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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 Capital Realty 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. 


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.


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 (09/30/2014)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)-3.32%12.98%12.61%15.51%15.01%7.35%11.43%12/06/1995
Class A (at offer)-8.87%n/a6.14%13.27%13.64%6.71%11.08%
Institutional Class shares-3.25%13.25%12.96%15.80%15.30%7.62%9.08%11/11/1997
FTSE NAREIT Equity REITs Index-3.14%13.96%13.14%16.68%15.88%8.40%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 09/30/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.9.8%
Health Care REIT Inc.4.8%
Boston Properties Inc.4.7%
Host Hotels & Resorts Inc.4.7%
AvalonBay Communities Inc.4.1%
Equity Residential4.0%
Prologis Inc.4.0%
Public Storage3.3%
General Growth Properties Inc.3.0%
Essex Property Trust Inc.2.8%
Total % Portfolio in Top 10 holdings45.2%

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