UTAS' sustainability: A comment on the 2024 Annual Report

 

It’s a toss up between UTAS and the State government as to who is in worse financial shape.

UTAS’ 2024 Annual Report has now been released. It reports on a calendar year basis so it’s only 8 months since the year ended. Unreasonably slow nevertheless.

The following are some observations about the 2024 financials and some of the slides from a recent PowerPoint presentation to staff titled Our financial context.

A previous blog titled The Rufus Years described the abject performance of UTAS since Vice Chancellor Black assumed control. The most stunning chart was the noticeably downward trajectory of core earnings. The latest year shows a minor uptick, but that does come with a caveat which was absent from UTAS’ accompanying explanation.

 

 

The core activities of the University are:

·        learning and teaching

·        research, knowledge transfer and research training

·        community engagement and

·        activities incidental to undertaking the above.

Restructuring costs are not regarded as core activities. We’ll come to this shortly.

Essentially core activities exclude investment income, bequests and capital grants for buildings and interest paid on borrowed funds. It’s a commonsense metric which allow for meaningful comparisons over time and across universities. It includes depreciation on buildings used to conduct the core activities. UTAS some years ago bought a lot of real estate in Hobart City with a view to moving its core activities. But now that some have been sold or about to be sold (more on this below) the losses from disposal are being excluded from core earnings. In 2024, if losses on disposal were included (if depreciation on buildings is a core expense, so too should losses on disposal) then core losses would have been $52 million instead of $47 million, little change from the previous year’s loss of $55 million.

Because core earnings contain an allowance for depreciation which is a non-cash expense, the all-important figure of cash from core activities won’t be as bad. It’s cash that needed to pay the bills, cash needed for sustainability which is crucial,  not profits per se. Many entities struggle through making losses because they are still cash flow positive.

So, what are UTAS’ all important cash earnings from core activities, the EBITDA figure (EBITDA means Earnings Before Interest Tax Depreciation and Amortisation) ?

Slide 26 from the Staff PowerPoint Presentation had the preamble:

We have started to improve our annual result, though continued effort is needed to close the gap to our target range as we are continuing to draw from our reserves while below the line

We’ll come to the matter of running down reserves, but first the chart:

A few comments are warranted.

1.     The Target Range for EBITDA is $50 to $60 million per year.

2.     This is needed to pay interest, principally on the $350 million of Green Bonds of $15 million, plus $30 million for capital replacements and upgrades necessary for a learning and research facility the size of UTAS.

3.     UTAS told the recent Public Accounts Committee hearing into UTAS’ Financial Position the minimum EBITDA required was $60 million per year, so it has lowered the bar a little to $50 million.

4.     According to UTAS the EBITDA fell to $1 million in 2023 but in 2024 recovered to $15 million and is now heading upwards.

5.     The EBITDA figure is in nominal terms. In other words, part of the expected growth is simply due to inflation. But the target band is not adjusted for inflation. So how meaningful is it to present a line in nominal terms heading towards an unindexed target? Mark it down as three out of ten. It’s designed to mislead.

6.     One omission from EBITDA is restructuring costs. Under Rufus’ reign restructuring cost have totalled $49.2 million or $8.2 million per year, not a trifling amount even for UTAS. Excluding restructuring costs from core earnings is hard to fathom. They certainly reduce the earnings remaining  to fund interest payments, and capital replacements and upgrades, which is the whole point of an EBITDA calculation.

