Dear Mr. Berko: 

This may be hard to believe, but my husband and I have a close friend who is an engineer and, for the past 21 years, has helped us build a portfolio that has averaged 11.2 percent annually since 1993. He won’t accept any money for his advice because, he says, all the stocks he researches and recommends are the same issues he owns for himself. And we know that’s true because we’ve seen his portfolio statements. So for his management fee, we take him and his wife out for a classy steak dinner each quarter, though we’d gladly do it every month. Also, my husband doesn’t charge him for his dental work.
Now our friend is recommending that we invest about 6 percent of our portfolio ($50,000) in real estate investment trusts. Logically, one would think that with interest rates rising and the Federal Reserve cutting back on easy money — as well as cutting back its bond purchases — REITs would not be a smart investment. Because we’re doubtful about this (we discuss the market frequently together), I told our friend we would write you for your opinion. He said you will agree with him. I’ve enclosed his recommendations. 
— TS, Durham, N.C.
Dear TS: 
I have a longtime friend who is an engineer and also a nonpareil stock picker. I’ve watched this guy pick stocks for 38 years — and watched him buy stocks that looked like garbage but turned into gold. I came to the conclusion 205 years ago that engineers rather than politicians and lawyers should rule the world. Imagine for a moment that the president, the Cabinet and all the White House staff were engineers instead of lawyers. Then imagine that members of Congress (47 percent are lawyers) were engineers. Without question, our tax code would be fair; the budget would be balanced; our public schools would be exceptional; poverty would be eliminated; welfare costs would plummet; the trains would run on time; and there would be peace in the valley. Lawyers are America’s terrorists but without guns or suicide vests.
Your engineer friend is right; I’d be an REIT buyer today. Cohen & Steers, a highly regarded real estate advisory firm, says that since 1993, there have been eight periods of 12 months or longer during which 10-year Treasury yields rose by at least half of a percentage point. And during those eight periods, REITs gave investors total returns just under 15 percent. Of course, that 15 percent includes dividends because REITs must pay out at least 90 percent of their taxable income in order to qualify for REIT status. Today’s average REIT yields 3.8 percent.
And I like each of your engineer friend’s picks. Realty Income Corp. (O-$43.49), yielding 5 percent, is considered to be among the best-managed REITs in the industry. O owns 4,245 properties in 49 states, leased to names such as Walgreens, CVS, Pizza Hut, PNC, FedEx and BJ’s Wholesale Club. Its 96 percent occupancy rate is impressive, as is its dividend, which has increased for 19 consecutive years.
Chesapeake Lodging Trust (CHSP-$29.88) yields 4 percent and owns 20 upscale hotels in big cities, including San Francisco, New York and Chicago. Hotel room demand is strong, and new construction is lagging. Revenues per room should rise by about 6 percent this year. CHSP has good numbers and trades at 13 times funds from operations.
W.P. Carey (WPC-$63), yielding 5.6 percent, invests primarily in commercial properties that are triple-net leased to single tenants such as Lockheed Martin, FedEx, The New York Times, U-Haul, Walgreens and Northrop Grumman. WPC’s 710 properties, totaling 84 million square feet, are leased to 232 different tenants and generated $870 million in 2013 revenues. Meanwhile, just 43 leases will expire in the next two years.
And the $4.4 billion T. Rowe Price Real Estate Fund (TRREX-$27.27), a no-load mutual fund, has delivered annualized returns of over 12 percent since 1999. Simon Property Group, General Growth Properties, Public Storage, Vornado Realty Trust and AvalonBay Communities are among its top holdings. TRREX yields 2.1 percent and has been managed by David Lee since 1997.
You have a darn good friend, and may God bless the engineers.
Please address your financial questions to Malcolm Berko, P.O. Box 8303, Largo, FL 33775 or e-mail him at Visit Creators Syndicate website at
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