Unlocking the Potential of Cash Available for Distribution (CAD) in Real Estate Investment Trusts
What Is Cash Available for Distribution (CAD)?
Cash Available for Distribution (CAD) is an essential metric for investors analyzing Real Estate Investment Trusts (REITs). CAD starts from the amount earned by a REIT, identified as Funds From Operations (FFO), and deducts the costs of recurring capital expenditures. These expenditures can include the necessary maintenance and enhancement activities such as replacing building roofs, resurfacing parking lots, and undertaking major repairs to HVAC equipment.
Being knowledgeable in CAD helps investors better gauge the financial health and potential yield of REIT shares. The ratio of market price to CAD is invaluable in estimating how well a REIT plays in terms of value.
Example of Cash Available for Distribution
Here’s a detailed example that breaks down the CAD calculation process:
- Net Income: $1,000,000
- Add: Depreciation: $150,000
- Add: Amortization of Deferred Charges: $50,000
Combining these amounts gives us the Funds From Operations (FFO):
- Funds From Operations (FFO): $1,200,000
We then subtract the recurring capital expenditures to find the CAD:
- Less: Recurring Capital Expenditures: $75,000
Concluding the process, we get:
- Cash Available for Distribution: $1,125,000
This final figure of $1,125,000 is available for distribution to shareholders, acting as a key metric to assess the underlying profitability and sustainability of the REIT’s distributions.
Frequently Asked Questions
1. What is the significance of CAD for REIT investors?
CAD is significant as it indicates the actual cash flow available from a REIT after all necessary capital expenditures. This metric helps in assessing the sustainability and growth prospects of dividend payouts to investors.
2. How does CAD differ from other financial metrics?
While Funds From Operations (FFO) provides a view of the operational income of a REIT, CAD further refines this by accounting for the needed capital expenditures, giving a more realistic figure of what is available for distribution.
3. Can CAD be used to compare different REITs?
Yes, CAD is an effective tool to compare the financial health of different REITs as it provides a clear picture of the cash flow available for dividends, which is a major consideration for investors.
4. Are there any limitations to using CAD as a metric?
One limitation of CAD is that it may not account for all future capital expenditures or unexpected costs, which can affect cash flows. Investors should use CAD in conjunction with other metrics for a holistic analysis.
5. How frequently is CAD reported by REITs?
Most REITs report their CAD figures on a quarterly basis, alongside their regular financial earnings reports. This frequency helps investors keep up-to-date on the REIT’s financial stance.
Further research on CAD and other financial metrics will significantly enhance investment strategies, guiding towards informed decisions and optimized portfolios.
Related Terms: Funds from Operations, Net Income, Depreciation, Amortization, Capital Expenditures.
