STANDING COMMITTEES F 3 Finance and Asset Management Committee Semi-Annual Borrower Reports (SABRe) for Housing & Food Services, Intercollegiate Athletics and School of Medicine South Lake Union INFORMATION This item is being presented for information only. BACKGROUND The Semi-Annual Borrower Reports (SABRe) are an aspect of an overall credit framework that is used at the University to assure that financial risks are identified and managed from the origination of an internal loan or debt issue to its final maturity. SABRes provide the Board of Regents with up-to-date information on the financial health of major borrowers and present pro forma vs. actual performance along with financial metrics. Key financial indicators show changes in performance and allow the Regents to see how the entities are responding. Housing & Food Services and Intercollegiate Athletics present a debt metric, a cash flow metric, and a reserves measure. When available, these measures are from audited financial statements and benchmarked against the most recent Regent approved pro forma or current financial plan. The research campus at South Lake Union presents actual and projected School of Medicine support and four-year historical growth in grants and reserves. A SABRe for the medical enterprise (UW Medical Center and Northwest Hospital) and the School of Dentistry are not included. Financial reports for these are anticipated for presentation to the Board of Regents in November. Attachments 1. Credit Framework for Internal Lending Program Funded Projects 2. Housing & Food Services SABRe Report October 2017 3. Intercollegiate Athletics SABRe Report October 2017 4. School of Medicine South Lake Union SABRe Report October 2017 F 3/210-17
Credit Framework for ILP Loans ORIGINATING OPERATING REPORTING MANAGING Institutional / Project Risks & Opportunities Timely Funding & Accurate Accounting Transparency & Early Warning Loan Maintenance & Financial Mitigation BOARD OF REGENTS APPROVE REVIEW APPROVE Capital Project Budget 1,3 Internal Loan 1,4 Semi-Annual Borrowers Report 1,4 Semi-Annual ILP Report 4 ILP Audit 4 Financial Stability Plan 1,2,4 Space Utilization 3 One Capital Plan 2,3 Institutional Debt Capacity Estimate 4 Financing Agreement 1,4 Debt covenants Reporting requirements Annual disclosure 1,4 Financial statement audits Covenant requirements Dedicated staff specialist for each borrower 1,4 UNIVERSITY ADMINISTRATION Financial Due Diligence 1,4 Base Case Key Risks Stress Tests Mitigation Plans Funding Plan 1-4 Draw schedule for project by source (debt, gifts, reserves, state) Loan Servicing 1,4 Amortization schedule Recording of loan Repayment budget Regular borrower meetings 1,4 Stakeholder Review covenant compliance Discuss upcoming challenges 1 Borrower 2 Planning & Budgeting 3 Capital Planning & Development 4 Treasury F-3.1/210-17 ATTACHMENT 1
Housing & Food Services (HFS) The proforma and projections include Phases 1-4a of the Housing Master Plan (HMP) and the design and pre-construction budget for Phase 4b. Phase 4a is underway and proceeding as planned; facilities will open to students in autumn 2018. Information regarding the status of Phase 4b was presented to the Board of Regents at the September 2017 meeting. FY17 contribution to reserves totaled $3.4M. Debt service coverage was 1.48x and reserve balances continued to exceed forecast. Several positive factors contributed to this success including strong occupancy demand, increased revenue from Commodore Duchess and Radford Court, and continued strong summer conference business. HFS anticipates drawing on reserves in FY18 resulting in cash flows of -$5.8M. This is due to additional capital outlays for HMP Phase 4a and the final contribution to the Phase 4b predesign budget. The reserve requirement set by HFS' ILP agreements totaled $17.4M in FY17 and is equivalent to 4 months of operating expenses plus $2.5M. HFS has earmarked $21.7M in restricted reserves for Phase 4a FF&E ($17.7M) and Phase 4b pre-construction costs ($4M). The remaining reserve balance of $25.5M is held for risk mitigation in the short term, early debt repayment, equity contributions to Phase 4b, and savings for future renovations (FY24+) of McMahon and Hansee Halls. Demand for autumn quarter housing was at an all-time high with a projected FY18 as-built occupancy of 112.7%. Housing demand continues to be strong throughout the University District and is a strong predictor of on-campus housing demand. HFS has increased overflow beds to help accommodate growing student demand and has taken other measures in an effort to house as many students as possible. Risk and Mitigations A significant decline in student occupancy is the primary risk to the system. Private market competition, price sensitivity, and reductions in longrange UW enrollment impact student occupancy. These risks are monitored by HFS throughout the year and, if necessary, mitigated by strategic occupancy planning. Total HFS debt service was equivalent to 29.0% of FY17 gross revenues and 50.8% of total FY17 operating expenses. HFS maintains debt service coverage (DSC) of at least 1.25x to mitigate this risk. DSC for FY18 is forecasted to be 1.41x. Selected Indicators System wide as-built occupancy indicates the overall health of residence hall and dining operations and measures demand for the system. 