Financial performance

Objectives

• Sustainable long-term financial structure

Major outcomes

1. Total net revenues of $1,041.2 million including $353.4 million of sales generated through the SLB program and $58.8 million from development land sales.
2. Net Profit After Tax of $85.1 million, above the Corporate Plan figure of $76.7 million.
3. Return on Equity of 6.2% compared with the Corporate Plan figure of 5.6%.
4. Proposed to Government a dividend of $51.1 million compared with the Corporate Plan figure of $46.0 million.
5. Payments to Government relating to 2012–13 of $107.9 million comprising dividends, income tax and State tax equivalents.
6. Maintenance of a capital structure consistent with targets for gearing ratio and the percentage of the property portfolio owned by DHA.

Overview

DHA’s Net Profit After Tax for 2012–13 was $85.1 million against a Corporate Plan figure of $76.7 million. As a result, a dividend of $51.1 million will be proposed to Shareholder Ministers for payment to Government in relation to the 2012–13 financial year. DHA delivered returns of 7.5% on total capital employed and a 6.2% return on the Government’s equity investment. Both outcomes were above the Budget figures for the year. DHA maintained a strong financial position and capital structure through 2012–13.

Operating results

DHA’s Net Profit After Tax for 2012–13 was $85.1 million, exceeding the Corporate Plan figure of $76.7 million. Total net revenues were $1,041.2 million compared with $928.6 million in 2011–12 and were generated primarily through housing services revenue earned from Defence and property sales.

Expenses totalled $942.0 million, compared with $824.0 million in 2011–12. The increased expenditure was mainly the result of higher property rental expenses, costs associated with capital services and increased provisions for impairment and make-good (at lease end). Rental outlays to lessors for residential properties were $317.0 million. This was an increase of $17.5 million or 5.8% compared to 2011–12 and flowed from a general increase in market rents and an increased number of leases.

DHA reports its financial performance in accordance with Australian and international accounting standards. In accordance with these standards, the financial performance for 2012–13 has been affected by an impairment charge of $3.0 million to the carrying values of DHA owned property and an additional charge of $4.7 million in relation to the make-good provision (may include re- paint and re-carpet at lease end), the future cost of which is affected by current interest rates. Despite these charges DHA has met its principal financial targets for the year.

Returns to shareholders

In accordance with Guidelines for GBEs, DHA makes an annual dividend payment to the Government as the owner of DHA. The Board of DHA has proposed to Shareholder Ministers a dividend of $51.1 million for the 2012–13 financial year, representing 60% of Net Profit After Tax.

DHA fully complies with the Commonwealth’s Income Tax, Fringe Benefits Tax and Goods and Services Tax legislation. DHA is also required to comply with the Government’s competitive neutrality policy which ensures that DHA is not able to enjoy a commercial advantage resulting from tax exemptions flowing from its status as a GBE. In accordance with this policy, DHA makes State tax equivalent payments to the Australian Government in respect of State taxes that would be applicable except for the exemption provision in the DHA Act.

In relation to income tax, it is estimated that DHA will pay $21.2 million to the Australian Taxation Office for the 2012–13 financial year. DHA made an interim payment of $27.9 million on 28 June 2013 in relation to its State tax equivalent liability, and has provided for equivalent amounts of $3.9 million for stamp duty, $3.8 million for payroll tax and $51.1 million for the proposed dividend. DHA will pay $107.9 million to the Government in relation to the 2012–13 financial year.

Residential property markets

DHA’s financial performance is affected by costs and income associated with land development, construction activity, property sales and property portfolio management. All four areas are dependent on the state of residential property markets across Australia. During the 2012–13 financial year, residential property markets have continued to experience relatively soft conditions in most major capital cities, with strong rental or capital growth only in Darwin and Perth. Despite these conditions, DHA achieved its property sales targets in 2012–13 and was able to meet its principal financial targets.

DHA property portfolio

DHA managed a total portfolio of 18,304 properties across Australia as at 30 June 2013, the ‘fair value’ of which was $10 billion. Of these properties, close to two thirds are owned by private investors and leased to DHA under market based arrangements. The majority of the leases were established under DHA’s SLB program. DHA owns 3,498 properties, with close to 2,500 of these being held as long term investment stock and the balance being inventory properties identified for sale through the SLB program. The DHA-owned portfolio was approximately 19% of all properties as at 30 June 2013.

In accordance with relevant accounting standards, inventory properties are held at the lower of cost and net realisable value and investment properties are held at the lower of cost and recoverable value. DHA’s inventory and investment properties and land holdings are valued by licensed property valuers on an annual basis. DHA’s investment and inventory properties are carried in its financial statements at $1.7 billion at 30 June 2013. The market value of these properties is $2.6 billion.

An important element of DHA’s asset and portfolio management strategy is the sale of surplus properties. In 2012–13, $51.2 million in revenue was generated from this source. Surplus housing stock is identified on the basis that it no longer meets the operational requirements of Defence, is positioned in an unsuitable location, or does not meet the Defence minimum amenity standards.

Development land sales

DHA has a number of major property developments across Australia that will assist in meeting Defence housing requirements. Land lots not required for this purpose are sold on the open market. In 2012–13, DHA sold 178 lots to the public from the Breezes Muirhead development in Darwin, the Bayriver development at Largs North in Port Adelaide and AE2 development at Ermington in Sydney. Total revenue generated from the sale of land was $58.8 million. In 2013–14, and future years, DHA will be making land sales from developments in Sydney, Brisbane, Townsville and Canberra, as well as from further stages at Breezes Muirhead and Bayriver.

Capital structure

DHA employs total capital of $1,902.5 million, which is funded through $1,392.9 million in equity and $509.6 million in debt. The equity is provided by the Government as the owner of DHA and the debt arrangements are provided through a loan arrangement with the Government. At 30 June 2013, gearing was 35.8% and the financial results for the year provided interest cover at 4.2 times.

A primary source of funding for DHA is the sale of properties through its SLB program and so DHA retains a focus on maintaining its attractiveness to individual investors. The overall sales objective is to achieve sufficient revenues from the sale and leaseback of inventory properties and to keep net cash from operating activities positive over the cycle. This source of funding was augmented in 2012–13, with the establishment of an unlisted property trust that will hold a portfolio of properties sold to it under SLB terms and conditions with units in the trust to be held by individual investors. The fund is being established in conjunction with Centric Wealth Limited, a private wealth fund advisor and manager and finalisation is expected in 2013–14.

DHA has loan arrangements through the Department of Finance and the Department of Defence. DHA does not have a commercial overdraft facility or access to re-drawable loan facilities. There were no new borrowings in 2012–13. Borrowings outstanding totalled $509.6 million as at 30 June 2013.

Standard & Poor’s credit rating

Standard & Poor’s credit rating of DHA continues to be a stand-alone rating of AA+. The credit rating assists DHA when negotiating financial transactions with the Department of Finance.
 
Table 4: Financial summary

1. These numbers relate to total managed stock.

2. These figures include constructions funded by the Nation Building – Economic Stimulus Plan.