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What Is Cash Available for Distribution (CAF)?

Cash Available for Distribution (CAF) represents the residual cash generated by a company, typically a Real Estate Investment Trust (REIT), that is available to be distributed to its shareholders as Dividends. This metric falls under the broader umbrella of Financial Metrics and is crucial for investors assessing the income-generating capacity of such entities. While the core concept of Cash Flow measures the overall movement of cash into and out of a business, CAF refines this by focusing on the portion that can genuinely be paid out to investors after accounting for essential operational and maintenance costs. Understanding Cash Available for Distribution is vital for investors seeking consistent income, as REITs are legally mandated to distribute a significant portion of their taxable income58.

History and Origin

The concept of Cash Available for Distribution (CAF) largely emerged within the Real Estate Investment Trusts (REITs) sector. REITs themselves were established in the United States in 1960 through the Real Estate Investment Trust Act, designed to allow small investors to pool capital for real estate investments and gain benefits akin to direct property ownership, while also offering risk diversification and professional management57.

As REITs gained prominence, traditional accounting measures like Net Income proved inadequate for evaluating their true operational performance and dividend-paying capacity. This was primarily due to significant non-cash expenses such as Depreciation and Amortization that heavily influence reported earnings but do not represent actual cash outflows54, 55, 56. To address this, the National Association of Real Estate Investment Trusts (Nareit) introduced Funds From Operations (FFO) as a standardized measure of a REIT’s operating performance. 51, 52, 53However, FFO still did not fully capture the cash truly available for distributions, as it often did not deduct for recurring Capital Expenditures necessary to maintain the properties. This gap led to the development and widespread adoption of CAF (also known as FAD or CAD) by analysts and investors as a more refined Non-GAAP Measures to better gauge a REIT's ability to consistently pay distributions. The Nareit website provides extensive resources on REIT market data and terminology, including definitions related to cash available for distribution.

50## Key Takeaways

  • Dividend Capacity Indicator: Cash Available for Distribution (CAF) is a crucial metric for income-focused investors, signaling a REIT's capacity to pay and sustain Dividends.
    49* Non-GAAP Measure: CAF is a non-Generally Accepted Accounting Principles (Non-GAAP) financial measure, meaning its calculation may vary between companies, necessitating careful review of a company's specific methodology.
    47, 48* Operational Health: A healthy CAF indicates that a company is generating sufficient Cash Flow from its core operations to cover expenses, service Debt, and distribute cash to shareholders.
    45, 46* Beyond Earnings: CAF provides a more comprehensive view of a company's financial liquidity and its ability to distribute cash than traditional earnings metrics, which can be distorted by non-cash items like Depreciation.
    43, 44* Strategic Decisions: For management, monitoring CAF helps in strategic decisions regarding capital allocation, Share Repurchases, and investment in new projects.
    41, 42

Formula and Calculation

The calculation of Cash Available for Distribution (CAF) typically begins with a REIT's Funds From Operations (FFO) and then subtracts recurring Capital Expenditures and other non-cash or non-recurring items. While there isn't one universally standardized formula for CAF, the general approach adjusts FFO to reflect the actual cash available for distribution.

A common formula for CAF is:

CAF=FFO−Recurring Capital Expenditures−Non-Cash Rent Adjustments±Other Non-Cash Items\text{CAF} = \text{FFO} - \text{Recurring Capital Expenditures} - \text{Non-Cash Rent Adjustments} \pm \text{Other Non-Cash Items}

Where:

  • FFO (Funds From Operations): This is typically calculated as Net Income plus Depreciation and Amortization, minus gains from the sale of properties.
    39, 40* Recurring Capital Expenditures: These are the regular expenditures required to maintain the existing properties and assets of the REIT, ensuring their continued operation and income generation. This excludes capital expenditures for new investments or growth.
    38* Non-Cash Rent Adjustments: This often refers to "straight-lining of rents," an accounting adjustment that smooths out rental income over the life of a lease, even if cash payments fluctuate. This non-cash portion is removed to reflect actual cash received.
    37* Other Non-Cash Items: This can include various non-cash expenses or revenues that are part of the Income Statement but do not affect actual cash availability for distribution.

