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Delaware REIT Fund Quarterly commentary March 31, 2015

Within the Fund

For the first quarter of 2015, Delaware REIT Fund (Institutional Class shares and Class A shares at net asset value) underperformed its benchmark, the FTSE NAREIT Equity REITs Index. Notes on relative performance at the sector level follow:

An overweight allocation and poor stock selection in the lodging sector detracted from Fund performance in the first quarter. The Fund’s overweight in Host Hotels & Resorts was primarily to blame, as the company lowered guidance on funds from operations (FFO). Host Hotels’ group business has been slow to materialize over the past two years. Generally, group business (conferences and conventions) lags a recovery by two to three years. But six years into the economic recovery, this segment of the lodging sector has continued to lag. In addition to Host Hotels’ lack of execution, we think its communication with investors has been poor. We reduced the Fund’s position accordingly.

In the freestanding sector, the rally in interest rates propelled long-duration-lease (triple-net) real estate investment trusts (REITs) higher during the quarter. We have maintained the Fund’s underweight given the interest rate sensitivity and absence of internal growth. At these levels, our concern is that interest rates could rise while the lack of growth in the asset class could push capitalization rates higher. The Fund’s lone position in the freestanding sector is Spirit Realty Capital. With its moderately high leverage and its reliance on one large tenant, Shopko, for more than 10% of its rental income, Spirit Realty has underperformed to date. Although the Fund’s position is small, the other triple-net REITs have continued to outperform given the interest rate backdrop.

Stock selection in the industrial sector resulted in minor underperformance, as Fund holding DCT Industrial Trust, a domestic owner of industrial properties, was down slightly more than 2%. The stock is at full valuation and we have reduced the position. Although cap rates have declined and net operating income continues to increase, investors have been wary of potential supply given the short construction cycle.

The Fund’s investments in the office sector outperformed due to an overweight that emphasized gateway cities. Positions in SL Green Realty and Boston Properties (which operate in East Coast markets) along with investments in Kilroy Realty and Hudson Pacific Properties (which have a strong presence in West Coast markets) provided exposure to declining cap rates and higher growth. There is little available office supply in the coastal cities, even as they continue to attract global capital. With improving fundamentals, companies in this sector should continue to perform well, in our opinion.

Solid stock selection drove performance in the mixed sector. Duke Realty, a company that owns industrial and medical office properties, has transformed itself over the past five years. Historically, Duke had been a Midwest suburban office company. Recognizing the low growth of that asset class, the company began investing in higher-growth medical office and industrial properties. Today, its exposure to suburban offices is just 15% of total assets. Together with its improved financial discipline, the company was rewarded with a higher valuation. Lastly, the Fund benefited relative to the benchmark by not taking a position in Liberty Property Trust, an owner of suburban office and industrial properties that has continued to suffer from slow growth.

Strong stock selection and an overweight in the apartments sector generated strong relative performance. Much as in the office sector, the Fund’s overweight resulted in low double-digit returns by focusing on companies with exposure to the coastal regions of California, Seattle, and the Northeast. Essex Property Trust, with exposure to San Francisco (the strongest apartment market in the United States), Seattle, and now Los Angeles, was up nearly 12%. UDR, a company that has transformed its portfolio to be more coastal, was up more than 11%. The apartment industry is in the midst of strong rental growth stemming from increased job creation, balanced supply and demand, and lower homeownership. If we have a note of caution, it’s that the sector has performed quite well over the past 18 months and valuations are high.


With the first quarter of the new year behind us, REITs continue to rise, propelled by low rates, limited supply, and investors’ seemingly unquenchable thirst for yield. With interest rates even lower in Europe and Japan, the result has been a global rally in real estate securities. Many companies can now cross borders and raise cheap capital, even after paying to hedge foreign currencies against the strong dollar.

We believe that our philosophy — that it’s important to understand the cost and availability of debt and equity capital — is being adopted by others on a global scale. Many foreign markets, including Europe and Japan, are experiencing very little growth. Yet stocks in these markets are trading at significant premiums to their net asset value (NAV), as much as 25% in Europe and 47% in Japan. In contrast, U.S. REITs, with less leverage and better growth rates, are trading at a premium to their NAV of just 5% (Data: FTSE). Why such a massive disconnect? Quite simply, many investors are buying where quantitative easing is in effect and selling where it has ceased. In other words, investors are eagerly buying where the cost and availability of capital is favorable (Europe and Japan) versus where, in theory, the cost of capital could be moving in the opposite direction (the U.S.).

Investors who have been waiting for real estate fundamentals to improve missed the first quarter gains in European real estate markets. Although we have yet to see any material acceleration in rental growth, European stocks have already reacted to quantitative easing, gaining 20% in euros on average for the quarter. For this reason, regardless of the region, we believe a balanced approach to capital markets and real estate analysis is prudent in helping to identify under- and overvaluation in real estate securities. (Data: FTSE, Bloomberg.)

Thank you again for your continued support.

Funds from operations (FFO) is the cash flow from operations before changes in working capital and changes in other short-term and long-term operating assets and liabilities.


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 (06/30/2015)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)-10.49%-6.47%3.14%7.70%13.47%6.15%11.34%12/06/1995
Class A (at offer)-15.63%-11.84%-2.78%5.59%12.12%5.52%11.00%
Institutional Class shares-10.42%-6.35%3.38%7.95%13.74%6.41%9.08%11/11/1997

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 definition)

Expense ratio
Class A (Gross)1.34%
Class A (Net)1.34%
Institutional Class shares (Gross)1.09%
Institutional Class shares (Net)1.09%
Top 10 holdings as of 06/30/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.10.2%
Equity Residential4.8%
General Growth Properties Inc.4.7%
AvalonBay Communities Inc.4.3%
Health Care REIT Inc.4.3%
Public Storage4.2%
Boston Properties Inc.3.9%
Vornado Realty Trust3.5%
Essex Property Trust Inc.3.3%
Host Hotels & Resorts Inc.3.2%
Total % Portfolio in Top 10 holdings46.4%

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.

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

Not FDIC Insured | No Bank Guarantee | May Lose Value