Harvard endowment is down $8B

Parents Forum
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<p>Bloomberg.com:</a> Worldwide</p>

<p>The rates are too low for me. </p>

<p>"Harvard University, the world’s richest college, is raising as much as $2.5 billion from sales of taxable and non-taxable bonds to repay debt and terminate an interest-rate swap agreement. </p>

<p>Harvard sold $1.5 billion in taxable bonds, according to data compiled by Bloomberg, and the university plans an offering of $1 billion in tax-exempt securities, Standard & Poor’s said. The long-term bonds, with maturities as long as 30 years, will replace commercial paper sold to finance the Cambridge, Massachusetts-based school’s “very ambitious” capital plan, and end a swap, S&P said in a report today. </p>

<p>S&P, which is based in New York, rates Harvard AAA and said its only credit concern was if the school issued “significant additional debt” amid “a declining investment market.” Marc Savaria, the analyst in Boston who wrote the report, didn’t return calls seeking additional comment. </p>

<p>John Longbrake, a Harvard spokesman, confirmed the school will sell at least $600 million in tax-exempt securities, declining to comment further. The school is expanding its campus in neighboring Allston across the Charles River, and Longbrake declined to estimate the expected cost. </p>

<p>Harvard’s endowment decreased 22 percent, or $8 billion, in the first four months of fiscal 2009, putting it on course for its worst performance in at least four decades. The fund, the world’s largest college endowment, had totaled $36.9 billion on June 30 after gaining 8.6 percent in fiscal 2008. The worst annual return that Harvard has recorded in at least 40 years was a loss of 12.2 percent in 1974. </p>

<p>Maybe Today </p>

<p>The taxable debt was split equally between 5-, 10- and 30- year securities, with yields 335 to 337.5 basis points more than U.S. Treasuries of similar maturity, Bloomberg data show. JPMorgan Chase & Co., Goldman Sachs Group Inc. and Morgan Stanley managed the sale. </p>

<p>Harvard also will price as much as $1 billion in tax-exempt debt next week, according to S&P and Bloomberg data, with New York-based JPMorgan the underwriter and the Massachusetts Health and Educational Facilities Authority the state agency serving as the conduit for the offering. </p>

<p>S&P didn’t provide details on the cost of terminating the interest-rate swap and the counterparty in the deal. Moody’s Investors Service, which rates Harvard Aaa, said in a Nov. 24 report the school “is an active user of swaps and derivatives to manage risks,” with agreements tied to $3.5 billion of its debt."</p>

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<p>cellar,</p>

<p>Thanks for the link. The notes to Harvard's financial statements are most interesting. </p>

<p>Some might find Note 2 informative, as I did, where it talks about Harvard adopting some recent FASB policies, including fair value, for the coming fiscal year.</p>

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<p>Newmassdad:</p>

<p>I found it interesting that Harvard did not choose to state their outstanding capital call obligations. The annual reports I've been looking at from other schools do state them in the notes: $200 million for Swarthmore, $268 million for Williams, and so forth. With an endowment 20 times larger and a more aggressive investment strategy in alternative funds, I'm guessing Harvard's obligations are somewhere north of $5 billion.</p>

<p>The other thing that caught my eye is this:</p>

<p>
[quote]
During fiscal 2008, these additional decapitalizations, in combination with the endowment distribution, resulted in an aggregate payout rate of 4.8

[/quote]
</p>

<p>4.8% payout from the endowment for operating expenses was a pretty high number for a weathlty school in 2007/2008. The payout rates from the conservatively managed big endowment schools have been running towards the low end of the range because endowments have been up so much. The higher you were in 2008, the more you have to cut going forward as opposed to a school that was closer to 4% in 2008 and could keep spending the same dollars and still stay below 5% even with the reduced endowments. Of course, Harvard was under so much political heat to spend their endowment that they may well have been "prepaying" some stuff just to make the number look bigger and get Grassley off their backs.</p>

