====== Cash Available for Distribution (CAD) ======
===== The 30-Second Summary =====
  *   **The Bottom Line:** **CAD is the true "take-home pay" of a business, revealing the actual cash left over to pay shareholders after all necessary operating and maintenance costs are settled.**
  *   **Key Takeaways:**
  * **What it is:** A cash flow metric, primarily used for [[real_estate_investment_trust_reit|REITs]], that refines [[funds_from_operations_ffo|Funds From Operations (FFO)]] by subtracting essential, recurring capital expenditures.
  * **Why it matters:** It provides a far more realistic view of a company's ability to sustain its dividend than standard earnings, helping investors avoid dangerous [[dividend_trap|dividend traps]].
  * **How to use it:** Calculate the CAD Payout Ratio (Dividends / CAD) to instantly gauge the safety of a company's dividend; a ratio consistently below 90-95% is a sign of health.
===== What is Cash Available for Distribution (CAD)? A Plain English Definition =====
Imagine you own a small apartment building.
At the end of the month, you collect all the rent. This is your revenue. From that, you pay the mortgage, property taxes, insurance, and the electric bill for the hallways. What's left over looks like a nice profit. This is similar to a company's operating income.
Now, your accountant, following the rules, tells you that you must also deduct "depreciation." She says the building is getting older and theoretically losing value, so you have to subtract a non-cash expense from your profit. This makes your official "Net Income" look smaller, even though no actual money left your pocket for depreciation. This is where many investors get confused. A company can have low net income but be flush with cash.
To get a clearer picture, real estate investors created a metric called [[funds_from_operations_ffo|Funds From Operations (FFO)]]. It smartly adds back that phantom depreciation expense to net income, giving you a better idea of the cash your property is generating.
But are you really free to spend all that FFO cash?
Not so fast. This year, the water heater in Unit 3B broke and had to be replaced. The roof started leaking and needed patching. The parking lot required re-sealing. These weren't optional upgrades; they were //essential maintenance//. You had to spend real, hard cash to keep the building in good working order and your tenants happy. If you didn't, your "cash-generating" asset would quickly fall into disrepair.
**Cash Available for Distribution (CAD) is the metric that accounts for this reality.**
It takes the FFO figure and subtracts the real cash you spent on these necessary, recurring capital expenditures. What's left is the **true, honest-to-goodness cash** you can put in your own pocket, reinvest to buy another property, or distribute to your business partners (shareholders) without letting your current business crumble.
In short, CAD answers the most critical question a business owner or investor can ask: "After paying all the bills and keeping the business in running shape, how much cash is //actually// left for us, the owners?" It's the ultimate reality check on a company's dividend-paying power.
> //"Earnings are an opinion, cash is a fact. But the intelligent investor digs deeper to find the cash that is truly free and distributable."//
===== Why It Matters to a Value Investor =====
For a value investor, who views a stock not as a flickering ticker symbol but as a piece of a real business, CAD is an indispensable tool. It aligns perfectly with the core tenets of value investing taught by legends like [[benjamin_graham|Benjamin Graham]] and [[warren_buffett|Warren Buffett]].
  *   **Focus on True Earning Power:** Value investors are obsessed with a company's sustainable, long-term earning power. GAAP Net Income can be misleading, distorted by non-cash charges like depreciation. Even FFO can be overly optimistic. CAD cuts through the accounting fog. It approximates the real, distributable cash profit of the business, which is the ultimate source of [[intrinsic_value|intrinsic value]] for any enterprise. It helps an investor think like a business owner, not a speculator.
  *   **Strengthening the [[margin_of_safety|Margin of Safety]]:** The cornerstone of value investing is the margin of safety—demanding a buffer between the price you pay and the value you get. When it comes to dividends, CAD is your safety inspector. A company paying a dividend that is comfortably covered by its CAD has a built-in margin of safety. For example, if a company generates $1.00 per share in CAD and pays out an $0.80 dividend, it has a $0.20 cushion. This cash can be used to weather a downturn, reduce debt, or grow the business. Conversely, a company paying a $1.20 dividend from $1.00 of CAD is funding that dividend with debt or by selling assets. This is the definition of an unsafe, unsustainable situation, and CAD makes it glaringly obvious.
  *   **Avoiding the Dreaded Dividend Trap:** High dividend yields can be incredibly alluring, but they often mask underlying business decay. A [[dividend_trap]] is a stock that offers a high yield that is ultimately unsustainable, leading to a dividend cut and a collapsing stock price. Investors who rely solely on Net Income or FFO to judge dividend safety can easily fall into this trap. A quick check of the CAD Payout Ratio is one of the most effective ways to identify and sidestep these value-destroying investments. If the company isn't generating the cash to pay you, the high yield is a mirage.
