Ivy Securian Real Estate Securities Fund

Ivy Securian Real Estate Securities Fund

Market Sector Update

  • Real estate stocks followed a now well-traveled path in the third quarter: price movements tie more directly to the changes in interest rates –particularly the 10-Year U.S. Treasury yield– than by the fundamental prospects of cash flow growth.
  • The “bondification” of real estate has been bemoaned by many market participants as irrational, but has become current reality. Another series of attractive earnings releases, along with favorable commentary regarding the current demand, supply and valuation landscape should be encouraging to investors. We believe earnings growth for the sector could inflect higher in 2019.
  • Merger and acquisition activity was quiet during the period, but the continued discount at which the stock prices trade relative to private market valuations could lead to an uptick in activity before the year is out.

Portfolio Strategy

  • The Fund underperformed its benchmark, the FTSE NAREIT Equity REITs Index, for the quarter.
  • Favorable stock selection across most property sectors was outstripped by our overweight toward coastal office companies, which badly lagged the index. Meanwhile, our two largest sector overweights —multifamily and datacenters— each outperformed the benchmark.
  • Multifamily real estate investment trusts (REIT) was the top performing REIT sector for the period as top-line growth remained steady for the most recent quarter. This marked the second consecutive quarter of earnings stability, which was a welcome surprise as many investors expected growth to decelerate. The manufactured housing (MH) companies also registered above-average performance, while student housing lagged the group. Fund performance benefitted from an overweight to MH and multifamily, though stock selection was solid across the sector. The Fund remains overweight to the sector, as we anticipate steady growth, albeit with some expense pressure.
  • Datacenter REITs were ahead of the broader sector after lagging earlier in the year, with record leasing volumes for several companies driving the outperformance. Stock selection and allocation both added performance in the quarter. The continued growth in several demand drivers —most notably cloud computing, artificial intelligence and data analytic— point to the potential of sustained earnings growth for the space and we remain overweight the group.
  • Defying the usual headwind of rising interest rates, Healthcare REITs were among the top performers this quarter. A supportive regulatory pronouncement for skilled nursing and surprisingly low impact from resolutions of troubled tenant leases ameliorated investor angst around weakening fundamentals. Medical office buildings (MOBs) also continue to deliver slow, steady growth, which is a reason we continue to favor the MOBs longer term. Though our weighting to the sector was increased during the quarter, we are cautious on the group, particularly regarding new senior housing supply going into 2019.
  • New supply concern continues to weigh heavily on the self-storage, which was among the worst performing REIT classes for the quarter. Revenue growth continued to decelerate after years of above-historic average results. The 2019 outlook is uninspiring and is largely a factor of an overly accommodative construction lending environment, pushing new supply to uncomfortable levels. The Fund remains underweight the sector.
  • Office owners continue to wrestle with ever-escalating capital costs and struggled in the quarter as a result. Building materials and labor to accommodate new and existing tenant space requirements are rising faster than rental rates. In addition, shifts in worker accommodation and space requirements are under systemic change. The resultant effect is causing higher than average vacancy pressures and weak rental rate growth. As this story becomes increasingly pronounced, we have carefully concentrated our ownership in companies that are building new, highly functional office space that is tailored to the modern workforce.


  • We entered 2018 expecting steady growth, low inflation and limited market volatility to be the guiding principles for the year. We had not expected a significant change to foreign trade policy, which has been a driver of more volatility than we initially anticipated. Consumer and business confidence remains persistently high following the tax policy changes, but global trade uncertainty remains an overhang toward better economic growth. Entering fourth quarter, we find ourselves where we started the year. However, we are optimistic 2019 could be bright.
  • With regard to the current commercial real estate cycle, we continue to see stable operating conditions across the sector with few material concerns on the horizon. Bank lending, commercial construction, equity allocations, and overall pricing metrics remain much healthier than was often the case in previous cycle peaks. As we’ve previously suggested, simply moving into the later stages of this recovery does not mean the sector’s fundamentals will turn negative. In fact, the prospect for re-acceleration of earnings growth for 2019 appears plausible if current expectations for corporate earnings materialize.
  • Higher U.S. Treasury rates have finally materialized, and while share price gains for REITs have been muted the results are far from the catastrophe many have predicted. We continue to believe that REIT share price performance will be heavily influenced by macro events, with support coming from an improving economy and GDP growth while potentially rising borrowing costs, such as a rising 10-Year U.S. Treasury yield, could offer resistance.
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  • Valuations of private market transactions continue to support REIT valuations, suggesting REITs currently trade at a discount to net asset value, while REIT pricing compared to broader fixed income and equity markets also looks attractive compared to historic averages. Significant fund raising in real estate private equity funds suggests further support for real estate valuation.

The opinions expressed are those of the Fund’s managers and are not meant as investment advice or to predict or project the future performance of any investment product. The opinions are current through Sept. 30, 2018, are subject to change at any time based on market and other current conditions, and no forecasts can be guaranteed. This commentary is being provided as a general source of information and is not intended as a recommendation to purchase, sell, or hold any specific security or to engage in any investment strategy. Investment decisions should always be made based on an investor’s specific objectives, financial needs, risk tolerance and time horizon. Past performance is not a guarantee of future results.

The FTSE NAREIT Equity REITs Index is designed to present investors with a comprehensive family of REIT performance indexes that spans the commercial real estate space across the U.S. economy. The FTSE NAREIT Equity REITs index contains all Equity REITs not designated as Timber REITs or Infrastructure REITs. It is not possible to invest directly in an index.

Effective April 30, 2018, the Fund's benchmark changed from the Wilshire U.S. Real Estate Securities Index to the FTSE NAREIT Equity REITs Index.

Effective April 30, 2018, the name of Ivy Advantus Real Estate Securities Fund changed to Ivy Securian Real Estate Securities Fund.

Risk factors: The value of the Fund's shares will change, and you could lose money on your investment. An investment in the Fund is not a bank deposit and is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Investment risks associated with investing in real estate securities, in addition to other risks, include rental income fluctuation, depreciation, property tax value changes and differences in real estate market values. Because the Fund invests more than 25% of its total assets in the real estate industry, the Fund may be more susceptible to a single economic, regulatory, or technical occurrence than a fund that does not concentrate its investments in this industry. These and other risks are more fully described in the Fund's prospectus.