Meeting of the Finance Committee November 13, 2014
Agen enda da I. ACTION ITEMS A. Medical Center Acquisition of 500 Ray C. Hunt Drive II. REPORTS A. Treasury Report B. University of Virginia Investment Management Company Report on the Long-Term Pool – Market Value and Performance as of 9/30/2104 C. Interim Academic Division Financial Report for 9/30/2104 D. AccessUVa Metrics Annual Report E. Executive Vice President’s Remarks 2
M EDICAL C ENTER A CQUISITION OF 500 R AY AY C. H UNT D RIVE OF PAT R I C K D . H O G AN E X E C U T I V E V I C E P R E S I D E N T A N D C H I E F O P E R AT I N G O F F I C E R
Medi dical cal Center ter Acq cquis isitio ition n of of 500 Ray y C. Hunt t Drive • Establish Fontaine as predominately clinical and research park. • Relocate clinical activities to provide better patient services: – Modern clinical space for Urology – Comprehensive clinical space for Cardiology • $12.0 - $14.0 million acquisition cost from Hospital Funds, reflects fair market value • $17.15 - $21.0 million total renovation cost from Hospital Funds 4
T REASURY RY R EPORT J AM E S M AT T E O A S S O C I AT E V I C E P R E S I D E N T & T R E A S U R E R
Debt t Por ortf tfoli olio o Optim timization ization Opportune time to consider changes to debt portfolio: • Historically low interest rate environment • Upcoming financing in early 2015 • Provides possible lever to fund University needs Reduce liquidity risk • Diversify bank counterparties • Better aligning ST debt with ST assets Optimization Considerations • Lessen remarketing risk • Reduce interest expense, where possible • 6
Pot otential ential Bo Bond d Fin inan ancin cing g Com omponents onents Refinancing of Commercial Paper Estimated $200 million outstanding at time of refinancing Refunding of Series 2005 Bonds $36 million callable on June 1, 2015 Refunding of VCBA Series 2004B $18 million currently callable Bonds $78 million variable rate bonds outstanding supported by operating Restructuring of Series 2003A Bonds liquidity. Restructure to mitigate put risk and reduce reliance on operating liquidity. Series 2015 Bond Issue Size Up to $332 million of refunded debt 7
Con onsi sider derations ations for or Fu Futu ture e Fin inan ancin cings gs • Fixed rate debt vs. Variable rate debt: Historically attractive long-term interest rates • Fixed Rate Debt Higher cost of capital in the near-term • Locks in low long-term rates • Historically attractive short-term interest rates • Creates near-term cash flow savings • Variable Rate Debt Results in better match between short-term assets and • short-term liabilities • Appropriate mix of Fixed vs. Variable balances risk and cash opportunity through interest cost savings 8
Evalu aluatin ating g Inter terest est Rat ate Envi vironm onment ent Tax-exempt Yield Curve vs Historical Average * The University cannot • predict future interest rates; however, we can evaluate historical market conditions to help project possible future trends Consideration should be • given to historical interest rates and the predicted future rates as inherently shown in the future yield curve Maturity Year * Assumes market rates as of November 5, 2014 compared to historical average AAA tax-exempt rates since January 1, 1991 9
Debt t Issu ssuan ance ce Objecti jectives es • Attempt to take advantage of historically low long-term fixed rates with the next bond issue • Consider “averaging in” more variable rate debt over time • Target a medium-term goal of better matching ST assets and ST liabilities as a risk management tool. 10
Hi Hist stori orical cal Debt t Mix ix 2009 2010 2011 2012 2013 2014 Fixed Rate $853,065 $839,645 $1,015,847 $994,608 $1,065,064 $1,052,073 Synthetic Fixed 100,000 100,000 100,000 100,000 100,000 100,000 Unhedged Variable 38,425 52,710 58,860 106,102 118,232 184,432 % Variable 4% 5% 5% 9% 9% 14% Total 991,490 992,355 1,174,707 1,200,710 1,283,296 1,336,505 Long-term WACC * 4.24% 4.24% 4.16% 4.16% 4.17% 4.17% * Long- term Weighted Average Cost of Capital (“WACC”) does not take into consideration outstanding commercial paper. Assumes al l variable rate debt is hedged at fixed payer swap rate. Source: Wells Fargo. 11
Proj oject ected ed Debt t Mix ix – Pas ast t Practice actice The University has historically refinanced its commercial paper with fixed rate bonds • Over time, variable rate exposure has fluctuated as commercial paper is drawn and then permanently • financed 6/30/2014 6/30/2015 6/30/2016 6/30/2017 6/30/2018 Long-term WACC * 4.17% 4.14% 4.14% 4.13% 4.30% * Long-term WACC does not take into consideration outstanding commercial paper. FY15 fixed rate borrowing based on market rates as of October 14, 2014. FY18 fixed rate borrowing assumed at current market rates plus 200 bps yield. 12
