Delaware REIT Fund

Objective

Delaware REIT Fund seeks maximum long-term total return, with capital appreciation as a secondary objective.

Strategy

The Fund primarily invests in real estate investment trusts (REITs).

Fund information
Inception date12/06/1995
Dividends paid (if any)Quarterly
Capital gains paid (if any)December
Fund identifiers
NASDAQDPREX
CUSIP246248868
Investment minimums
Initial investment$1,000
Subsequent Investments$100
Systematic withdrawal balance$5,000
Account features
CheckwritingNo
Payroll DeductionYes
IRAsYes

The performance quoted represents past performance and does not guarantee future results. Investment return and principal value of an investment will fluctuate so that shares, when redeemed, may be worth more or less than their original cost. Current performance may be lower or higher than the performance quoted.

Total returns may reflect waivers and/or expense reimbursements by the manager and/or distributor for some or all of the periods shown. Performance would have been lower without such waivers and reimbursements.

Average annual total return as of month-end (08/31/2014)
YTD1 year3 year5 year10 yearLifetimeInception date
NAV (view definition)20.02%23.40%13.47%17.77%7.98%11.84%12/06/1995
Max offer price13.11%16.31%11.25%16.39%7.34%11.49%
FTSE NAREIT Equity REITs Index21.17%24.14%14.57%18.78%9.06%n/a
Average annual total return as of quarter-end (06/30/2014)
QTDYTD1 year3 year5 year10 yearLifetimeInception date
NAV (view definition)6.53%16.86%12.83%11.17%22.02%8.61%11.80%12/06/1995
Max offer price0.41%10.12%6.35%8.98%20.58%7.97%11.44%
FTSE NAREIT Equity REITs Index6.98%17.66%13.21%11.84%23.52%9.61%n/a

Returns for less than one year are not annualized.

Class A shares have a maximum up-front sales charge of 5.75% and are subject to an annual distribution fee.

Expense ratio
Gross1.31%
Net1.31%
Quarterly total returns @ NAV
Year1st quarter2nd quarter3rd quarter4th quarterAnnual return
20149.69%6.53%n/an/an/a
20136.86%-1.43%-3.14%-0.32%1.70%
201210.62%3.26%-0.41%2.33%16.41%
20116.56%4.03%-13.82%15.23%10.09%
20108.51%-2.75%12.79%6.15%26.35%
2009-30.62%25.95%30.00%8.14%22.85%
20081.06%-4.51%5.36%-36.92%-35.86%
20074.41%-9.50%2.80%-11.67%-14.19%
200613.07%-2.18%8.68%10.13%32.38%
2005-7.21%12.29%1.67%0.55%6.52%
200412.40%-6.33%8.67%14.53%31.04%
Portfolio characteristics - as of 08/31/2014
Share assets$97.1 million
Number of holdings52
Market cap (median)$4.77 billion
Market cap (weighted average)$15.81 billion
Portfolio turnover (last fiscal year)101%
P/FFO ratio (view definition)16.97x
Beta (relative to FTSE NAREIT Equity REITs Index) (view definition)0.99
Annualized standard deviation, 3 years (view definition)15.85
Portfolio composition as of 08/31/2014Total may not equal 100% due to rounding.
Domestic equities96.6%
Cash and cash equivalents3.4%
Top 10 holdings as of 08/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.9.5%
Host Hotels & Resorts Inc.4.6%
Equity Residential4.5%
Boston Properties Inc.4.4%
Health Care REIT Inc.4.3%
AvalonBay Communities Inc.3.6%
Prologis Inc.3.6%
Public Storage3.1%
General Growth Properties Inc.2.9%
Essex Property Trust Inc.2.8%
Total % Portfolio in Top 10 holdings43.3%

Holdings are as of the date indicated and subject to change.