7.     Another more esoteric accounting trick is to include what is in effect a loan write-off  in core earnings. The following may be a bit nerdy but hang in there it’s quite important. Rather than borrow money to build student accommodation and use the rents to pay off loans, UTAS built student accommodation and then forward sold 30 years of rents to raise funds or to replenish what it had just spent. Some existing facilities were also included. The net effect was UTAS received $203 million, in two tranches in 2017 and 2021. It was in effect income in advance. The proceeds have been used along with the proceeds from the $350 million Green Bond issue to fund the Hobart rebuild and to help fund the losses that have coincided with Rufus’ appearance on the scene. UTAS’ partner in the arrangement Spark Living receives a share of the rents from students, roughly two-thirds, with the remainder retained by UTAS to pay rates etc. Spark is required to pay repairs and maintain the facilities in an agreed condition because at the end of 30 years the facilities revert to UTAS’ control.  From an accounting perspective the income received by UTAS in advance is amortised over the 30 years. A book entry transfers a portion to the P&L Statement as income each year. That amount is currently $6.2 million. Two thirds of rental income subject to the arrangements bypasses UTAS’ accounts and is paid directly to Spark. That’s how Spark gets its required income. In UTAS ‘books it includes $6.2 million as income each year which is in effect a partial  write off of a ‘loan’ it has received. It requires a long stretch of the bow to include this write-off as earnings in the EBITDA calc which is supposed to measure cash available to sustain operations, but UTAS manages to do it. An EBITDA calc isn’t part of the financials and there aren’t accounting standards which govern what’s included. The Auditor doesn’t check it. It’s up to Council to determine what interpretation to give. In this case it’s misleading. Deliberately so I’d suggest. Or just sloppy?

 

If core EBITDA is calculated from UTAS’ own calculation for core earnings by excluding depreciation, including the relentless restructuring costs, and excluding the ‘loan write-off’ as described above the EBITDA is noticeably more subdued.

 

 

Despite the restructuring and cost cutting the EBITDA is still a negative number – minus $3 million – a far cry from the minimum of +$50 million required for sustainability.  

What’s Plan B?

To emphasise, this is an EBITDA calculated from first accounting principles. There is not a strict accounting standard which governs its calculation, to my knowledge.

EBITDA is likely to worsen if UTAS has to pay more to Spark. Currently in addition to it receiving two thirds of relevant rents, Spark also has been receiving the distributions from the National Rental Affordability Scheme (NRAS) currently about $6.4 million per year but due to expire in 2026 thanks to Tony Abbott putting a 10-year limit on the scheme. Spark’s receipts, the two-thirds of rents plus the NRAS distributions totalled $21 million in the latest year 2023 for which there are details (reported to last year’s parliamentary PAC inquiry) which intuitively seems about the right figure for Spark to recoup its $203 million investment over 30 years, earn a return in the process, allow enough to keep the buildings up to standard and to compensate it for the risks it is taking. Remember it’s as if Spark has bought a 30 year annuity. At the end of the term it will have nothing as the buildings will revert to UTAS’ control so it has to ensure it gets its money back and makes a satisfactory return. Their is no residual value to its investment. When the NRAS distributions cease it appears unlikely Spark will be receiving an adequate amount from its share of the rents and hence UTAS may have to top up the returns, to the detriment of its severely challenged EBITDA figure. Perhaps another $6 million per year? UTAS used to often skite about the innovative approach it took to financing student accommodation. It might be coming back to bite it on the bum. Sceptics always thought it was nothing more than a way to escape the clutches of Tascorp and the need to seek the Treasurer’s permission to raise money (the Spark deal didn’t need the Treasurer’s approval) even if it meant the implied interest rates were higher.

So much for UTAS profitability, what about its financial position, its assets and liabilities?

Slide 24 from the recent staff presentation starts with the preamble:

 

Our Balance Sheet remains strong with a net asset balance of $1.3b, but it comprises largely illiquid assets such as land, buildings and equipment.

The commentary continues:

Other balance sheet highlights include:

·        Cash and Other Financial Assets of $483.2m made up of a mix of cash and term deposits as well as investments

·         Borrowings of $353.9m, almost entirely related to our $350m green bond debt raising in 2022

The chart gives an easily accessible overview of UTAS current position. First a few further explanations before noting a couple of serious omissions which no doubt are designed to mislead.

1.     The other liabilities (GORTO) of $164.1 million is in relation to the Grant of Right To Operate the student accommodation arrangement with Spark Living. It is that portion of the rental income received in advance (the $203 million) yet to be written off.