2013-2014 2014-2015 2015-2016 2016-2017 2017-2018 As-Built Occupancy 106.9% 110.9% 110.0% 110.2% 112.7% (1) Returning Residents (2) 40.0% 38.0% 40.4% 37.3% 38.6% Freshman Capture Rate (3) 71.6% 67.0% 68.6% 68.3% 70.7% (1) Projected autumn, winter, & spring quarter (2) Projected percent of prior year Spring resident count (3) Projected percent of freshman admission count 2.00 Debt Service Coverage (1) Net operating income as a multiple of debt service 1.56 1.48 1.48 1.25 1.26 1.30 1.37 1.40 1.41 1.43 1.26 1.28 1.29 1.28 1.32 1.32 1.46 1.44 1.00 0.00 $15 $10 $5 ($5) ($10) ($15) $150 $100 $50 Proforma (Phase 3 FY15 & Phase 4a FY16+) Actual thru FY16/Projected ILP Minimum 1.25x 3.3 33.3 10.8 (4.2) 8.2 Cash Flow Net operating income less debt service and capital expenses 4.9 6.4 5.4 3.4 0.3 0.9 (5.8) Pro forma (Phase 3 FY15 & Phase 4a FY16+) Actual thru FY16/Projected Reserve Balance (2) Unrestricted net assets; ILP minimum is 4 months of adjusted HFS operating expenses plus $2.5M (11.3) 53.6 61.8 65.1 59.3 65.7 71.2 80.1 50.8 55.7 56.0 57.0 45.6 40.7 (5.0) 8.9 6.6 11.3 91.4 1.2 47.3 48.5 13.9 105.3 Pro forma (Phase 3 FY15 & Phase 4a FY16+) Actual thru FY16/Projected ILP minimum (1) Effective FY17, debt for Commodore Duchess and Radford Court is recognized in the HFS debt service coverage calculation (2) Actual balances will be used on future capital expenditures or to retire debt F-3.2/210-17 ATTACHMENT 2
Intercollegiate Athletics (ICA) ICA continues to make progress in improving its financial stability. However, the department anticipates operating deficits in two of the next five fiscal years (FY19 and FY21). ICA has set aggressive goals around ticket sales and seat-related contributions, and is exploring new ways to increase revenues while improving overall fan experience at events. Growing the annual giving donor base is another priority and will help the department withstand revenue decreases in years without Don James Center renewals. The Financial Stability Plan estimate for FY17 was a deficit of -$5.6M. ICA's April 2017 presentation to the Board projected that the department would break-even in FY17. The unaudited FY17 year-end projection is now $1.87M cash-flow positive, driven by the following changes in revenue and expenses since the April presentation: o $3.7M increase in revenue, primarily related to: a Women's Basketball coach settlement; year-end Game Changer campaign contributions; accelerated Don James Center renewals; gate revenue for post-season hosting of Women's Basketball, Softball and Gymnastics; higher than anticipated souvenir and concessions revenue. o $1.9M increase in expenses, primarily related to: day of game expenses for officials and post-season hosting, spring sports postseason travel and Pac12 championships expense share; direct-billed electricity was significantly higher than April projections; incurring additional credit card fees due to the high level of new and renewal 2017 football season ticket sales prior to June 30. The Financial Stability Plan estimate for FY18 was $780K cash-flow positive. In April 2017, ICA presented a revised FY18 budget which was $2.14M cash-flow positive, buoyed by anticipated gate revenue growth associated with the strength of the football program. Soon after the April Board presentation, the NCAA approved the addition of a 10th football coach, which will impact ICA's expenses beginning in February 2018. Also, Don James Center renewals were higher than anticipated in FY17, leaving less to collect in FY18. These changes result in a revised cash-flow estimate of $1.59M for FY18. Risks and Mitigations While ICA has surpassed its annual fundraising goal by $3.2M in FY17, sustaining that momentum over the life of the campaign will be difficult. Football day of game expenses - including cost of security and guarantees paid to visiting non-conference opponents - continue to escalate at a significant pace. Mounting costs associated with NCAA deregulation, challenges to amateurism and litigation pose considerable financial risks. Increasing Pac12 distributions, revenue sports outperforming expectations, and an apparel deal in FY20 would help mitigate these risks. Selected Indicators 2016 season 2017 season % of prior year Football Season Ticket Renewals 