UTAS:Things must be bad -- Part 2

 

Tasmanian Labor continues to berate anyone not supporting the disposal by UTAS of its Sandy Bay land for residential housing. Liberals, Lambies and Greens are all portrayed as being disinterested in solving the housing crisis by building 2,000+ new homes and/or helping to fund a new STEM building.

UTAS’ surrogate spokesperson Dean Winter has been instagramming images of the proposed development taken from Deloitte’s two reports into the feasibility of the development of Sandy Bay dated November 2021 and March 2022. It’s reasonable therefore to conclude the development plan Dean has been spruiking is the same as described in those Deloitte reports.

In summary this is what we learnt from the Deloitte Reports:

·        The planned development is a 30-year project, mostly for 2,656 new residences, a combination of 1, 2 and 3 bedroom units with an average area of 88 square metres to be sold at an average price of $880,000 (2021 prices).

·        The project will be conducted in stages. Needless to say, outlays will occur before revenue so funds will be required to fund the deficits in the early years. Peak project debt of $234 million will occur in year 5, in 2027, but the project is already 2 years behind schedule. The funds squirrelled away by UTAS to fund the project’s debt have all but disappeared, due to cost overruns and delays with the Hobart rebuilding and the increasing losses from core activities of teaching and research which UTAS is yet to fix. UTAS can’t borrow more without the Treasurer’s permission.

·        The project will reach cash break even in Year 17, after which time the project will start to rebuild UTAS’ equity. Over the ensuing 13 years cash profits of $800 million are predicted. That’s $800 million in future $s, which roughly translates to possibly $400 million in current $ terms. Not a great deal seeing UTAS’s current equity stands at $1,341 million.

·        UTAS initially hoped to run the project itself but due to its deteriorating financial position is now looking at ways to take on a joint venture JV partner and/or selling properties on a leasehold rather than freehold basis. The latter may result from restrictions that may be placed on UTAS by the recently tabled Bill in State parliament.

·        The Deloitte Reports stress that the project is currently only at the 5% design concept stage. To listen to politicians spruiking the deal one could easily start believing they’re ready to turn the first sod.

·        The project doesn’t even manage to meet the minimum target return if land and buildings to be redeveloped are given a zero value. For the project to achieve the target rate of return UTAS will have to pay the developer to take the land off its hands. This won’t occur of course, but what it means is that UTAS will have to accept a lower rate of return if a JV partner wishes to achieve a target rate.

·        If the project proceeds and the project land is given a value whatever that may be, whether it’s zero or $26 million, it will likely be far less than the current book value of the land and buildings. In which case UTAS will suffer a large drop in its equity position, which won’t start to be recovered until Year 17. Sceptics of the redevelopment have been labelled reckless if they don’t sign up as UTAS cheerleaders. It’s much easier to establish recklessness where existing assets are trashed in the hope of getting some back 17 years later. Its craziness on steroids.

·        Given that any surplus cash from the development won’t occur until at least year 17, that’s 2042 at the earliest, the redevelopment proposal has nothing whatsoever to do with funding a new STEM building. For the Labor Party to suggest otherwise reveals a wilful ignorance of reality.

·        Given that the existing land and buildings obviously have a value as part of a continuing institution for learning and research, it is that value that needs to be plugged into any model when trying to assess a rate of return on a project to convert a valuable asset to an above ground cemetery for cashed up baby boomers. It will certainly paint a different picture than the misinformed messaging from the Labor Party.

 

At the outset it must be emphasised the reports are not final feasibility studies awaiting a final investment decision.  They represent the initial thoughts at the 5 per cent concept design stage.

First there’s a late lunch with a few scribblings on the back of an envelope. Next comes the concept design stage. That’s where we are right now. There’s still another 95 per cent to come.

To give the impression as Dean Winter has done, that the road show is ready to roll is disingenuous at best, dumb and deceitful at worst.

Deloitte clearly spelt it out:

We stress that the Sandy Bay Master Plan is currently at 5% concept design stage and therefore the estimated cost and value metrics adopted in our assessment may change significantly as the masterplan continues to develop and more information pertaining to individual asset design and schedule of finishes becomes available”.

……………………..

“As the Sandy Bay Master Plan is currently at 5% concept design stage, we advise that our development feasibility assessment cannot be relied upon for financial or investment decisions. The assumptions within this report and underlying our cash [sic] flows may change materially over time as the design of the master plan changes.”

The feasibility study was designed to look at whether estimated revenue exceeds outlays and if so does it provide a suitable rate of return. Conceptually pretty straight forward. The project runs for 30 years and is broken up into stages. It’s a relatively easy spreadsheet exercise to discount future expected revenues and expenses back to present value to see if revenue exceeds expenses and what is the implied rate of return.

