Cash Available for Distribution (CAD)

Detailed Definition

Cash Available for Distribution (CAD) represents the portion of income produced by a Real Estate Investment Trust (REIT) that is available to be distributed to its shareholders after subtracting the funds used for recurring capital expenditures. These activities can include replacing building roofs, resurfacing parking lots, and conducting major repairs on heating, ventilation, and air conditioning (HVAC) systems.

CAD serves as a crucial indicator for REIT investors, reflecting the trust’s capacity to generate cash that can be disbursed as dividends. It provides a more accurate picture of financial health compared to just net income since it factors in the essential maintenance costs necessary to sustain property operations.

Example Calculation

To better understand CAD, consider the following calculation:

Net Income: $1,000,000
Add: Depreciation: $150,000
Add: Amortization of Deferred Charges: $50,000
- Funds From Operations (FFO) = $1,200,000
Less: Recurring Capital Expenditures: $75,000
- Cash Available for Distribution (CAD) = $1,125,000

This calculation begins with the net income of the REIT and adds back non-cash expenses like depreciation and amortization. From this, any necessary recurring capital expenditures are subtracted to arrive at the CAD.

Uses and Applications

Valuation Metrics: The ratio of a REIT’s market price to CAD can help estimate the value of the REIT’s shares.
Dividend Sustainability: CAD indicates the amount of liquid cash available for distribution as dividends, providing insights into the sustainability of dividend payments.
Investment Decisions: Investors may analyze CAD to gauge the long-term performance and reliability of returns from REIT investments.

Frequently Asked Questions (FAQs)

What is the difference between CAD and FFO?

Funds From Operations (FFO) adjusts the net income by adding back real estate depreciation and excluding gains or losses on asset sales. CAD further deducts necessary recurring capital expenditures from FFO to reflect the actual cash available for distribution.

Why is CAD important for REIT investors?

CAD is important as it reflects the REIT’s ability to generate cash for distribution to shareholders. It offers a more realistic view of the distributable earnings by factoring in the essential maintenance costs.

How does CAD affect dividend payouts?

CAD directly impacts dividend payouts, as it represents the available cash that can be distributed to shareholders after covering essential maintenance expenses. A higher CAD indicates a healthier, more sustainable dividend.

Is CAD specific to REITs?

Yes, CAD is particularly relevant to REITs, given their obligation to distribute a substantial portion of earnings to shareholders. It helps assess the distributable income after accounting for property upkeep costs.

Can CAD be negative?

While unusual, CAD can be negative if the REIT’s recurring capital expenditures exceed its FFO. This scenario suggests that the REIT might need to draw on reserves or leverage to meet dividend obligations.

Real Estate Investment Trust (REIT): A company owning, operating, or financing income-producing real estate and distributing at least 90% of taxable income to shareholders.
Funds From Operations (FFO): A measure of cash generated by a REIT from its operations, calculated by adding depreciation and amortization to net income and excluding gains or losses on sales.
Net Operating Income (NOI): Income generated from real estate operations, calculated by subtracting operating expenses from revenue, excluding interest, taxes, and depreciation.

Online Resources

Investopedia: What is Cash Available for Distribution?
NERA Economic Consulting: Understanding Real Estate Investment Trusts (REITs)
National Association of Real Estate Investment Trusts (Nareit): REIT 101: An Overview

References

National Association of Real Estate Investment Trusts (Nareit), “REIT Production Framework”, Retrieved from www.reit.com
Lindy, T., 2020, “Equity and Real Estate Investments”, McGraw-Hill.

Suggested Books for Further Studies

“Real Estate Investment Trusts: Income, Risk, and Performance” by Richard Garrigan
“Investing in REITs: Real Estate Investment Trusts” by Ralph L. Block
“The Complete Guide to Investing in REITs: Real Estate Investment Trusts” by Mark Gordon and Donald Brosh

Real Estate Basics: Cash Available for Distribution (CAD) Fundamentals Quiz

### What constitutes Cash Available for Distribution (CAD) for a REIT? - [ ] Net income after tax - [ ] Gross rental income from properties - [x] Funds from Operations after recurring capital expenditures - [ ] Net income before depreciation > **Explanation:** CAD is calculated by adjusting Funds From Operations (FFO) to account for recurring capital expenses, making it a better measure of the actual distributable cash available for shareholders. ### Why is CAD a preferred measure over net income in evaluating REIT performance? - [ ] Because net income ignores depreciation - [x] Because net income does not account for recurring capital expenditures - [ ] Because net income always overstates actual cash flow - [ ] Because FFO is always larger than net income > **Explanation:** Net income does not take into account recurring capital expenditures, which are essential for maintaining the revenue-generating capacity of the property. ### Which expense type is subtracted from FFO to arrive at CAD? - [ ] Mortgage interest - [ ] Property management fees - [x] Recurring capital expenditures - [ ] New property acquisitions costs > **Explanation:** To arrive at CAD, recurring capital expenditures are subtracted from the Funds From Operations (FFO). ### What is the primary purpose of calculating CAD for a REIT? - [ ] To determine potential property acquisitions - [ ] To understand tenant occupancy rates - [x] To assess the amount available for dividend distribution - [ ] To categorize different property types > **Explanation:** CAD is calculated primarily to determine the amount of cash that is available for distribution to shareholders in the form of dividends. ### Can CAD be higher than FFO? - [ ] Yes, always - [x] No, CAD accounts for additional expenditures reducing it compared to FFO - [ ] Yes, under certain accounting treatments - [ ] No, CAD does not consider expenditures > **Explanation:** CAD is always equal to or lower than FFO because it accounts for additional recurring capital expenditures. ### Which is typically NOT a consideration when calculating CAD? - [ ] Depreciation additions - [ ] Recurring capital expenditures - [x] Market fluctuations in property value - [ ] Amortization of deferred charges > **Explanation:** Market value changes do not form part of the CAD calculation. ### How does CAD impact REIT's investment attractiveness? - [ ] It helps in assessing the expected property appreciation - [x] It offers insight into dividend sustainability and financial health - [ ] It determines the operational costs effectiveness - [ ] It reflects tax liabilities for shareholders > **Explanation:** CAD gives prospective investors insights into the sustainability of the dividend distributions and overall financial stability of the REIT. ### What financial document is useful for calculating CAD? - [ ] Investment Property Register - [ ] Tenant Lease Agreement - [x] Income Statement - [ ] Zoning Permits > **Explanation:** The income statement provides the net income figures which, when adjusted, help in calculating Funds From Operations and subsequently, CAD. ### How often do REITs distribute CAD? - [ ] Annually - [ ] Whenever there is positive cash flow - [x] Typically quarterly - [ ] Biannually > **Explanation:** REITs usually distribute cash to shareholders in the form of dividends on a quarterly basis. ### Upon finding a high CAD relative to share price, what assumption might an investor make? - [x] The REIT is likely undervalued - [ ] The REIT is overvalued - [ ] The REIT is failing its operational benchmarks - [ ] The REIT will cut dividends > **Explanation:** A high CAD relative to the share price suggests that the REIT might be undervalued, indicating a potentially favorable investment opportunity.