Fin inan ancin cing g Optio tion n 1 – Ac Accelera celerate ted d Var ariabl iable The University can issue long-term variable rate debt to refinance outstanding commercial paper • In FY18, the University would issue $80 million in fixed rate bonds to achieve 20% unhedged long-term • variable rate debt 6/30/2014 6/30/2015 6/30/2016 6/30/2017 6/30/2018 Long-term WACC * 4.17% 3.73% 3.74% 3.74% 3.69% * Long-term WACC does not take into consideration outstanding commercial paper. FY15 fixed rate borrowing based on market rates as of October 14, 2014. FY18 fixed rate borrowing assumed at current market rates plus 200 bps yield. 13
Fin inan ancin cing g Optio tion n 2 – Ba Bala lance ced d Ap Approac oach The University can issue $120 million variable rate and $80 million fixed rate in FY 15 to refinance • outstanding commercial paper In a rising interest rate environment, this approach results in a lower WACC and also mitigates risks • associated with variable rate debt 6/30/2014 6/30/2015 6/30/2016 6/30/2017 6/30/2018 Long-term WACC * 4.17% 3.90% 3.90% 3.90% 3.62% * Long-term WACC does not take into consideration outstanding commercial paper. FY15 fixed rate borrowing based on market rates as of October 14, 2014. FY18 fixed rate borrowing assumed at current market rates plus 200 bps yield. 14
Next xt St Step eps At February 2015 meeting: • – Seek BOV Authorizing Resolution for bond issue – Seek BOV Approval to Amend the University’s Debt Policy to address: • Remarketing Procedures • Diversification of bank exposure • Staggered expiration of credit facilities • Staggered maturities of put-able debt • Reintroduction of debt burden ratio (as required by the Commonwealth) Consider Drafting a Liquidity Policy: • – Formalizing liquidity targets would provide transparency and help ensure support from rating agencies and investors 15
E NDOWMENT R EPORT : M ARKET V ALUE AND P ERFORMANCE AS AS OF OF J UNE 30, 2014 L AR RY K O C H AR D C H I E F E X E C U T I V E O F F I C E R O F U V I M C O
Outl tline ine • Governance and Staffing • Performance Review • Asset Allocation • Risk Management • Going Forward 17
Gover ernance ance an and Sta d Staffin ffing Board of Directors 11 members led by David MacFarlane as Chair, three appointed by the • BOV, and one by the President BOV representatives are Mac Caputo, John Harris, and John Macfarlane • Meets four times a year • Staff 32 UVIMCO team members • Investment team comprised of CEO/CIO, three Managing Directors, three • Associates, three Senior Analysts, and one Analyst Average of 20 years of investment experience among senior staff • 18
Perf rfor orman mance ce Re Revie view As of June 30, 2014 Market Value Annualized $ Millions % 1 YR 3 YR 5 YR 10 YR 20 YR Long Term Pool 6,950 100.0 19.0 12.4 15.2 10.8 12.6 Policy Benchmark 100.0 16.6 8.9 12.4 7.5 7.6 Equity Public 1,530 22.0 26.8 15.9 22.9 14.4 12.9 Long / Short 1,611 23.2 11.3 11.7 10.7 9.8 10.2 Buyout 996 14.3 28.3 15.1 19.8 14.3 -- Venture Capital 384 5.5 61.8 30.2 29.4 12.6 21.1 Total Equity 4,521 65.1 23.3 15.0 17.9 12.6 14.9 MSCI All Country World Equity 60.0 23.6 10.9 14.9 8.0 7.6 Real Assets Real Estate 527 7.6 14.7 12.1 1.0 (1.2) 3.8 Resources 340 4.9 27.1 11.6 26.0 21.2 -- Total Real Assets 867 12.5 19.3 11.5 15.5 10.7 11.8 MSCI Real Estate 10.0 11.6 9.7 18.6 8.7 8.6 Fixed Income, Cash & MAC Marketable Alternatives and Credit 761 10.9 14.6 11.1 12.9 7.4 8.1 Government Bonds 605 8.7 0.4 0.3 1.5 4.6 6.6 Cash & Currency 195 2.8 0.1 (0.0) 0.1 -- -- Total Fixed Income, Cash & MAC 1,561 22.4 7.4 5.3 7.4 5.8 7.3 Barclays Aggregate Bond 30.0 4.8 4.1 4.7 4.9 6.2 19
Perf rfor orman mance ce Re Revie view Annualized Returns of the Long Term Pool Versus Benchmarks and Peers Periods Ending June 30, 2014 1 YR 3 YR 5 YR 10 YR 20 YR Long Term Pool 19.0 12.4 15.2 10.8 12.6 Policy Portfolio Benchmark 16.6 8.9 12.4 7.5 7.6 Comparative Industry Data TUCS All Master Trusts Top Quartile (1) 17.6 10.5 13.4 7.7 9.2 TUCS All Master Trusts Median 15.7 9.4 12.1 7.0 8.6 TUCS All Master Trusts Bottom Quartile 12.6 7.6 10.2 6.3 8.0 (1) Trust Universe Comparison Service (TUCS) reports performance of over 900 institutions representing $3.5 trillion in assets under management 20
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