Financial management tools provide the speed and accuracy real estate companies need in a competitive investment landscape
by Darlene Bremer
In today’s fast-paced accounting environment, real estate companies have had to rely on some form of financial management software, from internally customized spreadsheets to the latest comprehensive accounting and financial management analysis software, in order to produce timely, reliable forecasting data. With competition for capital always looming, reporting quarterly earnings and distributing cash flow information throughout the organization efficiently is essential not only for real estate companies but any publicly traded company.
“REITs are faced with a great deal of public scrutiny and must provide accurate, timely, complete and complex reports to the Securities and Exchange Commission (SEC) and the investment community. This makes it essential to use financial management tools that make such reporting practical,” says Tom Ricci, vice president of systems implementation consulting for Management Reports International (MRI).
SEC reporting is done on an extremely tight schedule and, according to John Scott, executive vice president of product distribution for technology solutions provider The Realm, missing those deadlines is not an option. “Untimely reporting downgrades the perception of the company within the investment community,” he explains.
Even though the use of financial management packages is widespread throughout the industry, comprehensive tools that integrate all of the corporate operations are not yet prevalent. According to Jim Corl, senior vice president and portfolio manager for Cohen & Steers Capital Management, Inc., traditional real estate-specific software applications that are available today need to be improved to attain the same levels of integration that other industry specific software packages offer.
Software Evolution
Regardless of the current shortcomings, the industry has come a long way. A decade ago, real estate companies managed their operations on an asset-by-asset, or property-by-property basis, Ricci says. “To compete against all the opportunities available to investors today, real estate stocks must be managed and analyzed on a portfolio basis,” Ricci says. “To accomplish that, the financial management software must be sophisticated enough to provide detailed data from the property level all the way to a comprehensive, consolidated portfolio view. The software is becoming more of a multi-level, analytical tool, rather than a transaction-oriented accounting tool.”
According to Scott, financial management software has evolved in two basic ways. The first is by allowing access to the information to a broader range of personnel within the organization, and the second is joining past and present cash flow data to enable improved forecasting performance. “More workers are sharing data at the same time using either the Internet or a corporate intranet. And when leasing personnel gain real-time information from the field, they can perform their jobs better,” he says.
Software provider REsolve Technology has also noticed increased interest from real estate companies for web-enabled software solutions. “Companies are beginning to discover that web-based financial management tools can provide updated data to different locations more quickly and cost effectively,” says Eric Forman, REsolve Technology president.
“Software providers have been taking two different approaches to the evolution of financial management software tools,” Corl says. The first has been to integrate real estate-specific, web-enabled applications, that is, linking financial analysis and accounting tools together. The other has been to develop, from scratch, a comprehensive enterprise system that includes financial and online leasing functions, along with repair and maintenance, revenue management, and prospecting tools.
Arden Realty, Inc. converted its DOS-based application to MRI’s accounting and asset management Windows-based tool, which is integrated with an automated lease management tool called Strategic Lease Processing from ASI, says Rick Davis, Arden’s chief financial officer. Although software for the real estate industry has historically lagged behind other industries, Davis says that over the last few years the technology has become more flexible, making the tools more attractive for real estate companies to invest in.
Two and a half years ago, Equity Office Properties Trust began using J.D. Edwards tools for its financial management needs. “We chose the system because it was one of only a few companies at the time that provided a solution that enabled us to centralize our data and eliminate data transfer from our properties,” says Scott Morey, senior vice president and chief information officer. Although Morey believes that the functionality of financial management programs has not evolved much, programs have become easier to use, more robust, and are increasingly scaleable to the needs of individual real estate companies. “The consolidation trend and increased levels of IPOs over the past eight years or so has created a need for financial analysis software applications that could generate the reports necessary for the investment community and that could handle the volume of raw data,” Morey says.
Leading Applications
Any financial management software needs to include applications for transactional reporting that accurately reflects financial activities. “A good financial management tool also has to be able to forecast future performance based on past data,” Scott says. The analytical components of financial management software must be able to both examine the levels of discounted cash flows of the REIT’s portfolio, and examine risk scenarios and how they impact cash flow and enterprise values. “Analytical financial tools must be able to run ‘what if’ scenarios for the company,” he explains.
According to Corl, general ledger-types of applications are the most important to a publicly traded real estate company, and the most common ones to be automated. “Real estate is a very cash collection and distribution-intensive industry, and the ability to manage cash and have a good understanding of the company’s position is vital in analyzing a real estate stock’s investment potential,” he says.
Using a web-based system to connect its many offices has dramatically improved the budgeting process for many companies including MeriStar Hospitality Corporation.
“It used to be that each property had its own spreadsheet, but now all our budgeting and forecasting is done on web-based technology,” says Brian Garavuso, chief technology officer of MeriStar. “As soon as the last person enters their budget we have an entire overall budget for the organization in real time. The revenue of each one of our properties is updated daily and consolidated with graphs to make flash reporting even easier to understand.”
