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Delaware REIT Fund Quarterly commentary September 30, 2015

Within the Fund

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

The lodging sector was a disappointment not only in the third quarter but for all of 2015. Many of the stocks were expensive entering into 2015. As the year progressed, it became clear that growth in revenue per available room (RevPAR) would not meet expectations. Although many hotel real estate investment trusts (REITs) had initially projected RevPAR growth of 5–7%, actual growth came in at 3.5–4.5%. As a result, the sector was down 13.91% for the third quarter, underperforming the index by almost 16 percentage points. Contributing factors included the abundant supply in New York, the strong dollar that has slowed travel to gateway cities where most domestic hotel REITs own properties, and renovation and union issues in San Francisco. A moderate overweight allocation to the sector generally, and to Host Hotels & Resorts in particular, detracted further from Fund performance. Because Host Hotels had underperformed for several years, we believed it was attractively positioned, and we anticipated a recovery in its group and conference business, an area that often lags the transient segment. However, Host Hotels lowered its estimates, which we attribute both to a slowdown in the overall business and to relatively poor management. We now believe the stock is inexpensive, with the potential for shareholder activism to create added value through management changes and property sales. Barring a major economic slowdown, we think lodging stocks are attractively valued and could benefit from improved comparables in 2016 and beyond. On a positive note, Strategic Hotels & Resorts, a long-term Fund holding, agreed to be purchased by Blackstone Group, resulting in a 13% gain for the quarter. Given the selloff in the sector, Blackstone took advantage of the disconnect between public and private market values.

The office sector was down less than 1% for the quarter. Though our stock selection was good overall, the Fund’s overweight positioning resulted in mild underperformance. In particular, an overweight to SL Green Realty and Boston Properties, two office owners based in New York, weighed on performance. So far in 2015, investors have favored West Coast office companies, including Fund holdings Kilroy Realty and Douglas Emmett. However, now that we are seeing increasing value in New York–centric names, we have added to the Fund’s position in SL Green and added a new name to the portfolio, Empire State Realty Trust. Because this new addition sells for $465 a square foot when land values in New York are $500–600 a square foot, we see a large discount to replacement value. We reduced the Fund’s position in Boston Properties as its net operating income (NOI) growth should slow next year due to anticipated dispositions of property.

All other REIT sectors contributed to relative performance, though the Fund’s allocation to cash, which averaged 0.64% of the portfolio during the quarter, resulting in a mild drag of 0.05 percentage points.

The apartment sector has continued to perform well with rents driven by millennials’ preference for renting over ownership. Although supply is elevated — an issue we are monitoring — it appears that rent growth will be strong into year end. Solid stock selection and an overweight to the group drove performance. The Fund benefited from overweight positions in two national operators, UDR and AvalonBay Communities, which were up 8.6% and 10.2%, respectively. Overall, apartments outperformed the index by more than 4 percentage points for the quarter.

The self-storage sector continued its strong run, outperforming the index by more than 14 percentage points for the quarter. Self storage has been the strongest-performing sector over the past five years, and has averaged 8% growth in NOI over the past three years. Operators in this sector have taken advantage of marketing opportunities on mobile devices, a lack of supply that has only recently been relieved, and access to cheaper capital relative to their private-market peers. Although low capitalization rates make acquisitions difficult, companies like Extra Space Storage that manage properties have an opportunity to improve operations and spur NOI growth. The Fund’s overweights in Extra Space Storage and CubeSmart drove outperformance for the quarter.

The Fund’s lone holding in the diversified REIT sector, Vornado Realty Trust, an owner and operator of office properties in New York and Washington D.C., was down a little more than 4%. Vornado’s New York office properties have performed relatively well, but its D.C. office portfolio has suffered from reductions in the government workforce and from its Class B location of Crystal City. That said, Vornado outperformed its peers — many of which were down double digits — while the Fund’s overall underweight to the sector also helped performance.


Throughout the year, some investors and the media have been predicting the end of the commercial real estate cycle when the Federal Reserve raises interest rates. So it is hardly surprising to us that REITs have underperformed the S&P 500® Index for much of this year. Now, however, with the Fed’s having decided to delay a rate move over concerns about a global slowdown, REITs appear to be back in favor and are outperforming.

It seems irrational to us, as real estate analysts, that many investors seem to use the interest rate on/off switch to decide whether REITs are attractive or not. Of course, we do not disagree that rates can affect REITs if they are accompanied by widening credit spreads. But, in our view, higher rates alone should not dissuade investors from the sector. Remember that rising rates generally accompany an improving economy, which should translate into increased demand for real estate.

As REITs become a distinct sector in the S&P 500 Index, knowledgeable generalist investors who understand the sector have an opportunity to add value versus their peers. The key is to recognize which REITs are more or less interest rate sensitive and when to own one over the other. In recent history (over the past five years) investors have made a binary decision when it comes to REITs: When rates go up, sell; when rates go down, buy. Experienced investors know that a simplistic decision model such as that does not make sense in every situation. As dedicated REIT investors, we look forward to more investors understanding the sector and its nuances.

Thank you again for your continued support.

The S&P 500 Index measures the performance of 500 mostly large-cap stocks weighted by market value, and is often used to represent performance of the U.S. stock market.


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 (09/30/2015)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)2.95%-3.71%9.84%8.90%11.42%6.28%11.35%12/06/1995
Class A (at offer)-2.94%n/a3.50%6.77%10.11%5.65%11.02%
Institutional Class shares3.09%-3.45%10.15%9.20%11.70%6.55%9.14%11/11/1997
FTSE NAREIT Equity REITs Index2.00%-3.79%9.88%9.59%12.00%6.82%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)1.34%
Class A (Net)1.34%
Institutional Class shares (Gross)1.09%
Institutional Class shares (Net)1.09%
Top 10 holdings as of 10/31/2015
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.10.3%
Equity Residential5.2%
Public Storage5.0%
General Growth Properties Inc.4.8%
AvalonBay Communities Inc.4.2%
Host Hotels & Resorts Inc.3.7%
SL Green Realty Corp.3.5%
Vornado Realty Trust3.3%
Duke Realty Corp.3.1%
Kimco Realty Corp.3.1%
Total % Portfolio in Top 10 holdings46.2%

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.

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

Not FDIC Insured | No Bank Guarantee | May Lose Value