Cash Available for Distribution (CAD)

What Is Cash Available for Distribution (CAD)?

Cash available for distribution (CAD) refers to a real estate investment trust's (REIT) cash-on-hand that is available to be distributed as shareholder dividends. The CAD value is calculated by taking the REIT's funds from operations (FFO) and subtracting its recurring capital expenditures (CAPEX).

CAD is the most liquid subset of funds available for distribution (FAD). The benefits of having a stockpile of CAD are that it provides a more complete picture of a REIT's adjusted cash flows and how much investors can expect to receive in the form of dividend distributions.

Formula for Cash Available for Distribution (CAD)

C A D = F F O − R C E where: C A D = Cash available for distribution F F O = Funds from operations \begin{aligned} &CAD = FFO - RCE\\ &\textbf{where:}\\ &CAD = \text{Cash available for distribution}\\ &FFO = \text{Funds from operations}\\ &RCE = \text{Recurring capital expenditures} \end{aligned} CAD=FFO−RCEwhere:CAD=Cash available for distributionFFO=Funds from operations

How to Calculate CAD

Calculating cash available for distribution is done by subtracting recurring capital expenditures from funds from operations. The formula and calculation for FFO appear below.

What Does Cash Available for Distribution Tell You?

A real estate investment trust (REIT) is a pooled investment vehicle that holds a portfolio of income-producing properties and/or mortgages and is required to distribute nearly all its taxable net income to maintain REIT status. In fact, REITs are required to pay out 90% of taxable income earned to investors. While there is no standardized method for calculating funds available for distribution, many REITs calculate CAD in a similar way by adjusting the funds from operations value for straight-line rents, non-cash items, and any recurring real estate-related expenses.

To income-oriented investors, cash available for distribution is a key metric to assess a REIT's strength. REITs can increase it organically or through an acquisition.

For REITs, there is no hard and fast rule about CADs and how it’s calculated. Thus, when the metric is calculated by a REIT, the calculation could vary from company to company. As a result, it is a non-GAAP measure and should be treated as pro-forma.

Example of Cash Available for Distribution

Boston Properties (BXP) is a commercial property REIT that owns buildings in Boston, New York, San Francisco, Los Angeles, Washington D.C., and Reston, Virginia. In 2020, the REIT's CAD payout ratio was 96.4% compared with 86.7% in 2019.

Boston Properties' financial statements indicate that it calculates CAD by adding to FFO lease transaction the costs that qualify as rent inducements, non-real estate depreciation, non-cash losses from early extinguishment of debt, and stock-based compensation expense; then eliminating the effects of straight-line rent and straight-line ground rent expense adjustment; and finally, subtracting maintenance capital expenditures, hotel improvements, and equipment upgrades and replacements. This list of cash flow adjustment items is not exhaustive, but it shows how cash and non-cash items are handled to present a more accurate figure of 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 sector, but it is generally defined as the difference between FFO and recurring expenses. Recurring capital expenses that are typically subtracted from the FFO to determine the CAD value include replacing building roofs, HVAC system repairs, resurfacing of parking lots, and other significant routine maintenance. Some REITs may choose to deduct tenant improvements, straight-lining of rents, or leasing commissions from FFO.

The National Association Real Estate Investment Trusts (NAREIT), a trade group for the industry, defines FFO as net income plus depreciation less the gain on property sale plus loss on the property sale.

F F O = N I + D A − I I + I E − G P + L P − I V + L V where: N I =  Net income D A =  Depreciation and amortization I I =  Interest income I E =  Interest expense G P =  Gain on property sale L P =  Loss on property sale I V =  Income from unconsolidated ventures L V =  Loss from unconsolidated ventures \begin{aligned} &FFO = NI + DA - II + IE - GP + LP - IV + LV\\ &\textbf{where:}\\ ∋ = \text{ Net income}\\ &DA = \text{ Depreciation and amortization}\\ &II = \text{ Interest income}\\ &IE = \text{ Interest expense}\\ &GP = \text{ Gain on property sale}\\ &LP = \text{ Loss on property sale}\\ &IV = \text{ Income from unconsolidated ventures}\\ &LV = \text{ Loss from unconsolidated ventures} \end{aligned} FFO=NI+DA−II+IE−GP+LP−IV+LVwhere:NI= Net incomeDA= Depreciation and amortizationII= Interest incomeIE= Interest expenseGP= Gain on property saleLP= Loss on property saleIV= Income from unconsolidated venturesLV= Loss from unconsolidated ventures