<p>I'd have to go back and read it again, but as I was looking at the FASB fair value stuff, a lot of the changes were delayed and not scheduled to go into effect until next year.</p>

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<p>Much of this discussion likely seems technical to most people.
But if Harvard is borrowing to meet private equity obligations (and private equity vehicles have most often levered up themselves to get higher returns), then Harvard is not in the position of loosing its whole investment. It is placing itself in the position of losing money it never had in the first place as well. I think it's called doubling down in Las Vegas with borrowed house money.
Of course, from a strict liquidity standpoint, Harvard could sell more and more of its marketable stocks and bonds instead. But would you want almost all of your endowment to consist of illiquid and often impossible to value assets?
Just a bad bind. Of course Harvard is not alone here. I'd love it if Yale were as transparent.</p>

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<p>Billionaires</a> battling for 'premier' timberland | PressDemocrat.com | The Press Democrat | Santa Rosa, CA</p>

<p>"But in a surprise move Thursday morning, attorneys for holders of the $714 million bonded indebtedness announced that legendary California timberman Archie "Red" Emmerson may join with Texas banker Andrew Beal and Harvard's endowment fund to make an even higher offer.</p>

<p>As envisioned under that plan, Emmerson's Sierra Pacific Industries, California's single largest landowner, would take over the Scotia mill complex operation in partnership with Harvard and Beal. Beal has said he's willing to put up $603 million cash for Pacific Lumber's assets.</p>

<p>Harvard apparently is no newcomer to timber investments.</p>

<p>"It has $5 billion invested in forestry right now," Harvard lawyer Steven Hoort told bankruptcy court Judge Richard Schmidt, according to the Dow Jones Newswires."</p>

<p>From danas..."But would you want almost all of your endowment to consist of illiquid and often impossible to value assets?"</p>

<p>Timber is a very large percentage of Harvard's assets. It's a ridiculous amount.</p>

<p>I bet that timber isn't worth half what it was 6 months ago.</p>

<p>Harvard's asset allocation leaves a lot to be desired.</p>

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<p>
[quote]
Just a bad bind.

[/quote]
</p>

<p>And they can't make any moves without wagging the market. The very act of trying to sell $1.5 billion of private equity drives the prices down even further and erodes the value of their own endowment.</p>

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<p>danas,</p>

<p>I don't think it is a simple as you say, but we really can't say because H does not disclose enough about its endowment financial performance for us to draw valid conclusions. There is the possibility that H lost real money, not just unrecognized gains. I have not taken the time to study the financials to figure it out. Maybe ID or someone else has?</p>

<p>It is true that we've had a pretty technical discussion, but it is important in order for us and others to decide whether to trust the numbers we read. Because of the rather loose public disclosure rules for non-profits and academic institutions, I don't put that much trust in these numbers - certainly not as much as I do the numbers of publicly held organizations that have much stricter SEC rules, for example. </p>

<p>The bigger issues, which I have not yet seen discussed on these boards (and might merit a new discussion) are:</p>

<ul>
<li><p>are any colleges facing cash flow crises that might lead to bankruptcy or even shutdown?</p></li>
<li><p>if so, how would a prospective attendee know?</p></li>
</ul>

<p>I think there is a real risk of failure this cycle. It has happened in past down cycles.</p>

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<p>
[quote]
...are any colleges facing cash flow crises that might lead to bankruptcy or even shutdown?

