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Delaware REIT Fund Quarterly commentary June 30, 2016

Within the Fund

For the second 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:

In the apartments sector, our stock selection resulted in Fund underperformance relative to the benchmark sector. While we had invested more heavily in companies with a larger market capitalization, it was smaller-cap companies that outperformed. With the exception of markets like New York and San Francisco, growth has been slowing in the gateway cities where we have invested. In contrast, demand has held up in smaller markets. With lenders beginning to rein in credit, however, we expect to see supply peak later this year, leading to renewed strength in the larger-cap segment.

The specialty sector is a mix of single-family housing, prison, file-storage, outdoor-media, and “triple-net” real estate investment trusts (REITs). The Fund underperformed due to poor stock selection; while the sector outperformed, the Fund’s lone position did not participate in those gains. The single-family home market is improving with Colony Starwood Homes and Silver Bay Realty Trust up 23% and 15%, respectively, for the quarter. In addition, as the chase for yield continues, EPR Properties — a triple-net REIT that owns movie theaters, TopGolf entertainment complexes, and charter schools — was bid up. And EPR is not alone; most triple-net REITs have reacted similarly to decreasing bond yields. Because companies in this group are very yield sensitive, and because the Fund already has yield-sensitive investments in the freestanding (long-term leases) sector, we decided to avoid the specialty group.

Although our stock selection in the healthcare sector was very strong, the Fund’s underweight to this group negatively affected relative performance. These companies have lower growth but longer leases, making them more interest rate sensitive. Consequently, many investors are buying these companies now that the 10-year Treasury yield has declined from 2.10% to 1.36% as of early July. The group is facing cyclical headwinds in senior housing because of oversupply and structural headwinds that resulted from lower government reimbursements. Yet, the market continued to bid these stocks to levels above net asset value (NAV) solely due to the decline in rates. When companies are selling above their NAV, with no external growth, slowing internal growth, and regulatory issues, we find it difficult to add to the Fund’s allocation at this time. Right now, the market is clearly enamored with yield. While we were early in our belief that fundamentals would matter, we think it’s only a matter of time before this sector comes to its senses.

In the industrial sector, the Fund’s overweight and solid stock selection provided outperformance for the quarter. Historically, this sector has had net operating income (NOI) growth that has approximated that of U.S. gross domestic product (GDP). However, with the growth in same-day and next-day deliveries by online retailers, demand has sustained NOI growth of 4–5%, two to three times that of the GDP. In addition, online retailers are demanding larger and more sophisticated space, allowing for further external growth through development. The Fund’s holdings are predominantly domestically oriented, with the exception of Prologis. With its exposure to Europe, Prologis may experience similar demand there in the future, in our view.

The shopping centers sector continued to outperform given low supply, need-based shopping, and less competition from online retailers. Although growth remains in the low single digits (3–4%) shopping centers have the lowest inventory as a percentage of new stock of any sector. We have maintained an overweight to this sector throughout the year and believe that performance should be less volatile than in prior cycles. Most companies are resorting to in-fill development or less risky redevelopment. Two of the Fund’s holdings, Equity One and Urban Edge Properties, outperformed in the second quarter. Both have long-term redevelopment plans that we think have the potential to generate above-average growth versus their peers.

The diversified sector represents REITs in multiple property sectors, from triple-net to office and industrial ownership. Although the Fund’s two holdings performed in line with the market, stock selection provided outperformance as we avoided taking a position in externally managed NorthStar Realty Finance. With the company currently engaged in a merger, its stock declined 10% as investors expressed their displeasure with plans to maintain the company’s external manager structure. Additionally, NorthStar Realty Europe, which was spun out of NorthStar Realty Finance, declined 19% due to concerns surrounding the British vote to leave the European Union (Brexit).


We are now into the eighth year of the recovery from the global financial crisis, and REITs continue to outperform. The reasons are many, but a few stand out. Low rates, limited supply, and a hunger for yield are pushing commercial real estate prices to levels beyond the last peak in 2007.

All sectors, except office, have higher occupancies now than before the recession. With today’s subdued growth, most businesses, not just REITs, have been more risk averse and have reduced capital expenditures. As a result, existing properties are worth more and can achieve higher rents. At the same time, with capital both in plentiful supply and reasonably priced, REITs have flexibility in choosing between acquisitions, development, or redevelopment to achieve returns.

REITs may also be getting a boost from the decision to add the REIT sector to the S&P 500® Index this August. It appears that some investors are putting money into the sector now, expecting the shares to trade higher when they become part of the index.

Finally, with the Federal Reserve backing away from an imminent interest rate hike, many investors are screening stocks for yield. That’s driving small, highly leveraged and zero-growth companies to relative valuation levels that are at a six-year high versus their larger-cap peers. Investing based on yield is risky, however, since it is dependent on interest rate policies rather than fundamentals. Consequently, we have sold or trimmed those positions that we deemed to be trading at a high valuation or were more interest sensitive, in favor of larger-cap companies with better fundamentals.

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 (06/30/2016)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)5.43%10.16%21.52%12.25%11.48%6.92%11.81%12/06/1995
Class A (at offer)-0.62%3.81%14.57%10.05%10.16%6.29%11.49%
Institutional Class shares5.55%10.34%21.90%12.53%11.77%7.19%9.74%11/11/1997
FTSE NAREIT Equity REITs Index6.96%13.38%24.04%13.58%12.60%7.45%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 08/31/2016
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.10.1%
Equinix Inc.4.9%
Vornado Realty Trust3.5%
General Growth Properties Inc.3.3%
Duke Realty Corp.3.0%
AvalonBay Communities Inc.3.0%
Welltower Inc.3.0%
UDR Inc.2.8%
Host Hotels & Resorts Inc.2.8%
Alexandria Real Estate Equities Inc.2.8%
Total % Portfolio in Top 10 holdings39.2%

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.

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

Not FDIC Insured | No Bank Guarantee | May Lose Value