Funds Available For Distribution (FAD)

What Does Funds Available For Distribution Mean?

Funds accessible for distribution (FAD) is an internal measure of the amount of capital that a real estate investment trust (REIT) has to pay out to common shareholders and unitholders.

A REIT holds a portfolio of income-delivering properties as well as mortgages and is required to disseminate practically the entirety of its taxable net income to keep up with REIT status. While there is no normalized method for working out funds accessible for distribution, numerous REITs compute FAD likewise by adjusting the funds from operations value for straight-line rents, non-cash things, and any recurring real estate-related expenses.

Understanding Funds Available For Distribution (FAD)

A REIT is a pool of properties and mortgages packaged together and offered as a security as a unit investment trust. Every unit in a REIT addresses a proportionate part of ownership in every one of the underlying assets. To qualify as a REIT under Securities and Exchange Commission (SEC) rules, a property company must circulate something like 90% of taxable income to its investors.

Funds accessible for distribution, a non-GAAP measure, are a proxy for a REIT's cash flow for investors. Another measuring stick is the funds from operations (FFO) metric, however FAD is viewed as more representative of cash flow as a result of certain adjustments that give a more genuine economic image of a REIT's operations.

Illustration of Funds Available for Distribution Calculation

Boston Properties (BXP) is a commercial property REIT that possesses structures in Boston, New York, San Francisco, Los Angeles, Washington D.C., and Reston, Virginia. In 2020, the REIT's FAD payout ratio was 96.4% compared with 86.7% in 2019.

Boston Properties works out FAD by adding to FFO lease transaction costs that qualify as rent affectations, non-real estate depreciation, non-cash losses (or deducting gains) from early extinguishment of debt, and stock-based compensation expense; killing the effects of straight-line rent and straight-line ground rent expense adjustment; and taking away maintenance capital expenditures, lodging improvements, and equipment overhauls and substitutions. This rundown of adjustment things isn't comprehensive, yet it shows how cash and non-cash things are taken care of to introduce a more accurate figure of genuine funds accessible for distribution to investors.

Features

Real estate investment trusts (REITs) are required to pay 90% of taxable income to investors.
In any case, there is no normalized method for computing what funds are accessible for distribution (FAD).
By and by, numerous REITs compute FAD by adjusting the funds from operations value for straight-line rents, non-cash things, and any recurring real estate-related expenses.