Financial analysis software: Quest for the 'killer' App

The real estate industry has been slow to embrace technology as a solution to managing its essential processes: leasing and asset management, operations and property management. Until recently, most firms were content to manage their assets and leasing process using DOS-based applications, off-the-shelf spreadsheets and word processors. Although the business community in general had adopted the Windows standard by 1990, real estate software firms did not begin to offer Windows versions of their programs until 1994. Now every major real estate software firm has moved its applications to the Windows platform and heavily promotes their "early entry" into Windows.

"DOS-based programs were too inflexible and difficult to learn," says Edwin Van Ginkel, senior manager of business consulting for the Los Angeles office of Arthur Andersen Real Estate Services Group. "These programs lacked a user-friendly interface and made it difficult to easily transfer information from financial models into accounting systems. As the needs of asset managers grew ... they began looking to Windows programs."

For an industry that accounts for billions of dollars in financial transactions and is a primary indicator of the nation's economic health, it is ironic that its technological infrastructure has been unable to keep pace with other industries' deployment of software solutions. One of the biggest obstacles to the development of financial analysis software for real estate has been the lack of a clear standard. The emergence and widespread acceptance of Windows as the platform of choice has been a decisive movement in the right direction. The other development toward a standard has been the growing adoption of a common format for the exchange of data by utilizing ODBC (Open Database Connectivity) protocols. By employing ODBC-compliant software, end-users are able to extract data from different, or external, programs, and import them into their resident programs. This flow of data should be seamless, but often glitches surface which hinder the import of data due to proprietary implementations of ODBC code and differences in the ways the host programs access, compile and interpret data.

Shakeout ahead? New demands on real estate firms to expand and refine their performance-reporting processes and improve the speed of reporting have created an environment that is spurring the software developers into a race to integrate advanced features and offer a virtual one-stop-shop application that does it all.

The quest for this "killer" App by software vendors has become their Holy Grail, and each one is immersed in a development program to devise integrated suites of applications that will meet all their clients' needs. The intensely competitive playing field is littered with a close-knit group of relatively small companies vying for market share. While each of these players has become known for their strengths for asset management or property management or lease analysis, they've begun to overlap into each other's niches.

"We're seeing real estate enter a period of transformation where users are pursuing new categories of tools to meet their needs," says Chris Shaida, a partner in the Information Technology Group of Ernst & Young Kenneth Leventhal Real Estate Group's New York office.

Consolidation, highly prevalent among commercial real estate firms, has been evident among real estate software developers, but at a far less torrid pace. Mergers and acquisitions, such as Quantra's aggregation of PRO-JECT, SKYLINE and Magnus Software, have been primarily pragmatic strategic moves designed to broaden and enhance the software firms' product lines. As these firms converge in a battle for the real estate professional's desktop, will one firm emerge victorious?

Both Van Ginkel of Arthur Andersen and Shaida of E&Y Kenneth Leventhal see no clear winner in a current marketplace marked by intense competition among a highly skilled group of specialized software developers.

An evolutionary process At one time PRO-JECT, long a DOS mainstay, held a dominant share of the market. PRO-JECT made it easier for firms to move from spreadsheet-based configurations, using software like Lotus, to an integrated system. PRO-JECT's slow adoption of Windows opened up avenues for companies like Argus Financial Software and Yardi Systems - among the first to move to Windows - to make inroads on PRO-JECT's share of the market and erode its dominant position.

"PRO-JECT hasn't done much for a long time," says Shaida, "and there's been little difference in the program in recent years. Basically, the upper tier of the market is dominated by Argus, Dyna and Quantra, with mainstream software like Skyline, Timberline and Yardi splitting the rest of the market."

The pivotal role of REITs and the influx of institutional investors have dramatically altered the real estate landscape and places new demands on the industry's reporting requirements unlike any it has ever experienced to date. As the industry tries to bridge the gulf between entrenched traditional management processes and the new requirements of the information age, it looks to the software developers for the innovative solutions it needs.

The competition and what it offers Just six years old, Atlanta-based ACG Professionals is a real estate financial services firm that has carved out a niche for itself by providing solutions to the shortcomings of existing real estate financial analysis software. ACG's president, Todd Zeldin, based his MBA thesis on the use of PRO-JECT. In his first job, with Financial Automation Ltd., he taught PRO-JECT to the company's clients.