Although there is a little commercial and retail development most is residential, with 2,656 dwellings proposed as per the March 2022 Deloitte report, a combination of 1,2- and 3-bedroom dwellings with an average floor area of 88 square metres. The average revenue from each unit is $880,000, based on 2021 prices. That puts the average price in current $’s at over $1 million. That must be Labor’s new target demographic, those who can afford to pay $1 million for a two bedder in Sandy Bay. Unlikely to attract young families or young singles looking for inner city accommodation. Retired baby boomers perhaps?

Selling an average of 84 per year will raise revenue of $4 billion over 30 years. Costs will reduce profits to $800 million over 30 years. That’s $800 million in future dollars. As the project will run in stages each stage necessitates outlays before revenues start. Hence debt funds are required in the early years peaking at $234 million in Year 5. Year 17 will see the cash break even point. Thereafter for the next 13 years profits may see $800 million added to UTAS equity. Because those $s will be earned well into the future, in current $ terms is probably only $400 million. To put this into perspective, UTAS’ current net worth is $1.3 billion, so we’re not talking about much at all.

The Deloitte model is similar to that used by developers when deciding how much to pay for an undeveloped block to accommodate a proposed development, so they can achieve their target rate of return. In this case the model was used to calculate the likely rate of return given estimated revenue and expenses. The initial run as disclosed in the Nov 2021 report included land for redevelopment as having a zero cost.  This meant that the rate of return ended up being 17.85 % just over the target minimum.

But someone must have thought….whoops….it’s not exactly kosha to assume the existing land and buildings to be redeveloped has a zero value, that there are alternative uses, like remaining at Sandy Bay and renovating.

So UPPL[1] instructed Deloitte to adopt a land value of $26 million to see how sensitive the model was to reality. The rate of return fell from 17.85 per cent to 13.81 per cent. If the existing land is worth more, the rate of return will fall even further short of the target.

To get the $26 million notional figure into context, it’s worth having a look at UTAS’s latest balance sheet. At 31^st Dec 2023 UTAS had $209 million of land and $746 million of buildings on its balance sheet, for a total of $955 million, quite apart from the yet to be completed building works in Hobart and the two Hobart hotels listed for resale, together totalling $250 million. Some of the $955 million will relate to Sandy Bay. So, to nominate a value of only $26 million to be used as the cost to calculate the rate of return for the Sandy Bay redevelopment appears to seriously undervalue the opportunity cost of existing land and buildings which need to be used in any calculation of a rate of return for a development project.  This is the crux of the current debate. What is the current book value of the land and buildings UTAS reckons is only worth $26 million as a redevelopment proposition. It’s likely to have a book value considerably higher. It must have a value as an existing university, albeit deliberately run down. Which means that triggering the redevelopment project will lead to a catastrophic book loss, likely to be a significant amount alongside any expectancy sometime after Year 17 of the vanity plan.

Perhaps UPPL didn’t bother to tell Dean Winter the full story. Perhaps Dean wasn’t smart enough to ask?

Even with a low-ball figure for existing land, the project failed to achieve the targeted minimum rate of return.

As a corollary the model also spits out a figure for the value of the land needed to achieve the targeted 17.5 per cent return. In the March 2022 Report that figure was minus $27 million. In other words, a developer wishing to earn a 17.5 per cent return wouldn’t pay UTAS for the existing land. Instead, it would require UTAS to pay the developer $27 million for the land.

Deloitte commenced their feasibility study assuming UPPL will develop the property and sell developed land and unit packages on a freehold basis.

But UTAS deteriorating financial position means that is no longer possible. Initially 2022 was pencilled in as the starting date. However, it won’t be able to fund the peak debt assumed to occur in year 5 of the development of $234 million because all its spare cash will be spent on a half-completed Hobart rebuild plus shelling out to cover losses from core activities of teaching and research. It will have to take on joint venture partners who will want a bigger slice if they are to achieve their preferred rate of return. A JV partner won’t want to be spending money on property it doesn’t own or a least have an interest in. Any attempt by a JV partner to protect its interest might even be in breach of Sec 7(2) of UTAS’ governing Act prohibiting borrowings without the Treasurer’s permission?

If UTAS has to resort to selling residential units on leased land being land it is unable to sell on a freehold basis, then joint venture partners will demand an even higher slice for the extra risks, namely lower than expected prices for leasehold vs freehold properties.

The point is, we simply do not know what UTAS is planning to do with public assets.[2]

Deloitte refers to the moving feast:                                                                          

A key feature of the transition strategy is the preference for UPPL to retain ownership over most of the Churchill Precinct in order to have a stewardship role to ensure that the precinct is developed for the benefit of the community and the university. The implication is that much of the residential housing will be delivered on some kind of rental basis or ground lease. Our assessment is undertaken on the basis that all assets to be constructed can and will be sold on a freehold basis.

