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Delaware REIT Fund Quarterly commentary December 31, 2013 Class A (DPREX)

Within the Fund

For the fourth quarter of 2013, Delaware REIT Fund (Class A shares at net asset value) posted a negative return but outperformed its benchmark, the FTSE NAREIT Equity REITs Index. Notes on relative performance at the sector level follow:

In the real estate investment trust (REIT) diversified sector, the Fund’s holding in Lexington Realty Trust declined more than 7%, underperforming both the sector and the index for the quarter. Lexington is transforming from a multi-tenant lease company to a triple-net-lease company with longer leases (with triple net leases, tenants are responsible for paying property taxes, building insurance, and maintenance costs). As this occurs, investors may become more comfortable with the company’s cash-flow stability. We think Lexington’s management team has done an admirable job of fixing the balance sheet and selling properties to maximize value. As of Dec. 31, 2013, the stock traded at 9.2 times 2014 funds from operations (FFO), a 35% discount to both the REIT and the triple-net-lease sectors (data: Citigroup, Green Street Advisors).

Our underweight to the smaller-cap companies in the shopping centers sector detracted from performance during the quarter. This sector has experienced solid occupancy growth and, in particular, small shop space (less than 10,000 square feet) is now fully recovered from the financial crisis — rising from 81% in 2009 to 88% today — thus improving cash flows. In our opinion, the Fund’s largest overweight position, DDR, will likely be one of few shopping-center companies to show year-over-year cash flow growth. DDR is predominantly involved in the power-center space (properties with single users) and supply is virtually nil for this subsector of shopping centers. Even with the issues that Best Buy and many of the big-name bookstores are facing, there continues to be strong demand for power-center properties, and we believe DDR has the potential to capitalize on that in 2014.

Entering the fourth quarter, we maintained a significant underweight to the healthcare sector as it was the most expensive sector in the REIT universe, trading at an average premium to net asset value (NAV) of approximately 40%. Our negative view was based on overvaluation, rising rates, and a lack of accretive deals as cost of capital increased. The sector underperformed the index by more than 6 percentage points during the quarter and we maintain the Fund’s underweight. When companies are selling at premiums to asset value, they can issue stock at a premium and buy assets, creating accretion. Healthcare REIT, for example, is generally too large to find accretive deals and needs equity to deleverage. The market punished the stock, however, and the company missed its window to issue equity at higher prices. Thus, with the stock down 13% for the fourth quarter, the company is forced to raise equity at higher costs of capital.

As the shortest-duration sector (due to daily repricing of its cash flows), lodging was the best-performing sector in the fourth quarter (and throughout 2013). The Fund’s position in Host Hotels & Resorts provided outperformance as its revenue per available room (or revpar) continues to rise year over year. The combination of occupancy and rising rates contributes to revpar growth. Occupancies have reached near peak levels, and we believe room rates should be the growth engine for the group in 2014 and beyond. A lack of supply (except for in Washington, D.C., and New York City) has helped maintain this cycle as credit continues to be less available for this sector. These stocks have reflected strong fundamentals, and we are moderately decreasing our allocation to the group but still on par with the index weight, as we believe the fundamentals warrant a positive view.


With REITs’ underperformance in 2013, we could conclude that many investors have essentially voted that growth should continue and defensive yield sectors should underperform in a rising rate environment. Because REITs have characteristics of both debt and equity, we are not surprised that they trailed equities and outperformed the 10-year Treasury note in 2013. The degree to which REITs underperformed broader equities, in our view, could be attributed to generalist investor selling, macro hedge fund shorting (although hedge funds are generally not known for their thorough analysis concerning the fundamentals of this sector), and outflows from dedicated REIT funds. (Data: FTSE, Bloomberg.)

As rising rates often signal an improving economy, management teams may gain confidence to increase spending, which should also improve employment. Rising rates can also create competition for high dividend-yielding investments, which weighed on the REIT sector in 2013. However, as a result of REITs’ underperformance, certain REIT sectors (such as malls) have become more attractive to us, and we are now finding what we believe to be solid values in the REIT universe.

Interestingly, the REIT credit markets did not misbehave relative to other debt sectors in 2013. Another anomaly, in our view, is that private market transactions are robust and capitalization rates in secondary and tertiary markets have continued to decline. Typically, these markets would be experiencing weakness if real estate cap rates were headed higher. So with debt markets healthy and private market transactions showing declining cap rates, we believe equity REITs may have a reasonable chance in 2014.

As always, we appreciate your support.


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.


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.

Performance data current to the most recent month end may be obtained by calling 800 523-1918 or visiting

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 quarter-end (03/31/2014)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)9.69%9.69%4.39%10.29%26.18%7.22%11.58%12/06/1995
Class A (at offer)3.37%3.37%-1.62%8.14%24.71%6.59%11.22%
Institutional Class shares9.82%9.82%4.72%10.58%26.53%7.49%9.16%11/11/1997
FTSE NAREIT Equity REITs Index9.98%9.98%4.16%10.65%28.20%8.23%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.

Index performance returns do not reflect any management fees, transaction costs, or expenses. Indices are unmanaged and one cannot invest directly in an index.

FTSE NAREIT Equity REITs Index (view)

Expense ratio
Class A (Gross)1.31%
Class A (Net)1.31%
Institutional Class shares (Gross)1.06%
Institutional Class shares (Net)1.06%
Top 10 holdings as of 03/31/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.10.1%
Boston Properties Inc.4.9%
Equity Residential4.3%
Prologis Inc.4.1%
AvalonBay Communities Inc.4.0%
Host Hotels & Resorts Inc.3.7%
Vornado Realty Trust3.3%
General Growth Properties Inc.3.0%
SL Green Realty Corp.2.9%
Essex Property Trust Inc.2.6%
Total % Portfolio in Top 10 holdings42.9%

Institutional Class shares are only available to certain investors. See the prospectus for more information. 

All third-party marks cited are the property of their respective owners.

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