It is critical for investors to review the specific calculation methodology reported by each company, as definitions can vary.
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Interpreting the Cash Available for Distribution (CAF)

Interpreting Cash Available for Distribution (CAF) involves understanding its implications for a company's financial health and its ability to return value to shareholders. A higher CAF generally indicates a stronger capacity for a REIT to pay and potentially grow its Dividends. Investors often compare a REIT's CAF to its dividend payout to determine the sustainability of these distributions. If CAF significantly exceeds the dividends paid, it suggests a healthy cushion, allowing for potential dividend increases, Share Repurchases, or reinvestment in the business.
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Conversely, if dividends paid are close to or exceed CAF, it may signal that the distributions are less sustainable in the long term, potentially leading to future dividend cuts or a reliance on external financing. A declining trend in Cash Available for Distribution over multiple periods could indicate operational challenges or increasing maintenance costs that are eroding the cash flow available to investors. Analysts use CAF to assess not only the current Dividend Yield but also the long-term viability of a REIT's income stream. This metric offers a more realistic picture of a company's true cash-generating ability from its core operations, distinct from accounting profits shown in standard Financial Statements.
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Hypothetical Example

Consider a hypothetical Real Estate Investment Trust (REIT), "Diversified Properties REIT," which reported the following for a given quarter:

  • Net Income: $1,500,000
  • Depreciation: $400,000
  • Amortization: $50,000
  • Gain on Sale of Property: $100,000
  • Recurring Capital Expenditures: $250,000
  • Non-Cash Rent Adjustments (straight-line rent): $30,000

First, we calculate the Funds From Operations (FFO):

FFO=Net Income+Depreciation+Amortization−Gain on Sale of Property\text{FFO} = \text{Net Income} + \text{Depreciation} + \text{Amortization} - \text{Gain on Sale of Property} FFO=$1,500,000+$400,000+$50,000−$100,000=$1,850,000\text{FFO} = \$1,500,000 + \$400,000 + \$50,000 - \$100,000 = \$1,850,000

Next, we calculate the Cash Available for Distribution (CAF):

CAF=FFO−Recurring Capital Expenditures−Non-Cash Rent Adjustments\text{CAF} = \text{FFO} - \text{Recurring Capital Expenditures} - \text{Non-Cash Rent Adjustments} CAF=$1,850,000−$250,000−$30,000=$1,570,000\text{CAF} = \$1,850,000 - \$250,000 - \$30,000 = \$1,570,000

Diversified Properties REIT has $1,570,000 in Cash Available for Distribution for the quarter. If the REIT has 1,000,000 outstanding shares and pays a quarterly dividend of $1.50 per share (totaling $1,500,000 in dividends), its CAF of $1,570,000 indicates that it has sufficient cash to cover its dividend payments with a small surplus. This surplus provides a Cash Flow cushion, which is a positive sign for investors concerned about the sustainability of the Dividends.

Practical Applications

Cash Available for Distribution (CAF) is predominantly used in the analysis of Real Estate Investment Trusts (REITs) and other income-producing real estate entities. Its practical applications extend across various areas of investment analysis and corporate finance:

  • Dividend Sustainability Assessment: For investors who prioritize income, CAF serves as a primary indicator of a REIT's ability to generate sufficient Cash Flow to cover its Dividends. A consistent CAF that comfortably exceeds dividend payouts is a strong sign of reliable income for shareholders.
    31* Valuation and Performance Metrics: While traditional metrics like earnings per share (EPS) are less reliable for REITs due to significant Depreciation expenses, CAF, alongside Funds From Operations (FFO), offers a more accurate picture of a REIT's operating performance and value. 29, 30It helps in evaluating the true cash profitability of the underlying real estate assets.
    28* Capital Allocation Decisions: For REIT management, CAF provides insights into the capital available for reinvestment, Share Repurchases, or reducing Debt. 26, 27A robust CAF allows a REIT to pursue growth opportunities through new property acquisitions or developments without compromising its dividend distributions.
  • Investor Due Diligence: When conducting due diligence on a REIT, analysts scrutinize CAF to understand its financial health and operational efficiency. Factors such as rental income, occupancy rates, and effective management of expenses significantly influence the CAF amount. 25Analyzing trends in CAF over several periods can reveal the consistency and growth prospects of a REIT's cash-generating capabilities. The National Association of Real Estate Investment Trusts (NAREIT) provides various market data and resources, emphasizing the importance of specific financial metrics for evaluating REITs.