  *   **Promoting Long-Term Thinking:** CAD forces an investor to consider the long-term health of the company's assets. By explicitly subtracting maintenance costs, it recognizes that a business must continually reinvest in itself just to stand still. A management team that ignores this and pays out excessive dividends is essentially liquidating the company slowly. A value investor uses CAD to find businesses run by prudent capital allocators who balance shareholder returns with the long-term stewardship of the business.
===== How to Calculate and Interpret Cash Available for Distribution (CAD) =====
Because CAD is a non-GAAP (Generally Accepted Accounting Principles) metric, there isn't one single, universally mandated formula. Companies have some leeway. This is why it's crucial to always check a company's quarterly supplemental reports or investor presentations to find exactly how they calculate it.
However, the logic is always the same, and the most common formulas are straightforward.
=== The Formula ===
The journey to CAD usually starts with FFO. The most basic calculation is:
`**CAD = Funds From Operations (FFO) - Recurring Capital Expenditures (Capex)**`
A more detailed and often more accurate formula you might see is:
`**CAD = FFO - Recurring Capex - Straight-Line Rent Adjustments - Other Non-Cash Items**`
Let's break down the key components:
  *   **Funds From Operations (FFO):** This is the starting point. Think of it as a rough proxy for the cash flow from real estate operations. It's calculated as `Net Income + Depreciation + Amortization - Gains on Sale of Property`. You'll almost always find this number clearly stated in a REIT's earnings report.
  *   **Recurring Capital Expenditures:** This is the most important adjustment. This is the cash spent to maintain the quality and competitiveness of the company's existing properties. It's often called "maintenance capex" or "stay-in-business capex."
    *   **Examples:** Replacing a roof, repaving a parking lot, upgrading an HVAC system, costs for tenant improvements (TI), and leasing commissions (LCs) to keep properties occupied.
    *   **Crucial Distinction:** This is different from //growth capex//, which is money spent to acquire new properties or develop new buildings. Growth capex expands the business, while recurring capex just maintains it. CAD only subtracts the maintenance portion.
  *   **Straight-Line Rent Adjustments:** This is an accounting nuance. GAAP rules often require companies to "smooth out" or average rental income over the life of a lease, even if the cash rent payments increase over time. This creates a non-cash revenue item. Since it's not cash received //this year//, it must be subtracted to get a true picture of cash flow.
=== Interpreting the Result ===
The raw CAD number itself isn't very useful. Its power comes from putting it into context, primarily through the **CAD Payout Ratio**.
**The CAD Payout Ratio = Total Dividends Paid / Cash Available for Distribution**
This simple ratio tells you what percentage of the company's true distributable cash flow is being returned to shareholders as dividends.
  *   **CAD Payout Ratio Below 80%:** This is a very strong sign. The dividend is exceptionally well-covered. The company is retaining a significant amount of cash, which it can use to pay down debt, fund growth projects without issuing new stock, or buy back shares. This provides a huge [[margin_of_safety]].
  *   **CAD Payout Ratio Between 80% and 95%:** This is a common and generally acceptable range for stable REITs. ((REITs are legally required to distribute at least 90% of their taxable income to shareholders, so their payout ratios are naturally high.)) In this range, the dividend is covered, but there's less of a cushion. An investor should look for a history of stability and consistent growth in CAD per share.
  *   **CAD Payout Ratio Above 100%:** **This is a major red flag.** The company is paying out more cash in dividends than it is generating from its operations. This is fundamentally unsustainable. The shortfall must be funded by taking on new debt or selling assets. Unless the company has a clear and believable path to rapidly growing its CAD, a dividend cut is highly probable.
**Beyond the Snapshot:** A true value investor never relies on a single data point. The most valuable insights come from analyzing the **trend** over several years.
  *   Is CAD per share consistently growing, flat, or declining?
  *   Is the payout ratio stable, or has it been creeping up toward that dangerous 100% level?
A company with a growing CAD per share and a stable payout ratio is a far superior long-term investment than one with flat CAD and a rising payout ratio, even if their current yields are identical.
===== A Practical Example =====
Let's analyze two hypothetical companies in the same industry: "Steady Office Properties" and "Glamour Growth Towers." At first glance, they look similar, both offering a 5% dividend yield.
A superficial investor might look only at FFO, a commonly cited metric.