Top sectors as of 08/31/2014
List excludes cash and cash equivalents.
Sector% of portfolio
Apartments19.1%
Regional Malls14.8%
Office13.0%
Lodging10.0%
Shopping Centers9.6%
Health Care9.3%
Industrial4.8%
Diversified4.2%
Self Storage3.7%
Mixed3.3%
Distribution history - annual distributions (Class A)1,2
Distributions ($ per share)
YearCapital gains3Net investment
income
Return of
capital
20140.0000.0990.037
20130.4390.2390.000
20120.0000.2150.000
20110.0000.1850.000
20100.0000.1760.000
20090.0000.2540.000
20080.0000.3120.000
20073.5830.3800.000
20066.6310.3800.000
20053.0110.4900.000
20041.8570.4800.000

1If a Fund makes a distribution from any source other than net income, it is required to provide shareholders with a notice disclosing the source of such distribution (each a "Notice"). The amounts and sources of distributions reported above and in each Notice are only estimates and are not provided for tax reporting purposes. Each Fund will send each shareholder a Form 1099 DIV for the calendar year that will provide definitive information on how to report the Fund's distributions for federal income tax purposes. The information in the table above will not be updated to reflect any subsequent recharacterization of dividends and distributions. Click here to see recent Notices pertaining to the Fund (if any).

2Information on return of capital distributions is only provided from June 1, 2014 onward.

3Includes both short- and long-term capital gains.

Bob Zenouzi

Bob Zenouzi 

Senior Vice President, Chief Investment Officer — Real Estate Securities and Income Solutions (RESIS)

Start date on the Fund: May 2006

Years of industry experience: 28

(View bio)


Damon Andres

Damon Andres, CFA

Vice President, Senior Portfolio Manager

Start date on the Fund: January 1997

Years of industry experience: 23

(View bio)


You may qualify for sales-charge discounts if you and your family invest, or agree to invest in the future, at least $50,000 in Delaware Investments® Funds. More information about these and other discounts is available from your financial advisor, in the Fund's prospectus under the section entitled "About your account," and in the Fund's statement of additional information under the section entitled "Purchasing Shares."

The following table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.

Shareholder fees
Maximum sales charge (load) imposed on purchases as a percentage of offering price5.75%
Maximum contingent deferred sales charge (load) as a percentage of original purchase price or redemption price, whichever is lowernone
Annual fund operating expenses
Management fees0.75%
Distribution and service (12b-1) fees0.25%
Other expenses0.31%
Total annual fund operating expenses1.31%
Fee waivers and expense reimbursementsnone
Total annual fund operating expenses after fee waivers and expense reimbursements1.31%

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Delaware REIT Fund Quarterly commentary June 30, 2014 Class A (DPREX)

Within the Fund

For the second quarter of 2014, Delaware REIT Fund (Class A shares at net asset value) posted a positive return but underperformed its benchmark, the FTSE NAREIT Equity REITs Index. Notes on relative performance at the sector level follow:

In the mixed sector, an underweight to the data center group detracted from performance. We had reduced the Fund’s exposure to data centers when supply continued to grow, even as many clients began construction of their own facilities. The supply-demand balance stabilized during the second quarter, resulting in the Fund’s underperformance in the sector. Long term, however, we think demand will likely decline. Duke Realty, the Fund’s largest holding in the sector, continued to perform strongly. Duke’s concentration on industrial and medical office properties and its acquisition of medical office buildings three years ago appears quite astute now that the Affordable Care Act is driving demand for an additional 60 million square feet of low-cost medical office space.

Although several small-cap healthcare companies outperformed, the Fund’s underweight allocation to the healthcare sector (the largest sector underweight in the portfolio) detracted from performance. Small companies’ yields were higher than those of 10-year Treasury notes, which declined throughout the quarter. We maintained the Fund’s underweight position because large-cap healthcare real estate investment trusts (REITs) have grown their asset bases to the point that incremental growth has become difficult to achieve, given the paucity of large deals and opportunities for accretion. The one bright spot, in our view, was medical office space, where Fund holdings Healthcare Realty Trust and Healthcare Trust of America have outperformed year-to-date. The low-cost nature of this property type, with its proximity to hospitals, is driving demand and declining cap rates for medical office space.

The Fund slightly underperformed in the shopping center sector due to a lack of positions in two securities that modestly outperformed: Retail Properties of America and Weingarten Realty Investors. The shopping center sector benefited from lack of supply, which pushed occupancy to levels last seen in 2007. Specifically, occupancy in small-shop space (less than 10,000 square feet) has increased to the high 80% range. Many of these tenants — mostly local businesses — were hit hard during the downturn but are now able to access credit and expand their footprints. 

Lack of investment in American Realty Capital Properties helped the Fund outperform in the freestanding sector. The company’s increase in outstanding shares that diluted shareholder equity, multiple acquisitions, and other questionable management actions sent American Realty Capital Properties shares down 9%. The company then promoted David Kay, a long-time industry veteran, to president, fired two board members, and promised no further dilution. These changes and a more attractive valuation suggested to us that the downside to owning American Realty Capital Properties may be limited, and we initiated a small position.

