UTAS: The Rufus years

 

Summary:

The first five years of Prof Black’s tenure has delivered $117 million in losses from the core activities of teaching and research including the relentless pattern of restructuring costs as UTAS struggles with declining real revenues and increasing costs. Capital grants of $227 million included as revenue help hide the losses.

Declining cash flows have accompanied the reduced profits to such an extent that 2023 saw UTAS with negative cash earnings for the first time in 2023, with no discernible plan to rectify the mess.

This means operations are unable to service the current level of borrowings.  Servicing existing borrowings as well as all new capex requires running down existing cash and investments until there’s no option but to start selling the family jewels, parts of the Sandy Bay campus.

At the rate of capex spending undertaken in 2023, UTAS only has another two years before the cash tin runs dry, which will not be enough time to make core activities sustainable once again.

The primary focus should be on arresting the decline in earnings from core operations. Moving to Hobart will only defer and exacerbate the problem. Building STEM facilities with a sale and leaseback arrangement won’t fix negative earnings from the core activities of teaching and research.It’ll make it worse as any investor/lessor will want a rate of return well in excess of the rate at which UTAS could borrow, if only Treasurer Ferguson will approve an increase in UTAS’ borrowing limit. UTAS knows this but sheer bloody mindedness has led it to deliberately pursue the reckless course of taking UTAS to the brink of insolvency, by trying to force the hand of the Parliament and the government to allow it to sell parts of Sandy Bay so that it can continue with its vanity project whilst ignoring the wishes of most other stakeholders.

Prof Black has recently railed against the inadequacies of Tasmanian schools’ performances notably the numbers who make it to Year 12. It may be a heart felt concern, but in part is likely to have been a reflection on the lack of students moving on to UTAS. Prof Black called for an inquiry into Tasmania's education system. Any inquiry should require a closer look at UTAS.

However less than expected numbers of Tasmanians wishing to study at UTAS must be in part due to mainland universities being able to attract the best and brightest, those who can afford it and those wishing more face-to-face learning and/or a more communal/collegiate setting than lesser quality offerings in a traffic congested city.

If the edu-migration international student Ponzi scheme was virtually over even before it started, no doubt ably assisted by the Covid virus, how long will the current plan last?

Even the mildly sceptic would question if UTAS racks up $117 million in losses from core activities over five years what are the odds of it pulling off a much riskier project like the Hobart move? If it doesn’t who’ll be left holding the can?

Isn’t it time to take a deep breath.

The government and the Parliament need to show who’s boss. Prof Black or the people of Tasmania?

What the 2023 Annual report revealed:

The 2023 year was by far the worst of the five years since Professor Black assumed the role of Vice Chancellor of UTAS.

UTAS reports on a calendar year. The 2023 result revealed UTAS’ core activities of teaching and research resulted in a loss of $54.8 million.

This is a crucial metric. Page 70 of the 2023 Annual Report describes its relevance:

In managing our financial performance, we focus on the result from core activities. Core activities reflect the underlying operations of the University, primarily teaching and research. This result provides a more comparable operating outcome year on year, as it excludes one-off or particularly volatile items such as capital grants, investment returns, and statutory funds which have restricted use.

So how does the 2023 result compare over the 5 years of Prof Black’s tenure? The following chart tells the story.

 Little explanation is needed. Prof Black’s first year started with a small loss of $1.9 million. The following year revealed a small profit. But thereafter it’s been all downhill.  Luge trips are usually less hectic. It’s been an astonishing decline.

The excerpt from the Annual Report stated core activities exclude:

·        Capital grants from government(s) usually for new buildings, which are included in overall income but obviously need to be excluded to derive a figure for profits from core operating activities.

·        Investment returns refer to returns from UTAS investments. What the Annual Report omitted to say that investment returns in this context refers to net investment returns. In other words, investment returns less interest paid. Historically investment returns far exceeded interest paid. This contributed to UTAS’s profits from non-core activities and helped offset losses from core activities. But in the last two years this has changed due to the $350 million Green bond issue. At the same time investments that grew following the bond issue and the forward selling of 30 years of rent from Purpose Built Student Accommodation to Spark Living are now being run down as capex works to reshape Hobart progresses. Returns from investments net of interest paid will contribute less to UTAS coffers. A loss in the very near future is likely.