36,496 38,826 106.38% New Season Ticket Sales 3,828 6,391 166.95% Football Luxury/Premium Seating Sold Out Sold Out NA Debt Service Coverage Net operating income as a multiple of debt service; FSP suspended ILP minimum through FY19 2.00 1.00 0.97 1.11 0.77 1.17 1.32 1.31 1.27 0.96 0.97 1.12 1.20 0.81 1.04 1.27 1.24 0.00 ($4) ($8) ($12) ($16) April 2017 FSP Proforma Actual (FY14-FY16) / Projected (FY17-FY22) Pre-FSP ILP Minimum 1.9 0.0 2.1 1.6 1.0 0.2 0.1 0.4 (8.4) Cash Flow Net operating income plus gifts minus debt service and capital expenses (5.8) April 2017 FSP Proforma (4.0) (3.9) (1.4) Actual (FY14-FY16) / Projected (FY17-FY22) (2.6) (6.5) Reserve Balance Unrestricted net assets; FSP established ILP minimum at $10M through FY19 $50 $25 33.0 32.1 17.6 26.3 29.8 28.4 31.4 27.5 27.6 24.4 23.1 25.0 25.3 16.5 17.5 April 2017 FSP Proforma Actual (FY14-FY16) / Projected (FY17-FY22) ILP Minimum Note: ILP Covenants will be revisited in FY19. F-3.3/210-17 ATTACHMENT 3
School of Medicine South Lake Union South Lake Union (SLU) includes SLUI, SLUII, SLU3.1, and SLU3.2. Overall, the actual financial performance for SLU is running behind the proforma performance. Lower actual results reflect lower than planned density in research space due to challenging federal grant environment, as well as the decision to include a Biological Safety Level 3 (BSL3) lab in SLU 3.1 which has lower research density than other research space. Other factors continuing to cause a challenging grant environment include faculty turnover and competitive renewals requiring multiple submissions for approval. FY17 results improved over FY16 results due to a $3.4M increase research activity (see chart below). Also, FY16 included a $1.5M one-time ground lease expense related to FY15. FY18 through FY19 projected results assume stable revenues and expenses consistent with FY17. FY20 through FY22 projected results are lower than proforma due to SLU3.2 delayed occupancy from February 2018 to July 2018 and the shelling of the 8th floor reducing research activity. The F&A rates negotiated in FY16 (74% in FY16, 75% in FY17, 76% in FY18 and FY19, and 76.5% in FY20-22) will lead to increasing Indirect Cost Recovery (ICR) in future years which will partially offset administrative costs. SoM SLU grant expenditures (which drive Indirect Cost Recovery (ICR) revenues) have increased slightly over the last three years, in spite of a challenging grant environment. SoM grant expenditures also have grown over the past four years at SoM non-slu sites. Overall, UW Medicine faculty were second in the country among all medical schools and first among public medical schools in total NIH research funding based on Federal FY16 awards. SLU 3.2 ($143M in borrowing) was approved by the Board of Regents in September 2015 and occupancy is planned for the summer of 2018. Diabetes & Obesity group scheduled for SLU 3.2 will be moving from SLUII. Backfill planning is underway to identify additional occupants for SLUII. Risks and Mitigations Potential federal research funding cutbacks, similar to 2013 sequestration, could result in delayed awards and reduced funding (NIH 2018 President's Budget is requesting overall lower funding in FY18 compared to FY17). Potential shift from federal research to non-federal research at SLU could result in lower ICR. Grant conversion to higher indirect cost rate at slower rate than forecast would move higher indirect cost recovery into later years (assumed 25% of grants convert to new rate each year). SoM has the opportunity to increase research density at SLU with ongoing recruitments which will reduce required Administrative Indirect Cost Recovery and other support. $8 $6 $4 $2 ($2) ($4) ($6) FY13 6.7 6.6 5.1 5.9 4.6 4.9 3.6 3.4 2.4 2.2 1.3 0.7 0.4 0.2 (0.4) SLU Actual vs Proforma Total SLU ICR and Other Revenues vs Expenses - Surplus/(Deficit) by Year (0.2) (2.2) (1.2) (4.9) ICR Surplus/(Deficit) - Proforma (operating budget/projected after 10 years) ICR excludes central libraries and central administration. (0.1) ICR Surplus/(Deficit) - Actual (projection for FY18-22) $400 $300 $200 $100 Total SoM Reserves (Excluding grants/contracts) 316.8 313.6 292.1 305.8 FY14 FY15 FY16 FY17 Reserves were the primary funding source of the FY17 forecasted operating loss. FY17 is preliminary. CAGR (1.2%) $600 $400 $200 483.9 489.1 SoM Direct Research Expenditures 411.4 425.7 419.9 454.0 72.5 63.4 62.7 66.1 FY14 FY15 FY16 FY17 South Lake Union SoM excluding South Lake Union SLU CAGR (3%) (1) (1) 2013 federal sequestration shifted significant research spending from FY13 to FY14. A higher percentage of Federal (NIH) funding at SLU led sequestration to disproportionately impact SLU. Note: CAGR = Compound Annual Growth Rate F-3.4/210-17 ATTACHMENT 4 482.6 520.1 CAGR 2.4% Non-SLU CAGR 3.3%