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Delaware REIT Fund Quarterly commentary March 31, 2016

Within the Fund

For the first quarter of 2016, 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:

The freestanding sector, characterized by stable, long-lease triple net companies, was the strongest-performing sector in the benchmark for the first quarter. The Fund underperformed, however, as a result of poor stock selection and an underweight relative to the benchmark. The Fund did not own Realty Income, whose shares gained more than 20%. We believe the stock is expensive with an unsustainable valuation, trading purely on yield. It is currently trading at a 50% premium to its underlying net asset value, while the real estate investment trust (REIT) market as a whole is trading at par. The Fund’s position in Store Capital was hampered somewhat when its largest shareholder, Oaktree Capital, sold its entire 33-million-share position. We believe this weighed on performance, and shares of Store Capital could “catch up” in the second quarter. The Fund’s positions in Spirit Realty Capital and National Retail Properties and the convertible position in VEREIT all outperformed the index for the first quarter.

The specialty sector is a blend of prison, file storage, outdoor media, and triple-net REITs. The Fund underperformed due to poor stock selection. We did not own shares of file storage provider Iron Mountain, which gained more than 25%. Its recent acquisition was not accretive, however, and we anticipate very little internal growth. The Fund also did not own private prison operators Corrections Corporation of America and GEO Group. Shares of both gained more than 20%. Historically, prison REITs have been volatile, subject to state budgets that come under pressure, and a reallocation of resources that affect prison populations and occupancies. They have also seen political pressure from many legislators who do not believe in the private prison industry.

In the apartments sector, the Fund’s underweight compared to the benchmark in student-housing companies and two apartment companies resulted in underperformance for the quarter. The student-housing stocks delivered solid performance, after having been held back last year when oversupply restrained rent growth. Mid-America Apartment Communities, not held by the Fund, performed well. Its properties are located in secondary and tertiary cities in the Southeast and Midwest, where supply is more limited than in larger, first-tier cities.

In the healthcare sector, our stock selection and underweight relative to the benchmark both contributed to performance during the quarter. The sector is confronting several structural issues. First, the Centers for Medicare & Medicaid Services is reducing reimbursements to skilled nursing facilities (SNFs). This should result in hospitals having more control over post-acute recovery. Home healthcare, a lower-cost option compared to SNFs, is the likely beneficiary. Second, available supply of senior housing continues to grow and is now 5.5% of inventory. Lastly, growth in net operating income for Ventas and Welltower has slowed and is now in the low single digits. We believe these issues may result in healthcare REITs underperforming this year. Had it not been for a dovish Federal Reserve, these stocks may not have recovered from their lows in late February. We maintain the Fund’s underweight position.

The mixed REIT sector was the second-strongest performing sector in the first quarter. PS Business Parks, an owner and operator of flex space (a facility that can quickly be converted back and forth between light industrial or office use) provided the outperformance as its shares gained more than 17%. Flex space caters to smaller businesses with an average tenant size of 4,000 square feet. With current occupancy levels at more than 90%, we believe higher rents are on the horizon. Once again, the Fund’s position in Duke Realty outperformed for the quarter, with shares rising more than 7%. Duke Realty has continued to benefit from its industrial and medical office holdings.

The lodging sector performed well as Host Hotels & Resorts’ stock climbed more than 8%. Despite the sector’s decline of more than 20% in 2015, its rebound in the first quarter was tepid, essentially moving in line with the benchmark. Revenue per available room (RevPAR) has slowed significantly over the past year. Running at 5–7% over the past several years, RevPAR has fallen victim to a slowing economy and excess supply in several gateway cities. It is now estimated to be in the low single digits. Anticipating that RevPAR will continue to be depressed, we have reduced the Fund’s position until we see economic growth increase and supplies tighten.


Real estate fundamentals have benefited from low supply, good job growth, and favorable financing costs. During the first quarter, we saw a peak in commercial real estate values and a rise in capitalization rates (a measure of the rate of return) for certain property types. Capital values have tended to peak 9–15 months before operational or rent growth peaks. With the larger-cap healthcare REITs no longer the largest buyer for senior housing, we are seeing some backup in those cap rates. The freestanding (triple net) sector has also seen a small rise in cap rates, and office companies are no longer experiencing declining cap rates in gateway cities such as New York and San Francisco.

As in the late innings of a baseball game, we believe some defensiveness is appropriate. Real estate does not function in a vacuum. If corporate earnings come under pressure, real estate (being a lagging indicator) could be affected as well. On the plus side, the Fed has maintained low interest rates, which has kept low financing costs in place. Lastly, as a consequence of the downturn in 2007 and 2008, most publicly traded REITs are better capitalized today than they were then.

Thank you again for your continued support.

The MSCI World Index is a free float-adjusted market capitalization weighted index designed to measure equity market performance across developed markets worldwide.


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 (03/31/2016)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)4.49%4.49%3.17%9.76%11.19%6.12%11.67%12/06/1995
Class A (at offer)-1.54%-1.54%-2.75%7.60%9.88%5.49%11.35%
Institutional Class shares4.53%4.53%3.45%10.04%11.46%6.38%9.55%11/11/1997
FTSE NAREIT Equity REITs Index6.00%6.00%4.43%10.47%11.89%6.56%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 definition)

Expense ratio
Class A (Gross)1.32%
Class A (Net)1.32%
Institutional Class shares (Gross)1.07%
Institutional Class shares (Net)1.07%
Top 10 holdings as of 03/31/2016
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.9.3%
Public Storage5.7%
Equity Residential4.9%
AvalonBay Communities Inc.3.8%
Host Hotels & Resorts Inc.3.2%
Duke Realty Corp.3.1%
UDR Inc.2.9%
Prologis Inc.2.9%
General Growth Properties Inc.2.8%
Boston Properties Inc.2.8%
Total % Portfolio in Top 10 holdings41.4%

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.

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

Not FDIC Insured | No Bank Guarantee | May Lose Value