Cash Available For Distribution (CAD): Meaning And Examples

Cash Available For Distribution (CAD): Meaning And Examples

Cash Available For Distribution (CAD): Meaning And Examples

Cash available for distribution (CAD) is a crucial metric for evaluating real estate investment trusts (REITs) and their ability to generate cash flow for dividend distributions. In simple terms, CAD refers to the cash-on-hand that a REIT has available to distribute as shareholder dividends.

To calculate CAD, the recurring capital expenditures (CAPEX) are subtracted from the funds from operations (FFO). This calculation provides a more accurate reflection of a REIT’s adjusted cash flows and the amount that investors can expect to receive in dividend distributions.

Key Takeaways:

  • CAD represents a REIT’s cash-on-hand available for distributing dividends to shareholders.
  • CAD is calculated by subtracting recurring capital expenditures from funds from operations (FFO).
  • Boston Properties is an example of a commercial property REIT that calculates CAD through various adjustments to FFO.
  • CAD provides a more comprehensive picture of a REIT’s cash flow and dividend potential compared to other metrics.
  • Yield-focused investors often consider CAD when selecting REITs for recurring income.

How to Calculate CAD

To calculate cash available for distribution (CAD), you need to follow a specific formula. First, start with the funds from operations (FFO), which includes net income, depreciation, interest income and expense, gain on property sale, loss on property sale, income from unconsolidated ventures, and loss from unconsolidated ventures.

Next, subtract the recurring capital expenditures (RCE) from the FFO. Recurring capital expenditures typically include expenses for routine maintenance and repairs, such as replacing roofs or repairing HVAC systems.

Let’s break down the formula:

CAD = FFO – RCE

The resulting CAD value represents the cash that is available to be distributed as dividends to shareholders. By calculating CAD, investors can gain a clearer understanding of a REIT’s cash flow and its ability to provide consistent dividend payments. It is important to note that there is no standardized formula for calculating CAD, so it’s essential to analyze the methodology used by each individual REIT.

Now, let’s take a look at an example to illustrate the calculation process:

Example:

FFO RCE CAD
$10,000,000 $2,000,000 $8,000,000

In this example, the funds from operations (FFO) amount to $10,000,000, while the recurring capital expenditures (RCE) stand at $2,000,000. By subtracting the RCE from the FFO, we calculate the cash available for distribution (CAD) as $8,000,000.

Calculating CAD provides a valuable insight into a REIT’s financial health and its ability to generate cash flow for dividend distributions. It is a key metric that yield-focused investors often consider when selecting REITs for recurring income.

Benefits and Importance of CAD

Cash available for distribution (CAD) is an important metric for evaluating REITs and their ability to generate cash flow for dividend distributions. CAD provides a more accurate measure of a REIT’s current capacity to generate cash flow compared to other metrics, such as funds from operations (FFO). It takes into account recurring capital expenditures and gives investors a clearer picture of how much they can expect to receive in dividend payments.

Yield-focused investors often use CAD as a key metric when selecting REITs for recurring income. By considering the cash available for distribution, investors can assess the sustainability of dividend payments and make informed decisions about their investment portfolio. CAD offers a comprehensive view of a REIT’s financial health, as it factors in both the income generated and the capital expenditures necessary to maintain and grow the portfolio.

However, it is important to note that there is no standardized formula for calculating CAD. Each REIT may have its own methodology to determine the cash available for distribution. Therefore, analysts and investors should be cautious and take the time to understand how CAD is calculated by the specific REIT they are interested in.

Benefits of CAD:

  • Accurate measure of a REIT’s cash flow
  • Provides insight into dividend sustainability
  • Helps investors make informed decisions

Difference Between CAD and FFO

When comparing cash available for distribution (CAD) and funds from operations (FFO), the key difference lies in their treatment of capital expenditures. CAD takes into account recurring capital expenditures and subtracts them from FFO to determine the cash that is available for dividend distributions. On the other hand, FFO represents the operating performance of a REIT and does not consider capital expenditures.

While FFO is a commonly used metric in the REIT sector, CAD provides a more conservative measure of a REIT’s current performance and liquidity. By subtracting capital expenditures, CAD gives a clearer picture of the cash flow that can be distributed to shareholders as dividends.

It is essential to note that there is no standardized formula for calculating CAD, which means that the calculation may vary between REITs. As an investor, it is crucial to analyze both CAD and FFO to gain a comprehensive understanding of a REIT’s financial health. By considering both metrics, you can evaluate the REIT’s cash distribution and cash flow distribution to make informed investment decisions.

Aspect Cash Available for Distribution (CAD) Funds From Operations (FFO)
Definition Represents the actual cash generated by a real estate investment trust (REIT) that is available for distribution to investors. A metric used by real estate investment trusts (REITs) to define the cash generated by their operations. It excludes gains or losses from property sales.
Calculation Net income + non-cash items (e.g., depreciation) – maintenance capital expenditures. Net income + depreciation and amortization of real estate assets – gains/losses on sales of properties.
Purpose Indicates the cash flow generated by a REIT that can be distributed to shareholders as dividends. Reflects the cash generated by a REIT’s core operations, providing a better measure of its ability to sustain dividends.
Focus on Cash Flow Emphasizes actual cash flow, taking into account the cash needed for maintaining and upgrading properties. Focuses on cash generated by core operations, excluding the impact of property sales or gains.
Treatment of Capital Expenditures Deducts maintenance capital expenditures from net income to provide a more accurate representation of distributable cash. Usually excludes capital expenditures, but it includes depreciation and amortization to reflect the economic impact of property ownership.
Use in Valuation Helps investors assess a REIT’s ability to generate cash and distribute dividends. Provides a measure of cash flow that can be more indicative of a REIT’s operating performance compared to traditional accounting metrics.
Adjustments for Non-Cash Items Focuses on cash-generating potential, excluding non-cash items like depreciation. Includes non-cash items like depreciation to provide a more comprehensive measure of operating performance.
Applicability Primarily used in the context of REITs and similar real estate investment vehicles. Mainly used in the real estate industry to evaluate the financial performance of REITs.

FAQ

What does cash available for distribution (CAD) mean?

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.

How do you calculate CAD?

To calculate cash available for distribution (CAD), subtract recurring capital expenditures from funds from operations (FFO).

What is the importance of CAD?

CAD provides a more complete picture of a REIT’s adjusted cash flows and the amount investors can expect to receive in dividend distributions.

What is the difference between CAD and funds from operations (FFO)?

The main difference is that CAD takes into account recurring capital expenditures, while FFO does not.

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