[/quote]
</p>

<p>I'm sure some are, or will be. However, what puts a college out of business is enrollment headed rapidly towards zero. As long as there is enrollment (and tuitiion revenues), they can usually keep the ship afloat. When the students leave, it's over - even if there's an endowment.</p>

<p>The first college to fail in this cycle, of course, is Antioch College in Ohio that closed its doors last spring. The University of Sante Fe's negotiations to sell itself to the former owners of Sylan Learning Center ended last week. There are desperate efforts to have the state of New Mexico absorb the private school into a public university (as was done years ago with New College in Florida). Sante Fe says an alum donated enough money in recent weeks to keep the college open thru the spring term, but I think that could unravel quickly if the state deal falls thru and students simply don't register after Christmas.</p>

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<p>One thing I had forgotten on this whole tax-exempt versus taxable bond thing:</p>

<p>Harvard owns large swaths of commercial real estate in Cambridge, Boston, and Alston -- much of which, at this point, has no educational use whatsover, but is purely investment property. Any debt used to purchase these properties and/or make capital improvements wouldn't necessarily qualify for tax-exempt bond issues.</p>

<p>In that sense, the financials Harvard (and other large university/conglomerates) aren't really comparable to schools where the main business is education. For example, take a gander at Emory's financials sometime. Their health care/hospital division/pharmaceutical development revenues dwarf their education division's revenues.</p>

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<p>ID,</p>

<p>The Allston situation is much more complicated than you suggest. The land, unless Harvard and the City of Boston and a number of others are lying through their teeth, was acquired for expansion of academic and research activities. In fact, one of the buildings being built is in that category.

[quote]
This project will include four building components and will total approximately 530,000 square feet of above-ground floor area in active program use for Harvard’s science initiatives, including an auditorium and multi-purpose room.</p>

<p>It also includes approximately 150,000 square feet of shared research support facilities below-grade, an underground distributed energy facility, loading and mechanical facilities and below-grade parking for approximately 350 vehicles. An additional 150 parking spaces will be located on the North side of Western Avenue.</p>

<p>Finally, the project will include various amenities open to the public, including retail space and a cafeteria. In addition, the Science Complex’s four building components will surround a central yard resembling the spatial character of Harvard’s yards and open spaces in Cambridge.

[/quote]
I grant you that retail and cafeteria space pose challenges for tax exempt financing (depends on sq ft and so forth), but sounds to me like most of it would qualify.</p>

<p>So to say the land is "purely investment property" strikes me as very odd. Do you have some insider information?</p>

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<p>"I grant you that retail and cafeteria space pose challenges for tax exempt financing (depends on sq ft and so forth), but sounds to me like most of it would qualify."</p>

<p>Harvard already sold taxable bonds this week. $1.5 billion. It's a done deal. So nobody has to worry about that. </p>

<p>Harvard is selling tax exempt bonds next week. $600 million to $1 billion. </p>

<p>So this concern about taxable bonds vs. tax exempt bonds has already been handled by Harvard.</p>

<p>Harvard is taking care of its cash flow needs.</p>

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<p>
[quote]
So to say the land is "purely investment property" strikes me as very odd. Do you have some insider information?

[/quote]
</p>

<p>I'm talking about the property they own across Boston IN THE MEANTIME before Harvard builds or converts to non-profit uses. For example, Harvard now owns most of Allston and is the landlord for a substantial number of commercial properties. They need to renovate and improve those properties just like any other real estate company. So, it's not surprising that they would issue taxable bonds for those purposes.</p>

<p>They've own properties all over the place, many of which would not be visibly connected with Harvard in any way. Just buildings.</p>

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<p>ID. OK. got it. You probably know, too, that they bought these properties on the cheap, often through proxies, quite a few years ago. I doubt they even needed bonds to buy them, given the low acquisition costs. Whether they spend much to renovate or improve this stuff, much of which is now used for truck parking and warehousing, is a good question, but I doubt very much they'd need to issue a bond to repave the truck parking areas. :) If you wonder what they own, here's a map: <a href="http://www.allston.harvard.edu/maps/allston_base.jpg%5B/url%5D"&gt;http://www.allston.harvard.edu/maps/allston_base.jpg&lt;/a&gt;&lt;/p>

<p>Compare that map to an aerial shot from Google or MSN, and I think you'll see this is pretty low upkeep property. Brighton Mills Shopping Center is the exception.</p>

