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Financial analysis software: playing catch-up the high-tech way.

In the beginning, financial analysis was relatively simple: a pencil, a piece of paper - and not much else.

Developers, managers, even owners performed their scenarios on the "back of an envelope," oftentimes retaining much of the crucial data in their heads. Later on, calculators made real estate analysis somewhat easier, but the process was still cumbersome. While the microchip forced many in real estate to enter the technology age, it wasn't until much-needed financial analysis software hit the marketplace that the industry took to high tech.

Financial analysis hasn't been the same since.

"The only constant is change, and what happens in the financial analysis software field is, to a certain extent, a reflection of the general real estate market," explains Ronald Dean, managing director at Argus Financial Software in Houston. "The real estate industry recognized some time ago that, for complex commercial analytical assignments, they needed to have a system that was well thought out with all of the calculations verified by someone else, with all the formulas behind the veil accurate. This complexity needs to be designed with an ease of use factor, where you have a pre-built system, fill in the data it needs, hit a button, and it prints out the information in usable reports."

For the most part, the real estate sector has lagged behind other industries in embracing technology. However, the next several years are expected to bring dramatic changes in the information systems utilized by real estate professionals. With the increased institutionalization and public market ownership of real estate through REITs and securitized debt, the demands for increased reporting and monitoring capabilities has forced many in the industry to "catch up."

Not only that, but some lenders are beginning to re-think the role of real estate financial analysis in their underwriting, loan monitoring and risk management activities. They want a financial analysis system that is adaptable and able to assist and add value in the three areas. No longer are lenders, managers and owners comfortable with being unable to answer questions like, "What would happen to the future performance of our real estate loan portfolio if office market rental rates in Southern Siberia declined by 15%?" This, time around, they want to know the answers to these types of questions before the event happens.

Like stocks and bonds, real estate values sometimes fluctuate, and investors are willing to accept that risk. Even so, real estate investors want to know that the people who are managing their assets are looking to the future and measuring how properties have actually performed.

"Investors need to be able to monitor the actual performance of properties so they can calculate their life to date returns from the investment and compare the return with alternative investment classes, as well as the projected potential returns associated with holding the property for a longer time frame," explains Lewis Foshi of Dyna Software in Clearwater, Fla.

"Handling this seemingly simple process in today's fast-paced, high-pressure world without letting it get the best of us is more complicated than it sounds," Foshi say, "because most organizations have to retrieve information from several different accounting and forecasting, systems, bring the information into a spreadsheet and then do custom calculations."

Active as well as robust

Thus, real estate financial packages must be active as well as robust, with a high transaction volume and the ability to handle multiple currencies and multiple processes, says David Voigt, vice president, Melson Technologies, Chicago.

"Property management solutions handle whatever level of detail you want them to handle," Voigt says. "Someone at site may enter a payable invoice in the system, but you don't want people at the site cutting checks. You want that only at the regional or corporate levels. So when the on-site personnel enters an invoice, it appears in the corporate payable level. The on-site people know when the service has been performed, so corporate receives the authorization to pay. And rather than have to cut one check per property, per vendor, corporate systems now can keep track of all the vendors for all the properties."

Voigt says that, currently, a number of customers use Skyline to manage their individual properties. Large insurance companies report into their corporate investment general ledger system but may be using a different vendor to do corporate level accounting, a different system for property management and so on.

"We bring it all to market so it becomes one integrated system," he continues. "There's a property management system, a large corporate accounting system and so forth. If there is only one individual property, then there's reporting daily. If you're dealing with a larger corporate environment, the on-site people can handle tenant move-ins, cash collection, etc., but all payables go out of the corporate office for efficiency. You can record some payables on site, but most of it is done at the corporate level. Say you want to send a vendor one check, but the amount includes payables for five to 10 properties. You can integrate property level activity at the corporate level; you need a financial analysis package that has the robust features you need at a corporate level."

Voigt adds that Melson's system can handle currency conversions. "If a company is managing properties in Canada or Mexico, it needs to keep track of different currencies. Sometimes you need to pay out pesos on site, while some vendors require U.S. dollars. The real estate market is growing ever more global, and investors and managers cannot afford to have a solution only tied to U.S. dollars, particularly with the movement of investment capital into Canada, Mexico, Latin America."

Dean notes that companies such as Agus are continually adding feature their financial analysis software in order to make work easier. "For this reason, Windows is the platform on which all future programs will be built. Programs doing financial analysis for real estate must be easy to use, or other solutions will be found. Since Argus came on the market, we have released at least one new feature-rich version every year - sometimes twice a year - including significant improvements and functionality enhancements."

These improvements, he continues, include portfolio sensitivity, changing assumptions at the portfolio level to perform "what if" scenarios, tenant detail reporting, a variety of debt structuring features, the ability to sort the rent roll in a variety of ways and the ability to have multiple user-defined calculations and supporting schedules. Compatibility is now key.

Developing a link

"If a company has 600 buildings that utilize one software program, we're developing a link that will enable them to bring that data over to the Argus system," says Dean. "Users will also be able to have data accessible through new open database connectivity features. We are in the process of completing an open architecture platform that will allow Argus data to be used by any of our customers' applications."

