Earnings and market indicators that come up often when investing in construction companies, real estate and REITs. 16 terms in total.
Companies that pool money from many investors, invest in real estate such as office buildings and logistics centers, and pay out the rental income as dividends. They must distribute most of their profit (in the US, at least 90% of taxable income), so income-seeking investors favor them, but their share prices tend to weaken when interest rates rise.
e.g. A REIT priced at $10 that pays $0.60 a year has a 6% dividend yield
FFO is a REIT's real operating cash measure: net income plus depreciation, minus gains from property sales. AFFO also subtracts items like building maintenance costs. REITs are valued on FFO rather than net income to judge dividend capacity and value.
e.g. REIT share price / FFO per share = P/FFO (used like the PER of an ordinary company)
A property's annual net operating income (rent minus operating costs) divided by its price. When interest rates rise, investors demand a higher cap rate, so the same rent supports a lower property value.
e.g. Net operating income $50M / building price $1B = 5% cap rate
Occupancy is the share of total floor space that is leased, and vacancy is the share that is empty. Rising vacancy cuts rental income and directly affects the earnings and dividends of REITs and real estate companies.
Property used for business, such as offices, shops, logistics centers and hotels. When remote work and high interest rates push down office values, regional banks holding related loans can also be shaken.
A REIT that owns data centers housing servers and leases them to cloud and AI companies. It draws attention because AI investment is lifting demand, but securing power and the cost of large-scale construction are the keys to its growth.
The interest rate on a home loan secured by the house. In the US the benchmark is mainly the 30-year fixed rate, which moves similarly to the 10-year Treasury yield. Falling mortgage rates boost home sales, which is good news for homebuilders, building materials and furniture stocks.
Starts are the number of homes on which construction has actually begun, and permits are the number of homes approved for building. Permits move ahead of starts, so they serve as a leading indicator of the housing market and help gauge the earnings of builders and building materials companies.
The number of previously built homes sold. They make up most of the US housing market, so this figure is widely watched to see how interest rate changes affect real estate.
The developer buys the land, plans the project and is responsible through sales. The contractor is the construction company that actually builds it. If a project fails, the contractor may have to take on debt it guaranteed, so investors check this when looking at construction stocks.
The total value of contracts a construction company has won but not yet completed, which will become future revenue. A large backlog means several years of revenue are secured, so it is a measure of earnings stability.
e.g. Backlog 30 trillion won, annual revenue 10 trillion won = about 3 years of work secured
Construction contracts a builder wins abroad, in places like the Middle East and Southeast Asia. They are a growth driver independent of the domestic housing market, so construction stocks can move sharply on news of large plant or nuclear power contracts.
The share of revenue spent on construction costs such as materials and labor. When raw material prices and wages rise, the cost ratio goes up and profit falls even on the same revenue.
e.g. Cost ratio 90% = $90 of construction cost for every $100 of revenue
The sale rate is the share of supplied homes that have been contracted, and unsold homes are those left without buyers. Rising unsold inventory can leave builders without construction payments on time and strain their finances. Homes still unsold after completion are seen as an especially serious warning sign.
e.g. If 700 of 1,000 homes are contracted, the sale rate is 70% and 300 homes are unsold
A way of lending based on the income a future development project is expected to generate, rather than on land or company collateral. If sales are weak, the debt cannot be repaid, and losses can spread to the builders that guaranteed it and to the brokerages and savings banks that lent the money.
Reconstruction means tearing down old apartments and building new ones, while redevelopment means rebuilding an entire run-down residential area. News of looser or tighter government regulation can change expectations for construction stocks and local real estate a great deal.