Learning From The Start Portfolio: Realty Income - Interest Rate Changes In Real Time

About: Realty Income Corporation (O), Includes: AMZN, COLB, NKE, UMPQ
by: ScottU

The Federal Reserve is poised to increase rates.

On the news shares of Realty Income will be purchased.

Tracking performance over time should net knowledge of at what point in the business cycle, purchases are best made in some rate sensitive securities.

The goal of this portfolio is two fold; one to show positive returns from the long term investing into quality companies, when values present themselves and two, to learn. This purchase falls much further onto the scale of learning than it does expected short term returns. Long term however I think I will do just fine with this purchase. Instead of reporting a trade after I've made it, I will be adding shares of Realty Income (NYSE:O) when the Federal Reserve announces that it has raised the Federal Funds Rate. Depending on where the price of shares is at the announcement I will be purchasing between 10 and 12 shares for this test.

I have a belief that investors must be careful to manage all types of risk, when investing into real estate in any capacity there are a lot of different risks to keep track of, but one of the most prominent is interest rate risk. Right now it appears that the Federal Reserve is starting down a path to raise rates multiple times over the next couple years, this seems like a perfect time to track in real time how an investment into a REIT is affected by changes in interest rates over time.

I have been a shareholder in Realty Income for over three years now, with my last purchase being in 2014 at $44.61 a share. Two years ago I chose them as one of my choices as the number one stock in the world article by Mike Nadel. In my own follow up after the one year mark, I suggested that the stock price might be stretched in terms of valuation, and while the stock did run up to as high as 72 dollars a share, before coming back down to a low of just under 49 dollars a share. My thesis in the follow up has turned out to be fairly correct and while the stock is still slightly overvalued, its nowhere near where it was a few short months ago.


From the beginning I want to state that I don't expect that in the short term shares will appreciate in value. Instead I expect that in the short term the raise in rates, will cause the price of REIT's to drop. I know from my experience working in real estate management and financing what effect rate changes will have on the underlying investment property valuation. I believe that this will hold true with REITs as well. However, I'm not as certain as I would like to be before investing more dollars into other REITs. With triple net leases it is easy to fall into the trap that the company is able to mitigate most risk as expenses are generally passed onto the tenants. The two risks that can not be passed on to tenants are interest rate risk and that associated with changes in lending standards among banks.

What I'll Be Tracking

My hope is that the run up to this expected rate hike has already seen a good amount of the downturn in the stock price take place. The company has seen over a 20% drop in price from its all time high. Like other companies in this portfolio I will be reinvesting all dividends back into Realty Income, adding partial shares to the portfolio each month. On months when the price has dropped I will receive more shares and when the opposite has occurred I will receive less shares. In the medium to long term I expect that the company will continue to provide its share holders with the income that they've become used to receiving, but not nearly as robustly as we've seen over the last couple years.

MerrillEdge has a nifty tracking portion that allows you to see the total capital appreciation or loss in real time. I'm curious to watch this over the first couple months as I expect there will be a loss to start with, and over time through reinvestment I will be able to track both the growth of the position from its starting point, and the long term capital appreciation of both the initial position as well as the reinvestment shares.

Other Positions

Normally when I make a purchase I use the closing prices on the day I made the purchase to give a total portfolio view. Because I'm making this purchase in the future I don't have that luxury, but after the market close on the day the shares are purchased I will add this information as an addendum to the article. Since the last purchase I am happy to report that both Columbia Banking Systems (NASDAQ:COLB) and Umpqua Holdings Company (NASDAQ:UMPQ) have done very well since election results were announced. On the other hand, Amazon (NASDAQ:AMZN) has struggled in the same period. On the whole the portfolio is showing an 18% return on all dollars invested and reinvested. On dollars invested the total return is 20.6% on the initial investments into the portfolio. As of 12/9/2016 all positions are showing a positive return, with Nike (NYSE:NKE) showing a .5% gain as the most recent purchase.

As soon as the rate hike is announced I will make the purchase and report the purchase price in the comment section of this article. Going forward I will report each reinvestment and update the results as discussed above. What other parts of the market are going to be affected by an increase in interest rates? What as investors are you doing to track how rates work for and against positions? Or conversely are there investors out there that are not worried about interest rates at all? I look forward to your responses in the comment section!

Disclosure: I am/we are long ALL COMPANIES MENTIONED AND MAY INCREASE OUR POSITION IN O. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.