What is Cash Available for Distribution (CAD)?
Cash Available for Distribution (CAD) quantifies the cash on hand that a real estate investment trust (REIT) can distribute in the form of dividends to shareholders.
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How to Calculate Cash Available for Distribution (CAD)
CAD stands for “Cash Available for Distribution” and reflects the operating performance of a REIT, which owns a portfolio of income-generating real estate property assets.
Cash available for distribution (CAD) measures a REIT’s residual cash flow to determine its capacity to issue dividends to shareholders.
In practice, the cash available for distribution (CAD) is predominately used to analyze the operating performance of REITs.
Why? The distribution of profits to shareholders in the form of dividends is an obligatory part of the REIT business model, so the CAD metric must be monitored by real estate investors to ensure enough profits are being generated to sustain its dividend payout.
Therefore, cash available for distribution (CAD) is designed to offer a more accurate measure of a REIT’s current capacity to generate cash flow.
The primary use-case of CAD is to determine the safety (i.e. “cushion”) of a particular REIT’s capacity to issue dividends since the metric represents the excess cash from which dividends are paid.
The calculation of CAD starts with net operating income (NOI), which is adjusted for non-cash items such as depreciation and amortization (D&A) while omitting capital expenditures (Capex).
Using traditional GAAP earnings metrics to gauge the profitability of REITs is unreliable. Instead, non-GAAP measures specific to the real estate sector, such as net operating income (NOI), offer more insights into the actual financial state of REITs with regard to profitability and cash flow.
CAD vs. FFO: What is the Difference?
Contrary to an industry-standard metric such as funds from operations (FFO) – which was developed and formally recognized by Nareit – there is no standardized formula to compute cash available for distribution (CAD).
The lack of standardization can serve as a barrier to using the CAD metric, especially for real estate acquisitions.
For example, the management team of a REIT could adjust their reported CAD metric further for other costs related to leasing (e.g. leasing commissions and tenant improvement allowances), as well as normalizing adjustments to rent.
These sorts of discretionary adjustments applied to determine the CAD can cause discrepancies among REITs. Therefore, it is imperative to identify and grasp each adjustment before performing any sort of comparative analysis.
Otherwise, comps analysis runs the risk of being distorted by the CAD metrics because of the different methods used to compute the metric (and can thus be misleading to investors).
While the cash available for distribution (CAD) metric is frequently used interchangeably with the adjusted funds from operations (AFFO) metric, there are often instances where the two are marginally different.
For instance, a REIT could perhaps calculate its adjusted FFO by deducting only the routine, recurring capital expenditures (Capex) since certain investors perceive the AFFO metric as reflecting the “run rate” profitability from core operating activities.
In contrast, the same REIT might deduct the recurring and non-recurring components of Capex in its calculation of CAD, since the CAD metric is a more conservative measure of current performance with more of a focus on actual liquidity (i.e. cash on-hand).
Note: The scenario provided above illustrates how the lack of standardization around the CAD metric creates room for interpretation among institutional real estate firms, which can be problematic for investors in the absence of in-depth diligence.
Cash Available for Distribution Definition (Source: Nareit REIT Terms Glossary)
