DHA Annual Report 2012

DHA financial performance

Overview

DHA’s Net Profit After Tax for 2011–12 was $82.8 million against a target of $81.8 million and a dividend of $49.7 million will be paid to the government in relation to the 2011–12 financial year. DHA delivered returns of 7.9% in relation to the total capital employed by DHA and a 6.2% return on the government’s equity investment in DHA. Both outcomes were in excess of the agreed figures for the year. DHA maintained a strong financial position and capital structure through 2011–12 and raised $324.9 million through its Sale and Leaseback program (SLB).

Operating results

DHA’s Net Profit After Tax for 2011–12 was $82.8 million, exceeding the Corporate Plan figure of $81.8 million. Total revenues were $1,016.2 million in 2011–12 compared with $1,012.2 million in 2010–11 and were generated primarily through housing services revenue earned from the Department of Defence and property sales.

Expenses in 2011–12 totalled $846.6 million, compared with $802.4 million in 2010–11. The increased expenditure was a result of a number of factors including 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 of $299.5 million increased by $11.7 million or 4.1%. The increase flowed from a general increase in market rents and an increased number of leases.

DHA reports its financial performance in accordance with relevant Australian and International accounting standards. In accordance with these standards, the financial performance for 2011–12 has been affected by an impairment charge of $5.0 million to the carrying values of DHA owned property; and a charge of $4.2 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 Government Business Enterprises, DHA makes an annual dividend payment to government as owner of DHA. The Board of DHA has approved a dividend of $49.7 million in respect of the 2011–12 financial year, representing 60% of Net Operating Surplus after Income Tax.

DHA fully complies with the Income Tax Assessment Act 1997, the Commonwealth’s Income Tax, Fringe Benefits Tax and the Goods and Services Tax legislation. DHA is also required to comply with the Australian 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 Government Business Enterprise. 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, DHA has made provision for an income tax liability of $22.7 million in the 2011–12 year. DHA has also provided for State Tax Equivalent payments including Stamp Duty ($10.1 million), Land Tax ($22.8 million), Payroll Tax ($3.1 million) and the proposed dividend ($49.7 million) – a total of $108.4 million payable to the government in relation to the 2011–12 financial year.

Residential investment markets

DHA’s financial performance is reliant on land development, construction, property sales and property portfolio management. All four areas are dependent on the state of residential property markets across Australia. During the 2011–12 financial year, residential property markets have generally experienced softening conditions. Despite these conditions, DHA achieved its property sales targets in 2011–12 and was able to meet its principal financial targets.

DHA property portfolio

DHA managed a total portfolio of 18,279 properties across Australia as at 30 June 2012, the ‘fair value’ of which was $9.9 billion. Of these, 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 SLB. DHA owns 3,800 properties, with close to 3,000 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 21 per cent of all properties as at 30 June 2012.

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 $1,766.4 million at 30 June 2012. 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 2011–12, $53.2 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 it to meet Defence housing requirements. Lots not required for this purpose are sold to the general public. In 2011–12, DHA sold 56 lots to the public from the Muirhead Stage 1 development in Darwin. In future years DHA will be making land sales from developments in Sydney, Brisbane, Townsville, Canberra and Adelaide, as well as from further stages at Muirhead.

Capital structure

DHA employs total capital of $1,868.4 million, which is funded through $1,358.8 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 2012, gearing was 36.2 per cent and the financial
results for the year provided interest cover at 4.3 times.

A primary source of funding for DHA is the sale of properties through its SLB program. In 2011–12, DHA sold 713 properties for a total sales value of $324.9 million. DHA continues to focus on maintaining the attractiveness of the SLB product 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.

DHA has loan arrangements through the Department of Finance and Deregulation 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 2011–12. Borrowings outstanding totalled $509.6 million as at 30 June 2012.

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 and Deregulation.