- Terms Used in the Real Estate Investment Trust Industry
 

Capitalization Rate (Cap Rate)

The capitalization rate for a property is determined by dividing the property's net operating income by its purchase price. Generally, high cap rates indicate higher returns and greater perceived risk.

 

Cash (or Funds) Available for Distribution

Cash (or Funds) available for distribution (CAD or FAD) is a measure of a REIT's ability to generate cash and to distribute dividends to its shareholders. In addition to subtracting from FFO normalized recurring real estate-related expenditures and other non-cash items to obtain AFFO, CAD (or FAD) is usually derived by also subtracting nonrecurring expenditures.

 

Cost of Capital

The cost to a company, such as a REIT, of raising capital in the form of equity (common or preferred stock) or debt. The cost of equity capital generally is considered to include both the dividend rate as well as the expected equity growth either by higher dividends or growth in stock prices. The cost of debt capital is merely the interest expense on the debt incurred. Variously defined as the weighted average of the cost of equity and debt capital employed by a REIT. Note:  A company's "true" cost of capital is the investor's expected rate of return on his/her investment.