In 1992, Zeldin launched ACG Professionals, and early on he was asked by clients to devise a method to consolidate PRO-JECT's lengthy reports into a more attractive presentation package complete with graphics and other analytic features. The interfaced spreadsheets, which provided key data from linked software programs such as PRO-JECT and Argus, quickly became popular.

"In 1992, we did a nationwide survey of 750 companies that showed PRO-JECT had a 77% share of the market," says Zeldin. "However, in the period from 1993-1994 a number of problems surfaced from clients related to the reporting function. Primarily, they were seeking a one-page executive summary or digest from PRO-JECT that could be bridged to forecasting programs. The process was severely limited by the restrictive nature and incompatibility of proprietary files. To this day, we are the only application capable of extracting and reformatting data this way."

Next, the company developed LDS- One, an innovative database repository product that effectively interfaces with both accounting applications and discounted flow packages.

"LDSOne allows you to quickly access a wide array of information by bridging different financial and management software products, and it significantly reduces redundancies in data output," says Zeldin.

The primary strength of LDSOne is in the due diligence area, where the software is used to abstract leases and perform other due diligence tasks for clients. ACG furnishes its clients with electronic abstracts, and clients that license the LDSOne program are able to bridge their in-house accounting programs to reuse, update and maintain the information gathered.

"The problem with today's due diligence practice is that it is completely and independently distinct from owning and managing the property," says Zeldin. "ACG streamlines the entire process by recycling valuable lease information."

According to Zeldin, the trend among real estate professionals is to obtain and exchange data electronically, either via disks, modem or e-mail. LDSOne is specifically designed to meet those needs and automatically upload data from accounting programs to any system, and upload data to a lease abstracting system and bridge it to an accounting system.

In one recent project, ACG worked with CB Commercial's due diligence team to sell a national portfolio of shopping centers to a national real estate company.

"ACG worked very quickly and efficiently to mobilize a team of knowledgeable real estate specialists to analyze all the pertinent information needed to develop financial models that enable us to present projection and cash flows to potential buyers," says Gary Saykaly of CB Commercial.

ACG's newest tool, called the "WinAppraise System," represents the next trend in financial analysis software - the web. Using the same basic database structure used for the CB Commercial due diligence team, ACG enabled users from 28 offices to access the data. Each office enters and maintains data independently and the WinAppraise system takes the data from local servers and places it on the web through a secure Intranet. The data is refreshed continually.

"Very few software companies like ACG understand the practical needs of the real estate industry and develop solutions to meet those needs," says Doug Haney, executive vice president and chief operating officer of Appraisal Services, based in the Los Angeles office of CB Commercial.

According to Haney, CB Commercial's Appraisal Division and ACG have teamed up to develop new applications with the ability to deliver appraisal documents electronically, including exhibits and photographs. These tools will dramatically streamline and speed up the appraisal process.

Much of ACG's consulting work to date has been with REITs whose market capitalization has grown from $8 billion to more than $120 billion since 1990. Among ACG's roster of REIT clients are such industry players as Cousins Properties Inc., Chelsea GCA Realty, Kilroy Realty and Vornado Realty Trust.

Recently, ACG has seen an increase in clients outsourcing their day-to-day financial information management systems and tapping the company for its advice and managerial expertise. For many companies, says Zeldin, a new system for in-house analysts is costly and not the best way to meet their immediate information needs.

Founded in 1984, Argus Financial Software is one of the dominant players in the financial analysis software arena. Based in Houston, Argus develops a family of products used throughout the world. Its flagship product, Argus Lease by Lease Version 7 for Windows, is a sophisticated tool for analysis, valuation, due diligence, asset management and budgeting.

Recently, Argus introduced Argus Development & Unit Sales, a financial analysis program that allows users to analyze present and forecast future cash flows related to selling off units such as raw land parceling, subdivisions, tract homes, business parks, condominiums, condo/co-op conversions, marinas and masterplanned communities.

"We were one of the first to be in Windows," says Ronnie Dean, managing director of strategic development for Argus Financial Software. "Our primary thrust has been to produce a full-scale program that is easy to learn and use."

Argus is used by banks, insurance companies, mortgage bankers, appraisers, developers, individual investors, property managers, asset managers, brokerage firms, consultants and government and regulatory agencies.

"Our major clients include such firms as calPERS, Met Life, GE Capital, LaSalle and many of the leading REITs," says Dean. "Argus Lease by Lease is also used at more than 100 colleges and universities worldwide."