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<p>It's not just Allston. I'm by no means an expert on Harvard's real estate holding, but they own significant commercial real estate around Boston and Cambridge. Every so often, it pops up in the news. For example, a few year's back, Mayor "Mumbles" Memino wanted Harvard to develop a Harvard owned property on Mass Ave in Roxbury into some kind of research institute. Harvard decided to put the institute somewhere else and Mumbles was all in a huff.</p>

<p>It wouldn't surprise me if Harvard owns most of Harvard Square. And, there's all the real estate around the hospitals and the medical school.</p>

<p>Another example, they bought the Doubletree Guest Suites Hotel on Soldier's Field Road a couple of years ago with every intention of continuing to operate it as a hotel for the foreseeable future.</p>

<p>I'm not saying, by any means, that this accounts for all their taxable bonds, just that I should have thought of that when I was considering whether it was odd for Harvard to be issuing taxable bonds.</p>

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<p>One of the interesting things about Harvard is that, unlike many other major universities, it does NOT own a hospital or a health system (except for its student clinic). If you look at Penn's operations, it is a hospital/medical practice conglomerate with a sideline in education.</p>

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<p>
[quote]
If you look at Penn's operations, it is a hospital/medical practice conglomerate with a sideline in education.

[/quote]
</p>

<p>Same thing with Emory. Looking at it from an undergrad education standpoint, it's almost useless to try to glean anything from many university financial reports. The health care and research business units dominate the financials.</p>

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<p>


</p>

<p>I don't think we're likely to see many bankruptcies or closures. There are always some at-risk schools, usually small private schools with little or no endowment that survive essentially on tuition revenue, but they're always at risk. The current recession might make it harder for some of their students to meet tuition and transfer to cheaper publics or schools with better FA, but interested dad is right (post #49), as long as they can keep putting students in the chairs, they can usually keep the doors open.</p>

<p>For the rest, they'll just have to stretch their dollars farther. Many have already announced postponement or cancellation of major capital projects, along with hiring freezes. Those will probably multiply if the recession deepens or continues for long. That translates over time into an aging, inadequate, and possibly deteriorating physical plant, and a smaller, less complete faculty, both of which adversely affect educational quality---higher s/f ratio, bigger classes, more gaps in the curriculum, more students unable to get the classes they want or need for their majors, etc. Some colleges will be forced to skimp on financial aid, or to cut back on student services of various kinds. At the same time, there will be pressure for more tuition revenue, either through tuition hikes (which will face strong resistance from parents in the current market), expansion of the size of the entering class (which needs to be balanced against limits on the capacity of the physical plant), pressure to admit more full-pays (at the expense of applicants with financial need), and for some publics, pressure to admit more out-of-state and international students who pay at a higher rate and are easier to turn down for financial aid. There are lots of ways for colleges to balance their budgets in hard economic times, but they aren't pretty.</p>

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<p>I think a few privates will close. A few small Christian ones already have. I'd worry about smaller third tier privates in declining states.</p>

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<p>I learned something counter-intuitive this week. Historically, college enrollment increases during economic downturns. This may be the result of few jobs and more people taking advantage of a lull in employment to return to school. Whatever. The good news for colleges is that increasing enrollment will help them weather the financial downturn.</p>

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<p>
[quote]
I learned something counter-intuitive this week. Historically, college enrollment increases during economic downturns.

[/quote]
True, but historically, it was easy to borrow the money to attend. I don't think that is the case this year!</p>

<p>I suspect we are going to see a wave of failures among struggling private colleges if this downturn continues for more than a year: Falling attendance this year, as kids decide they can't afford to pay so much, which leads to financial losses and closure the following year or two. </p>

<p>We need to keep in mind that the thing that greased a lot of activities in the past, easy credit, is no more. The student's can't borrow enough to attend, the college can't mortgage more assets to ease its cash flow needs. The result is...</p>

<p>Publics will use the approach bclintonk suggests: enlarge classes, defer maintenance and such. But not the smaller privates.</p>