·        Statutory funds include philanthropic funds and endowments which are restricted. Effectively they are amounts held in trust by UTAS. They ebb and flow as they are received and spent and as such are included as revenue and/or expenses but excluded from the calculation of profits from core activities.

However, the most significant exclusion from core activities didn’t rate a mention. These are restructuring costs. It is common to exclude one-off expenses when trying to establish comparative figures, but restructuring costs are not one offs. They appear with such regularity that, without adequate explanation, it’s difficult to see why they don’t form part of core activities. Under Prof Black’s reign restructuring costs have averaged $8.8 million per year. In 2023 they amounted to $9.5 million.

If restructuring costs are included with core activities, the last five years look bleak.

Losses in every year culminating in a whopping $64.4 million loss in 2023.

It’s not difficult to calculate that core activities and restructure costs have contributed $117.3 million of losses over the past five years.

One reason it was kept well hidden is because $227 million of capital grants boosted the balance sheet over that period.

It must be noted that these losses include depreciation of UTAS’s assets which principally comprise its buildings. It is entirely appropriate that wear and tear on buildings be recognised as an expense. Depreciation is a non-cash expense. And there are others, but depreciation is the most significant. This means that a profit figure will understate cash from operations. Profits can be negative, but entities struggle on if cash flow is positive.

Positive cash flow is the only way any entity like UTAS can sustain itself, not only being able to pay operating expenses but to help pay for new capex and to service borrowings. The standard measure of cash earnings is EBITDA which stands for Earnings Before Interest Tax Depreciation and Amortisation, essentially the cash earnings before interest and depreciation (NB UTAS doesn’t pay tax).

As was noted in HERE  the UTAS Council meeting on 27^th April 2023 noted the Council “discussed the challenging conditions facing the University in 2023” and how “to generate a positive EBITDA in the coming years.” The fact that UTAS’ EBITDA was plummeting is now confirmed by the 2023 Annual Report. This is UTAS’ EBITDA on Prof Black’s watch.

The Council discussed the negative EBITDA in April 2023 which means management must have known about it for longer, yet  2023 still posted a negative EBITDA of $16.6 million. This is extremely serious. Falling real revenues, declining international students and inflationary effects on expenses may describe what’s happening but idle descriptions give no hint about solutions.

Turning round a negative EBITDA will be like turning the Queen Mary in mid-stream with a strong current and an ebbing tide. Having Captain Queeg on the bridge adds another layer of difficulty. Tugs will be needed. Will Tug Master Michael Ferguson assist? When will the government be asked to assist

UTAS with a negative EBITDA is not something Green bond holders would have expected. When they tipped in $350 million the EBITDA was $60.4 million (posted in 2021). It’s now negative $16.6 million. Interest to pay bondholders must now come from running down existing cash and investments. It’s not a viable place to be for too long. It certainly makes the value of bonds much less should they wish to sell to another party. If they were misled when buying the bonds it could get messy.

Thus far we’ve covered declining profits and declining cash flows culminating in a negative EBITDA, the inability to pay interest from current earnings.

So, what did UTAS spend on new capex in 2023? A total of $162 million was spent. Of this $154 million was added to the work in progress pool which now has book value of $205 million. These are yet to be finished buildings.

To finance capex, cash on hand declined by $53.6 million and investments of $114.2m were sold. Fortunately, 2023 was a better year for shares and investments and UTAS made an unrealised investment gain of $17.6 m which was included in investment income for the year. 

As well as outlaying $162 million, the Annual Report notes another $136 million is committed at year’s end. Committed means it will be payable in this year 2024, of which $111.6 million will be for the Timberyard Building, Hobart and $17.3 million for the Northern Transformation project.

A quick snapshot of what’s left to pay for more capex follows (the 2022 figures are also shown):

Amounts are $ million.

	2023	2022
Cash on hand	76	130
Investments	450	547
Subtotal	526	677
Less Restricted funds	150	146
Capex commitments	136	130
Amount available	240	401

 

At the end of 2023, $240 million was still available, a decrease of $161 million over the 2023 year. It will be noted this was all used to pay capex of $162 million for the year. Also of note are the restricted funds ($150 million at the end of 2023) which are unavailable to be used to fund capex (as we noted earlier in this blog).