Both stock selection and an overweight in the apartment group aided the Fund’s relative performance during the quarter. The apartment industry has been generating steady, albeit subdued, growth in rental income. Supply has topped out as renting continues to find favor over home ownership, which remains in decline. Fund performance benefited from investments in UDR, a national apartment company with a portfolio of both “A” and “B” quality apartments and a geographic tilt toward coastal markets, and Post Properties, based in the Southeast and undervalued given sluggish Sunbelt markets. Post Properties has been selling properties and returning cash to shareholders through stock buybacks; it is also considering a special dividend. 

In the self-storage sector, the Fund benefited from an underweight allocation and good stock selection. We think the sector is overvalued after experiencing strong 8.5% annualized growth in net operating income over three years. We moved to an underweight position this year, as we believe growth could slow and supply could accelerate next year. Extra Space Storage, the Fund’s sole overweight position in the group, outperformed with a gain of 11%, while Public Storage, the Fund’s underweight position, rose only 3%, underperforming its self-storage peers and the overall benchmark index. 

Outlook

REITs have continued to outperform in 2014 as both interest rates and supply have remained quite low. Interest rates dropped about 30 basis points in the first half of the year, providing support for REITs. (A basis point equals one one-hundredth of a percentage point.) Taking advantage of lower rates, many REITs refinanced and extended the term of their debt for 7 to 10 years. At this point in past cycles, supply would be more than 2.1% of total inventory, which is the 30-year average. Today, supply is just 1%, with most property sectors seeing tight supply-demand ratios. One benefit of a slower recovery is that rents have not risen quickly, keeping development in check by making it less profitable. Additionally, banks have tightened credit standards for most private developers, thereby limiting their activity, which further benefits property owners. (Source: FTSE, Bloomberg.)

We believe that low or limited supply is essential to maintaining the current positive market conditions for real estate investors. If nonfarm payrolls continue adding more than 200,000 jobs a month, as they have in 2014, rising wages could lead to higher inflation and an increase in interest rates. Although REITs historically have not correlated with interest rates, many investors in this cycle have treated REITs as a pure yield vehicle. We would not be surprised to see these same investors flee the sector if rates were to rise. In that event, as dedicated REIT investors, we believe a shorter-duration portfolio (that is, hotel and apartment REITs) would fare well, given that these REITs’ leases are repriced more frequently than those of longer-duration healthcare and triple-net-lease companies.

As always, we appreciate your support.

[12908]

The views expressed represent the Manager's assessment of the Fund and market environment as of the date indicated, and should not be considered a recommendation to buy, hold, or sell any security, and should not be relied on as research or investment advice. Information is as of the date indicated and subject to change.

Document must be used in its entirety.

Carefully consider the Fund’s investment objectives, risk factors, charges, and expenses before investing. This and other information can be found in the Fund’s prospectus and its summary prospectus, which may be obtained by clicking the prospectus link located in the right-hand sidebar or calling 800 523-1918. Investors should read the prospectus and the summary prospectus carefully before investing.

Investing involves risk, including the possible loss of principal.

Narrowly focused investments may exhibit higher volatility than investments in multiple industry sectors.

REIT investments are subject to many of the risks associated with direct real estate ownership, including changes in economic conditions, credit risk, and interest rate fluctuations.

A REIT fund's tax status as a regulated investment company could be jeopardized if it holds real estate directly, as a result of defaults, or receives rental income from real estate holdings.

“Nondiversified” funds may allocate more of their net assets to investments in single securities than “diversified” Funds. Resulting adverse effects may subject these Funds to greater risks and volatility.

Not FDIC Insured | No Bank Guarantee | May Lose Value

Fund Finder

Daily pricing (as of 09/19/2014)

Class APriceNet changeYTD
NAV$14.50no chg14.72%
Max offer price$15.38n/an/a

Total net assets (as of 08/31/2014)

$246.8 million all share classes

Lipper ranking (as of 08/31/2014)

YTD ranking145 / 257
1 year143 / 245
3 years113 / 212
5 years96 / 173
10 years87 / 126
Lipper classificationReal Estate Funds

(View Lipper disclosure)

Benchmark, peer group

FTSE NAREIT Equity REITs Index (view)

Lipper Real Estate Funds Average (view)

Additional information