What is cash available for distribution (CAD)?
Cash available for distribution (CAD) refers to a real estate investment trust (REIT) cash that can be distributed as dividends to shareholders. The CAD value is calculated by taking the REIT funds from operations (FFO) and subtracting its recurrence capital expenditure (CAPEX).
CAD is the most liquid subset of funds available for distribution (ADF). The benefit of having a CAD stock is that it provides a more complete picture of a REIT’s adjusted cash flow and how much investors can expect to receive in dividend distributions.
- Cash available for distribution (CAD) is a REIT measure that subtracts recurring capital expenditures from funds from operations (FFO).
- CAD is a non-GAAP measure used as an approximation of a REIT’s cash flow for investors
- The CAD can be increased organically or by acquiring new properties.
- The CAD calculation does not follow a standardized formula in the REIT industry, so analysts and investors should take care to note the methodology used.
Cash available for distribution (CAD) formula
VSAD=FFO−RVSEwhere:VSAD=Cash available for distributionFFO=Funds from operations
How to Calculate CAD
The calculation of cash available for distribution is done by subtracting recurring capital expenditures from funds provided by operations. The formula and calculation of FFO appear below.
What does cash available for distribution tell you?
A real estate investment trust (REIT) is a pooled investment vehicle that owns a portfolio of income-producing properties and/or mortgages and is required to distribute substantially all of its net taxable income to maintain its status as a REITs. In fact, REITs are required to pay out 90% of taxable income earned to investors. Although there is no standardized method for calculating funds available for distribution, many REITs calculate CAD in the same way by adjusting the value of funds from operations for straight-line rentals, non-cash items and any recurring expenses related to real estate.
For income-oriented investors, or so-called yield-oriented investors, cash available for distribution is a key metric for selecting a REIT. REITs are instruments sought after by a segment of investors seeking recurring income or returns, such as retirees supplementing their monthly or quarterly income through their investment return. For this, REITs can increase their yield organically through their own acquired real estate portfolios or through acquisitions.
Example of cash available for distribution
Boston Properties (BXP) is a commercial property REIT that owns properties in Boston, New York, San Francisco, Los Angeles, Washington DC and Reston, Virginia. In 2020, the REIT’s Canadian dollar payout ratio was 96.4%, compared to 86.7% in 2019.
Boston Properties’ financial statements indicate that it calculates CAD by adding to the FFO rental transaction costs that qualify as rent inducements, non-real estate depreciation, non-monetary losses due to the early termination of the debt and stock-based compensation costs; then eliminating the effects of straight line the adjustment of rents and linear land charges; and finally, subtracting the maintenance capital expenditures, hotel improvements and equipment upgrades and replacements. This list of cash flow adjusting items is not exhaustive, but shows how cash and non-cash items are treated to present a more accurate figure of the actual funds available for distribution to investors.
The difference between CAD and FFO
Cash available for distribution calculations does not adhere to a standardized formula in the REIT industry, but is generally defined as the difference between FFO and recurring expenses. Recurring capital expenditures that are typically subtracted from the FFO to determine CAD value include building roof replacements, HVAC system repairs, parking lot resurfacing, and other major routine maintenance work. Some REITs may choose to deduct tenant improvements, rent linearization or rental commissions from FFO.
The National Association of Real Estate Investment Trusts (NAREIT)a trade group for the industry, defines FFO as net income plus depreciation minus the gain on the sale of the property plus the loss on the sale of the property.
An extended formula for FFO is:
∋= Net revenueFFO=NOTI+DA−II+IE−generalist+LP−IV+LVwhere:DA= Depreciation and amortizationII= interest incomeIE= Interest expensegeneralist= Gain on sale of propertyLP= Loss on sale of propertyIV= Income from unconsolidated joint venturesLV= Loss from non-consolidated businesses
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