A wealth of valuation software packages "take information about properties and leases and analyzes each type of lease, making assumptions, showing how quickly leases will turn over, what rents will be at future times, etc., to create a pro forma that says, `Here's what the building is going to look like in 20 years, here's how long their leases are, etc.,"' says Howard Honickman, executive vice president of Newstar Technologies Inc., Ontario. "The trick is to try to make assumptions as realistic as possible, so you do it from a worst-case and expected-case viewpoint and then make business decisions.

"The next big area now deals with performance returns on a historical basis - what we expect over 25 years based on various assumptions," he continues. "Say a building does a 10% rate of return. How has the property or portfolio performed over the last year, five years, or since inception? To get those figures has proven to be an extraordinarily difficult task for asset managers. The difficulty has been getting all data on a historical basis. This is where new financial analysis management systems designed as a data warehouse system can be a great aid, because the data warehouse can store historical performance information."

Thus, asset managers now need to not only perform `what if' portfolios, but also show rate of return information. "It really requires a true asset management data warehouse, where you can grab information from all disparate systems," Honickman says. "The data warehouses can input information and meld with historical performance and get a true picture of what has gone on in the last 10 years."

Similar yet different needs

Real estate owners, investors, developers, lenders and service providers all have specialized and unique needs, all different from one another, dependent upon what their business really is, notes Foshi.

The capabilities that professional real estate analysts and managers need from their financial analysis software varies dramatically depending upon the facet of the real estate industry in which the financial analyst is involved and what it is that he or she is doing. An appraiser, an acquisitions specialist, an asset manager, a real estate lender and a portfolio manager all have similar yet different needs.

"The thing that all these real estate specialists have in common is that they look at the future income-producing capability of one or more real estate projects," Foshi says. "They all have very special, and very different, interests after that."

One interest they have in common is eliminating the redundant entry and re-entry of the same data in several different computer systems and databases such as the property management system, the accounting or general ledger system, the lease-by-lease forecasting system and the miscellaneous spreadsheets that perform specialized functions for which no commercially developed applications exist.

To eliminate the redundancy of information that exists in these separate systems, Foshi suggests allowing these systems to share their data with each other. "This is where the new technology and new ways of doing financial analysis come into play.

"Our clients at Dyna Software have always been leading edge companies concerned not only with single assets but portfolios of complex assets," Foshi says. "The demands of this type of client base have caused us to develop systems and applications to meet those types of needs. However, our other client base, the smaller companies with which these leading edge companies do business, has told us that the sophistication and comprehensiveness of our modeling capabilities has come at a price (to them)."

That cost is sometimes phrased as "Your system is too detailed for what I'm trying to do" or "This is more power than I need." Either way Dyna has gotten the message. "In essence, our client base has demanded products that have a split personality," he confides. "The product must meet the demands of the most sophisticated users but must also meet the needs of the smaller companies and appraisers with which these cutting edge companies conduct business."

"Financial analysis software has come a long way," says Bob Fahey, senior vice president of sales at Yardi Systems of Santa Barbara. "Five years ago, it centered on IRR and discounted projections. Today it means analyzing any aspect of a portfolio from leasing status to historical accounting to current value accounting."

Still, the key nowadays for most real estate software is the ability to slice and dice data. Companies are dealing with executives who don't want to dig through a 300-asset portfolio, who don't want 300 general ledgers and profit and loss statements. They want the information and they want it now.

Already, numerous changes are taking place in the analysis software industry. Several years ago. Melson purchased Financial Automation Ltd. (provider of the Pro-Ject evaluation system) and Softa (provider of Skyline Property Management system) in what analysts said was an effort to create economies of scale in marketing a suite of systems to the same industry and enhancing/expanding the systems into an asset management system.

This consolidation has occurred for various reasons ranging from the increasing cost to bring a product to market, to the cost to sell and stay in the view of the customer/prospect, to the limited scope of the application.

Ted Stearns of Real Pro-Jections of Carlsbad, Calif. - which offers the WinStack program - believes that there will either be more consolidation in the industry, greater joint ventures, or selling alliances between software companies.

According to Stearns, the selling alliances will either be on an exclusive marketing basis or for a "blue label" version tailored specifically for a suite of systems for financial analysis and property management, observers say. Yardi Systems, for instance, now has a Windows-based property management and separate asset management system that can import financial and tenant-related data from other property management systems (even non-Yardi systems), and then allow management to consolidate financials and report across the portfolio of properties.

"What once took a considerable amount of time to manually generate with a spreadsheet can now be created within as little as three minutes," Steams adds.

He notes that WinStack is "nearly seamlessly integrated" with lease analysis systems such as Argus, Dynalease and Pro-Ject, and property management systems such as MRI, Timberline and Skyline. Users are generating charts displaying tenants color-coded by lease expiration year or status.

"Management information regarding the percentage and number of square feet occupied, vacant or expiring annually is also displayed," he says. "While a spreadsheet can be modeled to perform calculations, WinStack produces these calculations automatically as part of the stacking plan. The resultant charts can then be easily imported to multimedia presentation software to executive meetings."

"Software companies are starting to work together, but there are some competitors who still aren't convinced about connectivity," sighs Fahey. "Eventually it will happen - and then user expectations will be even higher."

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