-category returns over the three-, five- and 10-year periods.

“We advocate a broader and more balanced and comprehensive approach to real estate investing than many of our peers,” says Kolitch, who has managed the Baron fund for nearly 12 years. “The product I manage is not a REIT fund. It is a real estate-related fund. We research, analyze and invest in REITs, and we’re quite optimistic about the prospects of REITs this year. But we don’t limit our real estate investments just to REITs.”

The companies in his portfolio must get the bulk of their revenue from either commercial or residential real estate. They should also have quality balance sheets and management teams that are “excellent allocators” of capital. In sum, he chooses companies he thinks are best in class and will grow faster than rivals.

One example is Red Rock Resorts Inc. “They own six casinos in arguably the best casino gaming market in the U.S., which isn’t the Las Vegas Strip but the Las Vegas locals market,” Kolitch says.

The Las Vegas locals market includes casinos operating along the Boulder Highway on the outskirts of town, as well as Henderson, North Las Vegas and unincorporated areas of Clark County. According to the Nevada Independent website, the locals market as a whole enjoyed a 16.6% rise in gaming revenue in this year’s first half while gaming revenue from Strip casinos saw an 11.3% decline.

“We think [Red Rock Resorts] will grow faster than most REITs, owns higher-quality real estate than many of the REITs we’re considering, and has a faster organic and external development growth rate,” Kolitch says. “And we see a path where over the next five years we believe we can double our investment.”

Another company he highlights is Marriott Vacations Worldwide Corp., a developer of real estate time-share resorts. That’s not to be confused with hotel operator Marriott International Inc., a company the Baron Real Estate Fund doesn’t own because it faces uncertain prospects for a rebound in business travel.

“Time will tell about hotels,” Kolitch says. “Two-thirds of the revenue from most hotels are generated from business travelers.”

Instead, he is more bullish on the recovery in vacation travel. “We’re more focused on the real estate time-share business, where 100% of its business comes from the leisure traveler,” he says.

And then there’s Azek Company Inc., a maker of outdoor, non-wood building products such as decking, railing, trim and other goods. Kolitch says 95% of Azek’s cash flow comes from the U.S. residential housing market, and he believes the company has a compelling multiyear strategic growth plan that should result in strong share price appreciation during the next few years.

Three Themes
In the second half of 2020, Kolitch structured his fund to take advantage of what he believed were three compelling investment themes. And he’s sticking with that game plan in this year’s second half.

The first theme focuses on Covid-19 recovery beneficiaries. He expects the release of pent-up consumer and commercial demand—coupled with a rebound in cash flows—to boost several of the hardest hit segments of real estate as more people get vaccines and the economy resumes normal activities.

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