Other leading applications include asset and lease management. And, according to Davis, it is vitally important that a publicly held company be able to accurately compare actual figures to forecasted figures to get real-time data on earnings and cash flow.
“In terms of the real estate market, the leading applications are rent collection, cash management, accounts payable, forecasting and general ledger,” MRI’s Ricci says. Transaction processing is a vital part of a real estate company’s core business and, further, it must be able to demonstrate its profitability and investment potential.
Costs and Savings Vary
There is as wide a cost range for financial management software as there are programs to choose from. “Costs can range from $20,000 to $500,000, depending on the size of the organization, the type of modules required, and the number of employees accessing the system,” Ricci says. These prices usually include the software license, upgrades, enhancements and patches. Total turnkey solutions that include implementation and training may be available, but are generally considered extra services that are purchased on an incremental basis.
For example, The Realm’s two main product lines range from $3,500 to $7,500 per seat. “Additional costs include training and business process engineering associated with the software,” Scott says. Yardi Systems, Inc.’s products range from $50,000 to $1 million, according to Dennis Johns, marketing operations manager for Yardi. Other factors that contribute to cost include the number of users, the level of functionality, the operating systems required, connectivity issues and processing speed.
Arden Realty spent between $1.5 million and $2 million for its system two-and-a-half years ago. That price, however, included hardware, software, implementation and training for about 200 employees. But the results have already been seen. Since implementing the system, Arden’s tenant retention rate has increased about 3 percent.
Because the advantages of installing a financial management tool are not solely seen in the bottom line, it’s not as easy to quantitatively define savings. “It’s hard to put a number on savings. However, some of our clients have indicated that they have been able to reduce their operational costs by as much as 20 percent since using the system,” Ricci says.
By moving its budgeting process to the web, AMB Property Corporation streamlined what had been a time, people and paper-intensive process into one which saved the company 30 to 40 days of employee time each year, according to Wayne Pryor, chief technology officer for AMB.
According to The Realm’s Scott, ongoing savings can be seen in the form of improved forecasting and analysis functions. “REITs can use financial management tools to project earnings over 10 years to better manage profitability and model various scenarios to determine their impact on cash flow, allowing them to be better prepared to adjust to economic changes,” he says.
An informal rule of thumb is that a successful application should pay for itself within 12 months.
Rather than specific cost savings, however, the features and functionality a financial software system delivers to real estate management can represent a key advantage in an increasingly competitive investment marketplace. “Financial management tools enable REITs to implement best practice processes rapidly throughout their organization to improve performance and to communicate that performance to the investor,” Johns says.
What’s Next?
Now that the use of financial management tools is more prevalent, companies are looking at the next generation of software and technological capabilities. According to Ricci, real estate companies are shifting away from using multiple, non-integrated databases, and looking toward finding tools that can address complex reporting requirements from a single enterprise solution. Another trend, he adds, is the integration of automated leasing functions into the financial applications. “The information is stored in a single database, which reduces costs, eliminates multiple data entry, and shortens the life-cycle of the leasing process, which increases revenue potential,” he says.
Scott predicts that the next step in financial management software is the use of information technologies that are accessible to an even greater number of personnel within the company. Scott adds that there will also be an increased exchange of information between the real estate company, its tenants, its suppliers, its brokers and investors.
Morey agrees that the next step is to use the web to have a company’s system interact with suppliers, reducing paper and increasing responsiveness. He also predicts that leasing functions will be further automated, which will streamline customer interactions, including receipts, customer service, and maintenance and repair functions.
“Our clients have shown considerable interest in the development of automated rent collection, e-procurement via the Internet, integrated purchasing, work order and inventory processes, rapid tenant screening application and leasing processes, e-marketing, and interactive web sites,” Yardi’s Johns says. Wireless technology is also expected to have a significant impact on facility management, improving the desirability, and therefore performance, of those properties that adopt it.
Davis predicts the development of imaging technology within the next three years that will easily allow direct scanning of documents into computer systems. “In addition, web-enabled document archives with shared access would significantly increase productivity and decrease the amount of time it takes to process lease contracts,” he says.
“The use of sophisticated, comprehensive enterprise management systems will become more widespread within the next three years,” predicts Corl. The movement will be led by the larger, public firms, since those are the companies that already have a more sophisticated financial organization in place and are better able to both understand and capitalize on the benefits. “Sophisticated tools will create economies of scale in the real estate industry that have previously been difficult to access.” Corl adds the result, in the long run, will be accelerated consolidation of ownership within the industry.
Financial management tools will continue to revolutionize financial management as well as leasing and operating functions. The advantages to utilizing this available technology will continue to add up for real estate companies.
Darlene Bremer, a frequent contributor to Real Estate Portfolio, is a freelance writer based in Solomons, MD.