Given all the uncertainty about the proposed development it beggars belief than Dean Winter was able to ride into town and without hesitation declare anyone not supporting UTAS was a traitor to Tasmania. We only know about the Deloitte Reports because of the RTI persistence of Robert Hogan[3]. It didn’t result from Labor’s commitment to truth transparency or any other public policy principles.

In summary this is what we learnt from the Deloitte Reports:

·        The planned development is a 30-year project, mostly for 2,656 new residences, a combination of 1, 2 and 3 bedroom units with an average area of 88 square metres to be sold at an average price of $880,000 (2021 prices).

·        The project will be conducted in stages. Needless to say, outlays will occur before revenue so funds will be required to fund the deficits in the early years. Peak project debt of $234 million will occur in year 5, in 2027, but the project is already 2 years behind schedule. The funds squirrelled away by UTAS to fund the project’s debt have all but disappeared, due to cost overruns and delays with the Hobart rebuilding and the increasing losses from core activities of teaching and research. UTAS can’t borrow more without the Treasurer’s permission.

·        The project will reach cash break even in Year 17, after which time the project will start to rebuild UTAS’ equity. Over the next 13 years cash profits of $800 million are predicted. That’s $800 million in future $s, which roughly translates to possibly $400 million in current $ terms. Not a great deal seeing UTAS’s current equity stands at $1,341 million.

·        UTAS initially hoped to run the project itself but due to its deteriorating financial position is now looking at ways to take on a joint venture JV partner and/or selling properties on a leasehold rather than freehold basis. The latter may result from restrictions that may be placed on UTAS by the recently tabled Bill in State parliament

·        The Deloitte Reports stress that the project is currently only at the 5% design concept stage. To listen to politicians spruiking the deal one could easily start believing they’re ready to turn the first sod.

·        The project doesn’t even manage to meet the minimum target return if land and buildings to be redeveloped are given a zero value. For the project to achieve the target rate of return UTAS will have to pay the developer to take the land off its hands. This won’t occur of course, but what it means is that UTAS will have to accept a lower rate of return if a JV partner wishes to achieve a target rate.

·        If the project proceeds and the project land is given a value whatever that may be, whether it’s zero or $26 million, it will likely be far less than the current book value of the land and buildings. In which case UTAS will suffer a large drop in its equity position, which won’t start to be recovered until Year 17. Sceptics of the redevelopment have been labelled reckless if they don’t sign up as UTAS cheerleaders. It’s much easier to establish recklessness where existing assets are trashed in the hope of getting some back 17 years later. Its craziness on steroids.

·        Given that any surplus cash from the development won’t occur until at least year 17, that’s 2042 at the earliest, the redevelopment proposal has nothing whatsoever to do with funding a new STEM building. For the Labor Party to suggest otherwise reveals a wilful ignorance of reality.

·        Given that the existing land and buildings obviously have a value as part of a continuing institution for learning and research, it is that value that needs to be plugged into any model when trying to assess a rate of return on a project to convert a valuable asset to an above ground cemetery for cashed up baby boomers. It will certainly paint a different picture than the misinformed messaging from the Labor Party.

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[1] Deloitte was instructed by UTAS Properties P/L (UPPL) a wholly owned subsidiary of UTAS. UPPL was only incorporated in 2019 and at at 31^st Dec 2023 didn’t have much by way of assets or liabilities. At a guess it was incorporated to operate as UTAS’s property development arm for the Sandy Bay redevelopment. When UPPL instructed Deloitte, Prof Black was Chair. One of his fellow board members was David Clerk, UTAS’ Chief Operating Officer until December 2022 before quitting and resurfacing some months later kitted out in hi-viz standing alongside DeanWinter as spruiker in chief for the property lobby. The latest public filings show Prof Black has resigned from UPPL’s Board. The three current directors are two UTAS senior managers with an independent as Chair. It is odd from a governance perspective for the parent UTAS not to have a place on the board of an important wholly owned subsidiary. From memory the only time you see a company and a wholly owned subsidiary with no common directors is when insolvency approaches and where one entity gets dragged under because the associate can’t pay whatever is due. To avoid any director liability that may arise directors ensure they only sit on one board.

 

[2] The first Deloitte report started with land with a zero cost. When land was introduced as being worth $26 million in order to test the sensitivity of the rate of return to increased costs, it was accompanied with a stamp duty amount which suggest the land was to be sold. To whom at that stage is not clear, whether to UPPL itself or to a JV of which UPPL was a partner? In the second Deloitte Report the stamp duty amount was dropped, suggesting the land transfer was abandoned. Which suggests UTAS retaining the land but possibly selling it off on a leasehold basis once the new dwellings are built? UPPL hasn’t bothered to enlighten us.

[3]  This blog borrows heavily from Robert’s writings particularly Deloitte reports should sound death knell for UTAS relocation - Part 1 - The UTAS Papers  and A UTAS move to the Hobart CBD would cost at least $1.19 billion more than refurbishment of the Sandy Bay campus - The UTAS Papers