The latest version of Argus Lease by Lease, released in late 1997, is designed to be a flexible, easy-to-use tool for cash flow analysis and investment modeling across property types and phases of the development and investment cycle. Argus uses detailed monthly calculations to analyze the terms of the individual leases that are currently in place, the assumptions of future leasing activity, and the rollovers and renewals of each lease as it expires.

The core of the program is Argus' Rent Roll screens, where data can be easily entered into Excel-like spreadsheet templates. These screens can be customized with a variety of layouts, drop-down menus and configurations tailored to user preferences. Argus can also be used for the evaluation and negotiation of lease proposals or to help develop leasing strategies.

The ability to analyze properties under development has been broadened in Version 7. A wide variety of reports can be generated, based on desired level of detail, including property, tenant, comparison and audit reports. The comparison reports show much of this detail on a per-sq.-ft. basis. Other reports include an internal rate of return, yearly cash on cash return, average occupancy ratios, weighted average market rates, weighted average effective rents and other ratios and benchmarks. Reports can be generated using different currencies and exchange rates. Income statements and depreciation schedules are also available from the depreciations and taxes features.

Using its Open Argus solution to Open Database Connectivity, Argus can export data to outside reporting and database programs such as Crystal Reports and Microsoft Access. This utility, which works with any ODBC-compliant database, is included with every copy of Argus Version 7.

"We're continually upgrading," says Dean. "Currently, Argus 8.0 is being extensively field tested and will incorporate a number of new features users have been asking for."

Many of these features will translate into increasing the speed of processing and extending Argus' compatibility with Microsoft Access and the Microsoft Office suite of applications, as well as the ability to exchange data over the Internet. A help screen dialog button automatically dials up the Internet and connects to support services in the new version. Development is also under way on a product that will incorporate UK methodologies for valuations, which is the standard for Europe, and translation capabilities.

When it comes to portfolio and asset management and lease-by-lease analysis, the Dyna for Windows suite of applications has a strong niche among real estate professionals. Dyna Software and Consulting first emerged in 1981 with its Dynamis product for mainframes. Dyna's database development skills and ability to share data among diverse systems played a strong role in the evolution of its Windows suite, culminating in the release of Dynalease in 1992.

Dyna is popular with REITs, and its clients include the largest office REIT, Northwest Mutual Life, lenders, property management firms, owners and managers, investors and commercial as well as residential developers.

"Dyna's primary strengths are in its forecasting and budgeting tools," says Lewis Foshee, vice president of marketing for Dyna Software. "We specialize in institutional real estate and portfolio analysis tools of multiple property types through all phases."

According to Foshee, Dynalease is the only lease forecasting program where information on all properties resides in one native database, while other programs store data in a property-by-property database.

A market survey conducted by Dyna found that ease of use was the primary feature users were seeking. Dyna has built its suite of applications around the Microsoft Windows standard, designed to run on Windows 95 and Windows NT.

"Our applications were designed from the ground up using Microsoft products," says Foshee, "including Microsoft Visual Basic 5.0, Microsoft Access 8.0, Visual C++ and SQL Server. Demand in the industry for SQL Server-based programs is high."

Dyna's products are used for lease-by-lease forecasting and analysis, preparing cash flow, taxable income, GAAP and FFO projections, structuring debt, equity and partnership/JV structures and construction and development planning. The company's DynaBase module provides users with a powerful and easy-to-use tool to query the entire database and slice and dice data to produce customized reports and analyses. DynaBase also facilitates flexible reporting and integrates smoothly with DynaWriter, its Windows-based portfolio report writer that enables users to design their own custom reports.

Dyna's next release, slated for early 1998, will integrate a number of enhanced features for reporting on international markets and will implement the capitalization approach commonly employed in international transactions. Included will be tools to handle foreign employed in international transactions. Included will be tools to handle foreign currency conversions and methods for handling both metric and American standard measurements.

At one point, PRO-JECT, one of the leading products from Smyrna, Ga.-based Quantra Corp., dominated the financial analysis market. Since then, critics have faulted the program for being slow to move to the Windows platform. As a widely respected program and virtual industry standard, PRO-JECT has benefited from the integration of Skyline and Magnus Software into Quantra's family of products in 1996.

Today, Quantra provides a broad range of real estate-based investment management and analysis applications, including its Mortgage Loan Management System, Portfolio Strategy System, Real Estate Management System, Skyline for property management and PRO-JECT for Windows for property valuation.

