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.
How to Calculate Cash Available for Distribution (CAD)?
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.
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)
Cash Available for Distribution Formula (CAD)
There is no officially recognized formula for cash available for distribution (CAD) by Nareit. However, the most generalized variation of the CAD formula is as follows.
To reiterate once more, the components of a REIT’s reported CAD can vary widely based on management discretion.
Since there is no universally accepted formula to calculate cash available for distribution (CAD), the only course of action is to be more attentive to each adjustment, given the shortcomings of the metric.
The funds from operations (FFO) metric reflects the operating performance of a real estate property investment. The formula to compute FFO adjusts the net income attributable to common shareholders for non-cash items, namely depreciation, while subtracting any net gains on asset sales and netting losses from non-controlling interests (e.g. interest expense) against NCI earnings (e.g. cash dividends).
Considering the future performance of a REIT with regard to profit potential and cash flow is a function of the real estate assets in the REIT’s portfolio, the primary non-cash item added back is depreciation expense.
The main distinction between cash available for distribution (CAD) and funds from operations (FFO) is that CAD is adjusted to exclude more non-recurring items while deducting capital expenditures (Capex).
Once the adjustments to the funds from operations (FFO) metric are applied, the remaining profits represent the cash on hand that is available to be distributed to shareholders as dividends.
Cash Available for Distribution Calculator (CAD)
We’ll now move to a modeling exercise, which you can access by filling out the form below.
REIT CAD Calculation Example
Suppose we’re tasked with calculating the cash available for distribution (CAD) of Office Properties Income Trust (NASDAQ: OPI) for fiscal years ending 2021 and 2022 using the following historical data.
Calculation of FFO, Normalized FFO and CAD (Source: OPI, Q4-2022 Supplementary Filing)
The following table from OPI’s “Supplemental Operating and Financial Data” report from Q4-2022 presents a reconciliation of FFO, Normalized FFO and CAD attributable to shareholders.
From the “Net Income (Loss)” line item, we’ll start to work our way down to cash available for distribution (CAD).
- Funds from Operations (FFO), 2021A = –$8.2 million + $244.9 million + $62.4 million – $78.4 million = $221 million
- Funds from Operations (FFO), 2022A = –$6.1 million + $225.6 million + $21.8 million – $11.0 million = $230.3 million
The add-back of the depreciation and amortization expense (+) and impairment of real estate assets (+) should be intuitive, as those are non-cash expenses.
However, the gain on the sale of real estate (–) is subtracted from net income since the income is not part of the REIT’s core operating activities and is not a recurring source of income, i.e. it is a one-time event.
Our next step is to adjust funds from operations (FFO) into a normalized figure, which we’ll accomplish by adding back 3rd party, one-time fees, as well as the gain (–) or loss (+) on the early extinguishment of debt. Both adjustments are non-operating items, i.e. professional fees and costs related to financing.
In the final step, we must apply quite a few adjustments to the normalized FFO to arrive at cash available for distribution (CAD).
Briefly, the distributions from unconsolidated joint ventures are added, the non-cash expenditures are normalized (e.g. we subtract the straight-line rent adjustments included in rental income), a reversal is applied for the non-cash losses on investments (i.e. the equity method in accounting), the effects of the amortization related to lease value and debt costs are removed via add-back, and the recurring capital expenditures (Capex) are subtracted.
Upon applying each adjustment to the normalized FFO, we arrive at $126.7 million and $155.0 million for the cash available for distribution (CAD) for fiscal years 2022 and 2021, respectively.
- Cash Available for Distribution (CAD), 2021A = $155.0 million
- Cash Available for Distribution (CAD), 2022A = $126.7 million (18% YoY Decline)