^ Metric ^ Steady Office Properties ^ Glamour Growth Towers ^
| Funds From Operations (FFO) | $100 million | $110 million |
| Dividends Paid | $80 million | $88 million |
| **FFO Payout Ratio** | **80%** ($80m / $100m) | **80%** ($88m / $110m) |
Based on FFO, both companies seem equally healthy, with identical 80% payout ratios. Now, let's apply the value investor's lens and dig down to CAD.
We read the company reports and find that Glamour Growth Towers owns newer, shinier buildings but must constantly spend money on high-end tenant improvements and commissions to attract trendy tech tenants. Steady Office owns older, but well-maintained buildings with long-term, stable tenants, requiring less upkeep.
^ Metric ^ Steady Office Properties ^ Glamour Growth Towers ^
| Funds From Operations (FFO) | $100 million | $110 million |
| //Recurring Capital Expenditures// | - $10 million | - $30 million |
| **Cash Available for Distribution (CAD)** | **$90 million** | **$80 million** |
| Dividends Paid | $80 million | $88 million |
| | | |
| **CAD Payout Ratio** | **88.9%** ($80m / $90m) | **110%** ($88m / $80m) |
The CAD analysis completely flips the script.
  *   **Steady Office Properties** has a healthy and sustainable dividend. It generates $90 million in true cash and pays out $80 million, leaving $10 million as a safety buffer. Its 88.9% CAD payout ratio is reasonable and safe.
  *   **Glamour Growth Towers** is a [[dividend_trap]] in the making. Despite its higher FFO, its high maintenance costs mean it only generates $80 million in true distributable cash. Yet, it's paying out $88 million to shareholders! That $8 million deficit is being funded by other means, likely debt. Its 110% payout ratio is a flashing red light signaling extreme danger.
This example shows how CAD allows an investor to look past the surface-level numbers and understand the true economic reality of a business, instantly separating a sustainable investment from a precarious one.
===== Advantages and Limitations =====
Like any financial metric, CAD is a powerful tool, but it's not infallible. A wise investor understands both its strengths and its weaknesses.
==== Strengths ====
  * **Superior Realism:** CAD provides a much more realistic picture of a company's dividend-paying capacity than Net Income or even FFO because it accounts for the non-negotiable cash costs of maintaining business assets.
  * **Excellent for Dividend Analysis:** The CAD Payout Ratio is arguably the single best metric for quickly assessing the safety and sustainability of a dividend, particularly for REITs and similar entities.
  * **Highlights Management Quality:** Analyzing a company's CAD calculation and its trend over time can reveal how disciplined and shareholder-friendly management is. Prudent managers will clearly define and manage their recurring capex.
==== Weaknesses & Common Pitfalls ====
  * **Non-GAAP Inconsistency:** This is the biggest drawback. Because there is no strict, audited standard, companies can define CAD differently. One company might classify a certain expense as "growth capex" (which isn't subtracted), while a more conservative competitor calls it "recurring capex" (which is). This can make direct, apples-to-apples comparisons between companies difficult without careful scrutiny of their financial footnotes.
  * **Potential for Manipulation:** A dishonest management team could intentionally misclassify essential maintenance costs as growth projects to artificially inflate the reported CAD number and make their dividend look safer than it really is. **Always be skeptical.**
  * **Quarterly Lumps:** Recurring capex is not always spent evenly. A company might replace all the roofs in a large portfolio in the second quarter, causing CAD for that single quarter to look terrible. It's often better to use a Trailing Twelve Month (TTM) CAD figure to smooth out this lumpiness and get a more accurate view.
===== Related Concepts =====
  * [[funds_from_operations_ffo]]: The metric from which CAD is derived; understanding FFO is the first step to understanding CAD.
  * [[real_estate_investment_trust_reit]]: The asset class where CAD is most widely used and critically important.
  * [[free_cash_flow]]: The conceptual cousin of CAD used for general corporations. Both aim to measure the cash left over for owners after all expenses and necessary investments.
  * [[dividend_payout_ratio]]: CAD provides a more reliable denominator for this ratio, giving a truer picture of dividend safety.
  * [[dividend_trap]]: A high-yield stock with an unsustainable dividend. Analyzing CAD is a primary defense against falling into one.
  * [[margin_of_safety]]: A healthy cushion between CAD and the dividend paid is a classic example of a margin of safety in practice.
  * [[intrinsic_value]]: For income-focused investments, a reliable and growing stream of CAD is a fundamental component of the company's intrinsic value.