What it means
Property and infrastructure businesses report large depreciation charges on assets that often hold or gain value, so accounting profit understates their cash generation. That is why the sector built its own ladder of measures, starting with funds from operations and ending with cash available for distribution.
Funds from operations adds depreciation back to net income and strips out gains on property sales. CAD then goes a step further and subtracts the money that must be spent every year just to keep the portfolio earning: maintenance capital expenditure, tenant improvements, leasing commissions and scheduled debt repayments.
The result matters because dividends are paid in cash, not in accounting profit. A trust that pays out more than its CAD is funding the difference from borrowings, asset sales or new share issues, and none of those can continue indefinitely.
There is no single mandated definition, which is the metric's biggest weakness. Two trusts can both report CAD and treat items such as non cash rent adjustments, development spending or one off legal costs quite differently, so any comparison needs a look at the reconciliation rather than just the headline.
Investors typically convert CAD to a per share figure and compare it with the declared dividend to get a payout ratio. A payout well below 100% suggests the distribution has room to grow, while one persistently above it is a warning that the dividend is being borrowed rather than earned.
In practice
Real-world examples.
Example
A listed warehouse trust reports funds from operations up 9% but CAD flat, because a wave of lease renewals brought heavy fit out contributions. Management holds the distribution steady rather than raising it, and explains the gap clearly in the results presentation.
Example
A toll road fund uses CAD as the formal basis for its quarterly distribution policy, committing to pay out no more than 90% of it. In a year when a bridge resurfacing programme absorbs $14,000,000, the distribution falls automatically and investors have already been told why.
Example
An analyst comparing two retail property trusts finds that one deducts development spending from CAD while the other does not. After putting both on the same basis, the trust with the more attractive headline number turns out to have the weaker distribution cover.
Think of it
“CAD is the cash a REIT can actually pay out-the true distributable amount.
Formula
Calculation
CAD = funds from operations - recurring maintenance capital expenditure - leasing costs - scheduled principal repayments
A fictional style calculation for a mid sized property trust: funds from operations for the year are $12,000,000. Recurring maintenance capital expenditure comes to $2,400,000, tenant improvements and leasing commissions to $900,000, and scheduled principal repayments on its mortgages to $700,000.
Total deductions = $2,400,000 + $900,000 + $700,000 = $4,000,000, so CAD = $12,000,000 - $4,000,000 = $8,000,000.
With 10,000,000 units in issue, CAD per unit = $8,000,000 / 10,000,000 = $0.80. The trust declares a distribution of $0.60 per unit, a total payout of $6,000,000, giving a payout ratio of $0.60 / $0.80 = 75% and leaving $2,000,000 retained for reinvestment.Case study
Seen in the real world.
This is a deliberately fictional illustration. Marlowe Yards Property Trust, an invented owner of light industrial estates, had paid a rising distribution for nine straight years and made the streak a central part of its investor pitch. Its board tracked funds from operations closely and mentioned CAD only in a footnote.
Ageing estates began demanding more roof and yard repairs, and letting agents' fees climbed as tenants churned faster. Funds from operations still grew slowly, but CAD fell from $9,200,000 to $6,500,000 over three years while distributions rose to $8,000,000, with the gap covered by drawing on a revolving facility.
When the facility came up for renewal, the fictional trust's lenders asked for the CAD reconciliation and the shortfall became obvious. Marlowe Yards rebased its distribution by a third, published a CAD payout policy capped at 85%, and rebuilt cover over the following two years.
Watch out
Common mistakes.
- Treating CAD as a standardised measure and comparing two companies' figures without reading how each one defines it.
- Leaving maintenance capital expenditure out of the calculation because it varies year to year, which flatters the result in exactly the years it should not.
- Assuming a distribution is safe simply because accounting profit covers it, when profit includes large non cash charges and excludes debt repayments.
Questions
People also ask.
Is CAD the same as free cash flow?
They are close cousins, but free cash flow usually deducts all capital expenditure while CAD deducts only the recurring spending needed to maintain existing assets.
Why do property trusts use CAD rather than earnings per share?
Because depreciation on buildings is a large non cash charge that makes earnings a poor proxy for the cash a trust can actually distribute.
What payout ratio against CAD is considered prudent?
Many funds aim to distribute somewhere between 80% and 95% of CAD, keeping the remainder as a buffer for lumpy maintenance years.
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