Johns Hopkins University
Faculty Budget Advisory Committee
Summary of June 24, 2019 Meeting
UPDATE ON PRE-ACQUISITION DUE DILIGENCE AND PLANNING FOR 555 PENNSYLVANIA AVENUE
Mr. Mitch Bonanno, Chief Real Estate Officer, provided an overview of the plans for the University to acquire and renovate the property at 555 Pennsylvania Avenue (555P), including 555, 565 and 575 Pennsylvania Avenue, Washington DC, currently referred to as the Newseum. The property includes the museum, executive offices, conference facility, residences, retail/restaurant and a parking garage. The property presently housing the museum would be transformed into an educational facility while the residential portion would remain intact.
The 555P project is currently in a programming and due diligence study period, which is set to conclude on July 24, 2019. Key factors still to be resolved before the end of the study period are negotiations with the D.C. Mayor’s office on terminating existing land use restrictions and payments in lieu of taxes as well as engagement with regulatory agencies that must review and approve the project. The current plan is to seek trustee approval to conclude the study period and proceed with project design in mid-July as long as all decision factors are met. The current timeline anticipates the acquisition/sale to occur between Q3 FY20-Q1 FY21 and construction to conclude Q4 FY22–Q2 FY23.
The current project budget for acquisition and renovations is $765M, which will be funded with a combination of philanthropy, proceeds from the sale of existing DC buildings and internal debt. The budget includes contingencies and carrying costs for bridge loan funding. This new D.C. space will be more expensive than the current D.C. space but is projected to be less costly than constructing a new building in D.C.
This is the largest capital project the university has undertaken. Dr. Lainie Rutkow, Professor at Bloomberg School of Public Health and School of Medicine, has been appointed Senior Advisor to the President to lead the strategy for the 555P project. Mr. Glen Steinbach, Strategic Advisor to the Senior Vice President for Finance and Administration, will also support development of the strategic direction for 555P. Dr. Rutkow shared with members that they have been meeting extensively with the 3 Schools – SAIS, CBS and KSAS AAP Programs – that currently have a presence in D.C. to gather information about how they would like to operate in the new space in the future. They have also conducted information sessions for all parts of the university to gauge interest in utilizing the new space in a variety of ways. This is an opportunity for the university to establish a greater identity in D.C., maximize use of the facility, and provide flexibility to support future JHU programming. Mr. Steinbach highlighted the goal of creating a collaborative learning and working environment via sharing services and spaces for students from all co-located university divisions and providing convening and conference space for events to advance research and academics.
Q3 FINANCIAL RESULTS AND FIVE-YEAR CAPITAL & OPERATING PLAN
Ms. Helene Grady, Vice President for Planning & Budget, reviewed the status of University financial results and year-end projections compared to budget as of the end of the third quarter of FY19. The University ended the third quarter with an operating surplus of $95 million, a margin of 2.0%, and $65 million favorable to the YTD budgeted result. After adjusting for one-time events that occurred in FY18 and FY19, YTD results for the two years are relatively level. Ms. Grady discussed YTD results for divisions that are projecting to end the year unfavorable to budget.
Mr. Daniel Ennis, Senior Vice President for Finance and Administration, opened up the five-year plan discussion. This five-year plan is transformational, representing impressive investment in core mission and strategic priorities, including the Bloomberg financial aid gift and the 555 Pennsylvania Avenue capital project. The university has raised extraordinary levels of philanthropy to support its missions. The balance sheet is strong and cash levels are projected to be healthy throughout the five-year plan period, even with a substantial increase in capital investment. However, there is significant risk in the five-year plan, particularly with regard to continued strong growth in master’s programs tuition, sponsored research and clinical revenue. In addition, there is operational risk beyond the five-year plan related to incremental program investments, operating and maintenance costs and depreciation associated with new facilities. The university will work to build out 10-year university-wide projections to confirm that operating performance can support the level of capital investment in the plan.
Ms. Grady briefed the committee on the five-year capital and operating plan. The FY20-24 capital plan totals $3.2 billion, an increase of $1 billion over the FY19-23 capital plan. Drivers of the increase are: the new 555P project ($740M), a new BSPH building ($121M) and increases in estimated costs for the Housing & Dining project ($98M) and the SNF Agora Institute ($51M). Several of the largest capital projects are heavily supported with philanthropy. This year’s five-year plan anticipates that 40% of capital projects will be funded with philanthropy compared to last year’s plan of 20%.
Projects that received trustee approval to proceed at the May 2019 meeting include:
Major capital projects not incorporated in the five-year plan include: East Baltimore Recreation and Wellbeing Center, Whiting School of Engineering New Academic Building, Carey Business School New Building.
The university’s GAAP operating margins are projected to hover around 1.0%-1.5% from FY20 through FY23 and then drop to 0.7% in FY24, driven by the substantial impact of non-capitalized project costs. Projected non-capitalized costs range $43M-63M each year of the five-year plan versus $21M-$26M each of the prior 3 fiscal years. After adjusting for one-time items and non-capitalized project costs, operating margins range 1.3%-2.3% throughout the five-year plan (compared to a range of 1.6% to 2.0% FY17-FY19).
Ms. Grady highlighted the significant impact of depreciation and interest expense related to capital investment on GAAP plan results, particularly in the out years. She also discussed some risks and drivers of projected results for selected divisions of the university.