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Delaware REIT Fund Quarterly commentary September 30, 2014

Within the Fund

For the third quarter of 2014, Delaware REIT Fund (Class A and Institutional Class shares at net asset value) posted a negative return that underperformed that of its benchmark, the FTSE NAREIT Equity REITs Index. Notes on relative performance at the sector level follow:

With the data-center real estate investment trust (REIT) business beginning to stabilize, the Fund’s underweight to this group detracted from relative performance in the mixed sector. Data centers are a cyclical business, and the Fund’s two largest positions in the sector, Duke Realty and PS Business Parks, underperformed as investors sold out of more-cyclical sectors. We believe that the fundamentals of both Duke Realty and PS Business Parks appear solid and should continue to show improvement. Shortly after the quarter ended, PS Business Parks sold its Portland, Ore., portfolio at a higher valuation than the market anticipated.

With a lack of exposure to prison REITs, Fund performance in the specialty sector lagged as both GEO Group and Corrections Corporation of America won new contracts that drove third-quarter gains. Additionally, Fund holding EPR Properties underperformed as the company issued equity to pay down lines of credit that funded year-to-date acquisitions. We think EPR is now quite attractively valued, and we added to the position in September. A stable theater business accounts for 80% of the company’s net operating income, and charter schools and other entertainment facilities account for the rest.

Relative performance lagged in the regional malls sector because of the Fund’s lack of exposure to Glimcher Realty Trust, which advanced 25% on a takeout by Washington Prime Group, a shopping center REIT. Otherwise stock selection was solid, and the mall group outperformed. This outperformance may be due in part to the launch of the iPhone 6 and the excitement that it brought to the mall sector, especially higher-quality malls such as Taubman Centers. Longer term, the growth of online retail sales is a threat to poorly located malls. We think malls will likely respond by becoming more of an “experience,” with restaurants and entertainment in addition to traditional shopping. We also anticipate seeing new types of tenants such as dental offices in the inline space. The box stores such as Sears and JCPenney will also have to experiment with new approaches to stay relevant. They could divide their anchor space, for example, and lease part of it to another retailer, such as Dick’s Sporting Goods.

Strong security selection drove the Fund’s outperformance in the lodging sector. Fundamentals are improving given limited supply and increasing demand from both corporate and leisure customers. Additionally, the sector has finally been able to sustain higher rates for hosting groups. The Fund’s leading stocks included Pebblebrook Hotel Trust and DiamondRock Hospitality. DiamondRock has forecasted strong gains in revenue per available room (RevPAR) as its two-year renovation projects have begun to bear fruit. We think this bodes well for full-service hotel companies in general. Five years into the economic recovery, supply is still below long-term averages. Barring an economic decline, we believe that growing hotel RevPAR should propel this sector with strong growth of funds from operations (FFO) into 2015.

The Fund benefited from strong security selection in the apartments sector. Apartment companies have delivered solid growth in net operating income, and while that is showing signs of slowing down, demand is matching supply as homeownership continues to decline. West Coast companies such as Essex Property Trust are seeing strong rent growth in San Francisco and Seattle, with some acceleration in Los Angeles, which had been lagging. AvalonBay Communities raised equity to fund development as returns on new construction are higher than for acquisitions, and rent growth continues to justify building over buying. Post Properties has taken advantage of a robust environment to sell assets and is using proceeds to pay down debt. Although this can be dilutive to earnings, it is accretive to the company as its stock has continued to trade at a discount to net asset value. Our only concern is supply in the Southeast and the Houston-Dallas market. Because permitting is less onerous in these areas, supply can exceed demand.

Although the freestanding sector underperformed the overall index, stock selection contributed to Fund outperformance in the sector. Early in the quarter, we sold National Retail Properties, a good company that we believe became overvalued. In its place, we added American Realty Capital Properties, a somewhat controversial company that had made some missteps. However, with new CEO David Kay, a veteran REIT executive, the company has corrected certain corporate governance issues and dispositions that we believe should align both corporate and shareholder interests. If the company can execute the plan it has put forth, the valuation gap with its triple-net-lease peers should narrow.


The volatile global backdrop presents a challenge for long-term investment decision making. Warren Buffett has always advised buying companies that you would be comfortable owning even if the market were to close tomorrow and stay closed for two years. Many Fund holdings have been in the portfolio for more than a decade. We have trimmed and added to the positions, but have held numerous names for the long term.

The volatility in interest rates, global equity markets, and currencies can make even seasoned investors question their strategies. We have implemented a process that takes into account both real estate fundamentals and capital markets. Given that capital moves across borders daily, real estate investing has become about more than just local supply and demand. As real estate is now a public industry that continues to securitize, we believe short-term volatility should not obscure the potential long-term benefits of owning real estate equities: (1) stable and rising dividends, (2) inflation protection, and (3) diversification when holding these securities over the long term.

As always, we appreciate your support.

Diversification may not protect against market risk.


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 11/30/2014
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.10.5%
Health Care REIT Inc.4.8%
Boston Properties Inc.4.8%
AvalonBay Communities Inc.4.4%
Public Storage4.3%
General Growth Properties Inc.4.0%
Equity Residential4.0%
Prologis Inc.3.6%
Host Hotels & Resorts Inc.3.4%
Essex Property Trust Inc.3.1%
Total % Portfolio in Top 10 holdings46.9%

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