2.     Contract Liabilities (Income in advance) of $205 million mainly relates to research grants and contract receive in advance and which normally is spent over the next one to three years.

3.     In order to have assets available to use to fund spending as required by the conditions of the research grants and contracts UTAS has in addition to its cash and investment, other amounts labelled ‘Receivable and Other Assets’  most of which will be received in cash within a year and  which includes surplus Hobart properties for resale  listed as being valued at $53.5 million, after UTAS’  Plan A to reimagine Hobart didn’t eventuate. A contract was executed for the sale of the Fountainside Hotel in 2024 after it was classified as an asset held for sale at the end of 2023. Settlement is expected to take place sometime in 2025.  The hotel remains an asset held for sale as at 31 December 2024, along with the old K&D Warehouse, 65 Argyle Street and 31-37 Bathurst Street

4.     Property plant and equipment is self-explanatory. Most relates to land and buildings

5.     Intangible assets of $47.9 million are mainly software.

6.     Service Concession Assets of $241.5 million is the value of the student accommodation subject to the GORTO arrangements with Spark Living. This confirms UTAS still owns the buildings but because they are subject to GORTO arrangements they are separately distinguished from other freehold property.

7.     Trade and other payables are self-explanatory.

8.     Provisions relate to employee entitlements.

A reasonably tidy balance sheet but not quite as strong as UTAS says, due to two notable problems.

First there are some seriously large capital commitments which will become due and payable in 2025. It may have happened already seeing as 2024 ended almost 8 months ago. Contracted amounts which are not due and payable yet aren’t included as liabilities, rather they are noted as future commitments in the Notes to Accounts. For the 2024 year there was $117 million of capital commitments relating to the Forestry/Timberyard and Taroona IMAS facilities.

Second there is a large chunk of cash and investments which is restricted. These are amounts, statutory funds, bequests etc that can’t be spent on flights of fancy.

A more meaningful total of cash and investments available to fund UTAS new buildings and indeed ongoing losses follows. The figures for the last 3 years are presented alongside the 2016 figures, the year before UTAS started with to GORTO arrangement which precipitated the Big Spend in Hobart Town.  The borrowings and the borrowing-like GORTO liabilities are also included in each year.

Available cash & investments $ million
	2022	2023	2024		2016
Cash on hand	130	76	31		17
Investments	547	450	452		288
Subtotal	677	526	483		305
Less Restricted funds	146	150	177		143
Capex commitments	130	136	117		42
Amount available	401	240	189		120
Borrowings	350	350	350		103
GORTO liability	175	168	162		0
Total borrowings	525	518	512		103

 

First to 2024. After including capital commitments and excluding restricted funds, the amount available to use for new buildings and to fund losses is not $483 million as suggested by UTAS but only $189 million. In 2 years this has dropped by $212 million as the Forestry building proceeded and funds were needed to pay interest and basic capital replacements and upgrades both of which should be funded by EBITDA.  The closing available cash of $189 million,  after adjusting for inflation is roughly where UTAS was in 2016. The only difference is borrowings then were $103 million compared with the figure at the end of 2024 of $512 million. Not only that but the ability to service the borrowings has moved in the opposite direction, almost an inverse relationship.

The ship needs to be turned around pretty quickly for before you know it $280 million of Green Bongs will need to be redeemed. 2032 will arrive quicker than expected. It won’t be a time when UTAS will be able to negotiate with bondholders. It will need the redemption funds on hand. The original plan was to subdivide and develop residential housing at Sandy Bay which would have helped both fund new STEM facilities and provide funds to redeem  $280 million of Green Bonds redemption which will take UTAS’ borrowing back to where they were in 2016. The next plan was to sell land above Churchill Avenue to help build STEM facilities at Sandy Bay.

Now what?

UTAS has a brand spanking new Foresty building in Hobart. But was it worth it?

UTAS’ path to sustainability is as indistinct as the Liberal’s sensible path to surplus.

A little more realism is needed. From management. From policy makers. From everyone. It’s hard to envisage a bigger stuff up could be carefully planned.