How SaaS Tech is Changing the Way We Invest, Report and Profit
By Rob Colligan & Cody Lott
As financial officers, we often have to remind ourselves what business we are really in: are we producing solid returns for investors, or focused on the process of producing financial reports? The food services industry is the perfect example. Restaurants don’t waste time developing separate ordering or reservation systems when they can leverage Grubhub, Seamless, OpenTable, etc. Instead, they focus on differentiators like developing their menus and providing outstanding service in a unique atmosphere.
So, why should financial institutions think any differently when it comes to Real Estate Investment Trusts (REITs)?
Sophisticated but Underutilized Tools
REITs have a different level of sophistication compared to other financial instruments. As such, they require the development and construction of extensive internal processes because until most recent years, a true investment accounting and reporting solution wasn’t available on the market.
Complex accounting systems are critical for data analysis, strategy, competitor review, and other meaningful tasks, with minimum resource needed for internal controls such as monitoring and periodic review.
For the REIT industry, however, despite the sophistication of the reporting process, more time is spent on maintaining, enhancing, and fixing outdated financial and accounting systems rather than reaping their benefits. For good reason, many avoid putting band-aids on poorly designed systems, but unless processes are designed in a thoughtful and forward-thinking way, band-aids may be inevitable.
SaaS is the Solution
Software-as-a-service (SaaS) investment operation technologies that remove time-intensive tasks like maintaining, monitoring and reviewing processes can be transformative for REITs. Outsourcing accounting processes helps institutions get back to what matters most to their business – capitalizing on the data to increase returns and future-proof their decision-making.
SaaS has grown meteorically over the past few years. According to Gartner, the sector leads public cloud services and is estimated to reach $171 billion in spending in 2022. This is $50 billion more than cloud system infrastructure services (IaaS), which is the second-highest grossing sector and is projected to reach $121 billion in 2022.
SaaS solutions provide unmatched data accuracy and transparency, which is critical to the core business of REITs given the unique IRS requirements they meet. For example, while REITs must pay 90% of taxable income in the form of shareholder dividends each year, those within the industry know many companies pay closer to 100% of taxable earnings. A comprehensive technology solution is essential to organizing and executing these payouts in an efficient way.
This requirement, and others, demonstrates a key pain point for REITs: tracking how income is generated, how income and assets impact regulatory constraints, and lastly how results are reported back to investors and tax authorities. “Good enough” won’t cut it for these categories; REITs must meet these conditions and to do so, they will find a software solution offers the path of least resistance and most efficiency.
Whether you’re investing in mortgage loans, agencies, mortgage-backed securities, swaps, futures or other derivatives including IOs, inverse IOs, TBAs, mortgage servicing rights, dollar roll strategies, or securitization activity and other structured financing arrangements, REITs can partner with SaaS providers to enhance the transparency and accuracy around:
- Amortization, accretion, derivative and hedging activity with consistent, accurate, and fully transparent results
- Tax basis reporting, where settings can be configured to calculate in parallel to results required under generally accepted accounting principles (GAAP)
- Building and maintaining a robust investment accounting and reporting engine that is continually enhanced based on user feedback, changing market demands or updates in regulatory requirements
- Compliance requirements across different jurisdictions, states or even countries to ensure team efforts consistently fall within bounds of local guardrails
Making the Evaluation
Knowing what matters most to REITs and to your business is essential to evaluating a technology partner. What differentiates your business and drives your success? Focus your resources on what you do best and find the right technology partner to make the financial reporting process as seamless and efficient as possible. Look for a partner that uses the power of thousands to improve your data quality, typically this is only found with SaaS providers.
It is easy to get bogged down in tracking complex financial transactions and multiple reporting requirements for GAAP, tax, REIT compliance and 1940 act exemptions, but leveraging a system to handle routine and repeated transactions allows companies to grow and scale up without the fear that their infrastructure can’t handle the volume or complexity.
Software cost is always part of the analysis, but for a REIT, getting financial results wrong can be fatal. Don’t rely on a band aid for that.
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Author Bios
Cody Lott is Director of Corporate and REIT Solutions at Clearwater Analytics (NYSE: CWAN), an accounting software platform used by banks, institutional investors, insurers and more to manage more than $5.6 trillion in assets every day.
Rob Colligan is a seasoned financial professional with 29+ years of experience leading public and private companies. Most recently, he served as the CFO of Chimera Investment Corporation from May 2013 – 2021.