UTAS only has two years at most of available cash if it keeps spending as it did in 2023.

Cash will also be needed to fund operating cash deficits until UTAS finds a way to turn the Queen Mary around. There is an unused $50 million overdraft approved, but a prudent Council will hopefully reserve that facility to fund operations in an emergency.

Selling off surplus buildings is sometimes touted as the fall-back position to help UTAS pay its bills. One can’t lose even if plans change, and surplus buildings need to be sold was the smug reassurance whenever UTAS was questioned about the wisdom of its investments.

UTAS has recently listed for sale the Mid City and Fountainside hotels. In its 2023 Annual Report the two buildings were shifted from property plant and equipment on the balance sheet to an account labelled ‘assets held for sale’. The latter has a value of $45 million which is the estimated sale proceeds.

However given the purchase prices, the ingoing costs, the costs of refurbishment described as ‘recent’ in the sales brochures and the likely exit costs, the investments will produce losses.

The Mid-City was bought in March 2018 for $25.85 million (NB this is the price on The List website altho’ UTAS told the Leg Co committee it only paid $23.5 million – the difference could be plant and equipment?) and the Fountainside for $18.76 million in December 2018. That’s almost $45 million for starters. Then there’s the ingoings of 5 per cent plus the sale fees of another possible 5 per cent. Then there’s refurb costs of who knows what.

With interest rates expected to stay higher for longer, the effects are starting to flow through to the amount investors are prepared to pay for commercial property. With higher interest rates, investors will want a higher return which means that offer prices will be lower. UTAS is selling property in a market where investors will be seeking to pay less than they would have in the past.

UTAS is about to be enveloped by a perfect storm. All the stars are in alignment.

Yet for UTAS it’s business as usual.

To recap:

The first five years of Prof Black’s tenure has delivered $117 million in losses from the core activities of teaching and research including the relentless pattern of restructuring costs as UTAS struggles with declining real revenues and increasing costs. Capital grants of $227 million are included as revenue which helps hide the losses.

Declining cash flows have accompanied the reduced profits to such an extent that 2023 saw UTAS with negative cash earnings for the first time in 2023, with no discernible plan to rectify the mess.

This means operations are unable to service the current level of borrowings.  Servicing existing borrowings as well as all new capex requires running down existing cash and investments until there’s no option but to start selling the family jewels, parts of the Sandy Bay campus.

At the rate of capex spending undertaken in 2023, UTAS only has another two years before the cash tin runs dry, which will not be enough time to make core activities sustainable once again.

To conclude:

The primary focus should be on arresting the decline in earnings from core operations. Moving to Hobart will only defer and exacerbate the problem. Building STEM facilities with a sale and leaseback arrangement won’t fix negative earnings from the core activities of teaching and research. It’ll make it worse as any investor/lessor will want a rate of return well in excess of the rate at which UTAS could borrow, if only Treasurer Ferguson will approve an increase in UTAS’ borrowing limit. UTAS knows this but sheer bloody mindedness has led it to deliberately pursue the reckless course of taking UTAS to the brink of insolvency, by trying to force the hand of the Parliament and the government to allow it to sell parts of Sandy Bay so that it can continue with its vanity project whilst ignoring the wishes of most other stakeholders.

Prof Black has recently railed against the inadequacies of Tasmanian schools’ performances notably the numbers who make it to Year 12. It may be a heartfelt concern, but in part is likely to have been a reflection on the lack of students moving on to UTAS. Prof Black called for an inquiry into Tasmania's education system. Any inquiry should require a closer look at UTAS.

However less than expected numbers of Tasmanians wishing to study at UTAS must be in part due to mainland universities being able to attract the best and brightest, those who can afford it and those wishing more face-to-face learning and/or a more communal/collegiate setting than lesser quality offerings in a traffic congested city.

If the edu-migration international student Ponzi scheme was virtually over even before it started, no doubt ably assisted by the Covid virus, how long will the current plan last?

Even the mildly sceptic would question if UTAS racks up $117 million in losses from core activities over five years what are the odds of it pulling off a much riskier project like the Hobart move? If it doesn’t who’ll be left holding the can?

Isn’t it time to take a deep breath.

The government and the Parliament need to show who’s boss. Prof Black or the people of Tasmania?