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Delaware REIT Fund Quarterly commentary March 31, 2017

Within the Fund

The Fund’s minimal exposure to the specialty sector detracted from performance in the first quarter, as it did not benefit from the sector’s gains. Many of the companies in this sector have characteristics that set them apart from other real estate companies. Thus, it’s not surprising that in a quarter in which many real estate investment trusts (REITs) struggled, companies in this sector did well. Single-family rental REITs, for example, which have little exposure to coastal markets and their oversupply, have continued to experience stronger growth in net operating income (NOI) than apartments. Likewise, billboard owner Lamar Advertising had a solid quarter considering its high degree of economic sensitivity. Prison REITs continued to outperform, helped by the postelection assumption that the Trump administration will not act to significantly reduce prison populations.

The Fund’s underperformance in the office sector was mainly due to stock selection, underweighting Boston Properties while overweighting Mack-Cali Realty and Kilroy Realty. Boston Properties owns offices in New York and other large urban areas. While the market focused on potential financial deregulation and the boost that it would give New York real estate, we believed the company’s leasing risk was underappreciated by investors. At current valuations, we thought the downside risk was greater. Mack-Cali is a New Jersey office owner that outperformed for much of last year before pulling back. New management appears to be back on the right track, and we believe this REIT may again outperform over the next 6-12 months. Kilroy is a West Coast owner of office space. Investors have been selling the company’s shares, enticed by the promise of deregulation in the New York market. Given that Kilroy has outperformed its East Coast competitors such as Boston Properties, we are keeping it in the Fund.

Stock selection was the reason for the Fund’s underperformance in the freestanding sector. We had underweighted Realty Income while its shares were rising. The shares have since sold off. Given Realty Income’s high-quality portfolio and premium to net asset value, we have established a position in the Fund. Also in the sector, the Fund’s overweight allocations to both Spirit Realty Capital and Store Capital hindered performance. Store Capital was affected by its exposure to Gander Mountain, a struggling retailer. Gander has filed for Chapter 11 bankruptcy and will close some stores. Because a Chapter 7 bankruptcy would have meant liquidation and loss of all rental income to Store Capital, this was a favorable outcome. Additionally, Store Capital’s efforts to raise equity and reload its balance sheet to finance its ambitious growth plans was favorably received by the market. As Store Capital grows, we anticipate Gander will become a smaller percentage of revenue.

The Fund’s data center and cell tower holdings were strong contributors in the technology sector for the first quarter, with stock selection driving performance. Shares of Equinix, a data center owner and operator, gained more than 12% during the quarter. Of all the data center companies, Equinix has the best model, in our opinion, relying more on internal growth and less on riskier development. Shares of Crown Castle International, an owner of cell towers, were also up 10% and could see more upside as AT&T looks to increase spectrum, thus adding to its cell tower contracts. Overall, the data center group has benefited from increased cloud traffic generated by corporations and the cell towers. Despite increased spending from the large cellular carriers, the potential merger of Sprint and T-Mobile could result in less traffic and spending from the combined entity.

Although shopping centers as a whole did not perform well in the first quarter, the Fund’s stocks outperformed and contributed to relative performance. Owning higher-quality centers such as Regency Centers, Urban Edge Properties, and Retail Properties of America cushioned the large declines that the retail area experienced in the first quarter. A flood of negative news concerning store closings and low valuations for Class B malls has led to discounts of share prices to net asset value (NAV) in the range of 15%-20%. JCPenney and many inline stores at high-quality malls are closing. Even though the number of bankruptcies and store closings in the quarter was not out of the norm overall, large-box stores appear to be in trouble, as retail sales increasingly yield to ecommerce. At the same time, we believe that high-quality malls should prevail, given their locations.

In the self storage sector, the Fund mildly outperformed for the first quarter due to an underweight to the benchmark. Storage companies have experienced slowing growth even as they remain expensive relative to their NAVs. Supply is beginning to ramp up and NOI growth has slowed from an average of 8.5% over the past four years to the 3%-5% range today. Although still better than the overall REIT market, it is a severe decline as occupancies are full and rate growth is the only driver. With promotions rising, the critical spring leasing season will likely determine the sustainability of cash flows for the remainder of 2017.


Over the past two years, REITs have basically traded flat, with some degree of volatility resulting from higher interest rates or widening credit spreads. Now, investor concern has spread to the demise of brick-and-mortar stores as retail sales move online. There is no doubt that ecommerce is taking share from brick and mortar. There are large anchor stores (JCPenney and Sears, for example) that will either severely downsize or go away.

This is mainly reflected, however, in Class B mall pricing where stocks are down 40% and sell 50% below their NAV. On the other hand, Class A malls (for example, Simon Property Group and General Growth Properties) are not experiencing the same amount of pain. Many ecommerce-only sites are not making money on sales due to high customer-acquisition costs and fulfillment and logistical expenses. Thus, some ecommerce companies, including Amazon, are opening brick-and-mortar sites. Remember, Amazon’s profit margin is only 2% on its online sales. Although there is pain and it is expected to continue, the REIT selloff seems overdone in many Class A malls and even shopping centers that don’t have anchor issues. While JCPenney closed 138 stores, only seven were in the REIT sector, which speaks to the high-quality locations of those properties.

The question then is: “What catalytic event will close these discounts?” It could be a bland earnings season unaccompanied by the deterioration expected by the market. Or it might be a takeout by private equity. Perhaps, in an effort to protect their NAV, it may be time for some larger companies to consider selling off properties, joint ventures, or stock buybacks. Time will tell, but REIT investors historically have been willing to overpay for yield and growth while showing reluctance to buy discounts to NAV.

Thank you again for your continued 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 (03/31/2017)
YTD1 year3 year5 year10 yearLifetimeInception
Class A (NAV)-0.69%-0.69%0.08%8.22%8.27%4.02%11.10%12/06/1995
Class A (at offer)-6.37%-6.37%-5.67%6.10%6.99%3.40%10.79%
Institutional Class shares-0.71%-0.71%0.30%8.47%8.54%4.27%9.05%11/11/1997
FTSE NAREIT Equity REITs Index1.16%1.16%3.56%10.26%9.99%4.85%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)1.33%
Class A (Net)1.33%
Institutional Class shares (Gross)1.08%
Institutional Class shares (Net)1.08%
Share class ticker symbols
Institutional ClassDPRSX
Top 10 holdings as of 03/31/2017
Holdings are as of the date indicated and subject to change.
List excludes cash and cash equivalents.
Holding% of portfolio
Simon Property Group Inc.7.7%
Welltower Inc.5.4%
AvalonBay Communities Inc.5.3%
Equinix Inc.5.1%
HCP Inc.4.3%
Prologis Inc.4.3%
GGP Inc.3.5%
Equity Residential3.0%
UDR Inc.3.0%
Public Storage2.8%
Total % Portfolio in Top 10 holdings44.4%

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