24## Limitations and Criticisms

Despite its utility, Cash Available for Distribution (CAF) comes with certain limitations and criticisms that investors should consider. Primarily, CAF is a Non-GAAP Measures, meaning there is no single, universally standardized definition or calculation methodology across all companies. 22, 23This lack of standardization can lead to inconsistencies in how different REITs report their CAF, making direct comparisons challenging. 20, 21Companies have flexibility in what they include or exclude, which can potentially impact the reported figure. 19The U.S. Securities and Exchange Commission (SEC) provides guidance on the use of non-GAAP financial measures, cautioning against their misleading use, especially if they exclude normal, recurring cash operating expenses.

18Another criticism is that while CAF accounts for recurring Capital Expenditures to maintain existing assets, it may not fully capture the entirety of a REIT's long-term capital needs, especially for property upgrades, redevelopments, or significant tenant improvements beyond routine maintenance. 17Some argue that CAF, like other cash flow metrics, can be short-term in nature and might not fully reflect long-term capital requirements for asset preservation or modernization, which can impact future Cash Flow. 16For instance, older properties may require substantial capital infusions over time to remain competitive and maintain their income-producing capacity. Therefore, relying solely on CAF without considering the age and condition of a REIT's portfolio or its future capital investment plans could lead to an incomplete assessment of its financial sustainability. Academic research, such as studies from Cornell University, often delves into the intricacies of REIT financial performance and valuation, highlighting the importance of looking beyond single metrics.

15## CAF vs. Adjusted Funds From Operations (AFFO)

Cash Available for Distribution (CAF) and Adjusted Funds From Operations (AFFO) are both non-GAAP metrics widely used to evaluate the performance and dividend-paying capacity of Real Estate Investment Trusts (REITs). While often used interchangeably, there can be subtle differences in their calculation and definition, leading to potential variations in the reported figures.
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The primary goal of both CAF and AFFO is to provide a more accurate measure of a REIT's distributable Cash Flow than Funds From Operations (FFO). Both metrics typically start with FFO and then deduct recurring Capital Expenditures necessary to maintain the properties. 13They also often adjust for non-cash items such as straight-line rent adjustments, which are accounting entries that smooth out rental income over the lease term, regardless of when the cash is actually received.
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The key distinction, when it exists, often lies in the specific "other adjustments" made. Some companies or analysts might include or exclude different non-recurring expenses, leasing commissions, or tenant improvement allowances when calculating CAF versus AFFO. 9, 10For example, one REIT might define its CAF to be slightly more conservative by including a broader range of non-recurring capital outlays, while another's AFFO might focus strictly on routine maintenance. Because neither CAF nor AFFO has a standardized definition, investors must carefully review each company's Financial Statements and supplemental disclosures to understand the precise components of their reported metric. The underlying confusion largely stems from this lack of industry-wide uniformity, despite both metrics aiming to provide a clearer picture of a REIT's distributable Dividends.

FAQs

Q1: Why is Cash Available for Distribution (CAF) important for REIT investors?
A1: CAF is crucial for REIT investors because it provides a realistic measure of how much Cash Flow a REIT generates that can actually be paid out as Dividends to shareholders. 8Since REITs are known for their high dividend payouts, CAF helps investors assess the sustainability and safety of these income streams, which is more accurate than just looking at Net Income.
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Q2: How does CAF differ from traditional earnings metrics like net income?
A2: Traditional earnings metrics such as Net Income can be misleading for REITs because they include significant non-cash expenses like Depreciation and Amortization. 4, 5These expenses reduce reported profits but do not represent actual cash outflows. CAF adjusts for these non-cash items and also subtracts recurring Capital Expenditures, providing a clearer picture of the actual cash available for distribution to shareholders.

Q3: Is Cash Available for Distribution (CAF) a standardized financial metric?
A3: No, Cash Available for Distribution (CAF) is a Non-GAAP Measures, meaning there is no single, universally accepted formula or definition for it across all companies. 2, 3Companies may calculate it differently, so it is essential for investors to examine a REIT's specific methodology and reconcile it to Funds From Operations (FFO) to ensure proper comparison and understanding.1