PRO-JECT for Windows fully implements the Windows environment throughout the scope of the application. Features of the software include detailed reporting, sophisticated sensitivity analysis and easy integration with other software and systems. Quantra's real estate management system incorporates new workflow tools called Report Manager that capitalize on the powerful distribution capabilities of the Internet and the Web.

According to company spokesperson John Barry, "Quantra is in the business of providing enterprise-wide solutions that use the latest tools for sharing and manipulating information in today's Windows and network environments."

Santa Clara, Calif.-based Yardi Systems has grown steadily in the 15 years since it developed its first application which ran on an Apple II. Today, Yardi's property and asset management software is used by more than 15,000 companies. One of the first software developers to standardize on the Windows platform, Yardi offers an integrated suite of Windows-based products for asset managers to capture performance, portfolio, analytical and operational data.

According to Karen Edgar, director of marketing for Yardi, two areas help define Yardi's strength as an asset management tool - its deployment of powerful accounting software across its entire product line, and its ability to support open systems and the seamless import/export of data between property and asset management systems.

Yardi's asset management functions include tools for portfolio analysis; custom reporting; integrated general ledger; cash and accrual accounting; commercial lease tracking; property proforma analysis; performance measurement; NCREIF and AIMR reporting; and summary review of assets and properties.

As part of its ease-of-use design, Yardi's vice president for product technologies, Bryant Shoemaker, says Yardi takes full advantage of Windows OLE interface to share data transparently between its programs and Microsoft Excel and Word, enabling users to export data and generate graphs and reports.

One of the innovative features in Yardi's asset management software allows the asset manager to view property data from Yardi's Property Management Program or other property management systems in summary fashion. If properties do not meet performance criteria specified by the asset manager, the manager can then drill-down from the fund review to the property level to retrieve more detailed data.

The drill down capability is based on a hypertext technology that allows users to jump directly to relevant data points in reports and income statements. This enables the user to zero in on specific origin points for items and trace them back to the source of entry.

Cushman & Wakefield employs Yardi's asset and property management applications at all of its offices nationwide, using them to enhance its services in industrial brokerage, financial and asset management and valuation a dvisory and research.

Yardi is presently gearing up its applications to take advantage of new functionality in the forthcoming Windows 98 and developing web-based versions of its software.

Other products of note that offer financial analysis tools include Exton, Pa.-based Colonial Systems' property management system with features of particular relevance to REITs; Least Cost Solutions, a California software developer that produces the LseMod series of financial analysis applications structured on Excel-like spreadsheets and offering a minimal learning curve; Beaverton, Ore.-based Timberline Software, which specializes in property management software; and CLR's Rent Roll software for multifamily property managers.

What it all means

The real estate industry is at a junction where technological advances are having a profound impact on the way the industry goes about its business and how it performs. New levels and depths of performance reporting, and a drive for the real estate industry to achieve parity with other industries in the eyes of Wall Street, have created an environment where the technologically advanced have the upper hand.

"Technology has fostered real changes in real estate's basic business processes. These tools are forcing changes in these processes and the industry needs to adapt," says Shaida.

It is clear that while no one software developer or standard has a lock on the market, the quest for the killer App goes on. All of the vendors are working hard to upgrade their products and integrate next-generation features that can only benefit users in general. The momentum toward uniting disparate systems, creating open standards for data exchange and fostering intelligent automation of the leasing/financial analysis process continues to raise the ante for all the players.

For the immediate future, the focus will be on leveraging technology to take advantage of the Internet and related communications opportunities; resolving the Year 2000 compliance problem; and assessing the impact of competing network technologies for control of the business community's desktops.

"It is essential for real estate professionals to realize that technology is an investment they have to make," says CB Commercial's Doug Haney. "Survivors ... need to embrace technology and train their people to use it."

* American General Hospitality Corp. bought 14 hotels for $270 million from Financial Security Assurance.

* Boston Properties took a portfolio of nine buildings, valued at $139.6 million, from Mulligan/Griffin Associates.

* First Industrial Realty Trust paid $138 million for operations of closely held Sealy & Co. and $200 million for 106 properties from Pacifica Holding Co.

* Simon DeBartolo Group and Macerich Co. formed a joint venture to buy 12 regional malls for $489.5 million and the assumption of $485 million of debt.

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