Defence Housing Australia

Overarching analysis of performance against our purposes

DHA improved its operational capability and governance foundations in 2016–17 to ensure that, as a government-owned business, we operated commercially. Stable leadership, including the Board’s appointment of Ms Jan Mason as Managing Director for a five year team, supported operational effectiveness. These factors undoubtedly contributed to our strong performance against the purposes in our Corporate Plan.

In 2016–17, we achieved or exceeded 19 KPIs, substantially met eight KPIs (achieved ≥85 per cent of the target) and did not meet one KPI (achieved ≤84 per cent of the target). Reasons for substantial achievement and non-achievement were directly related to complex environmental and operational factors over which we had little or no control.¹³

In summary:

1. Defence agreements, forecasting and policy

Our ability to achieve purpose 1 (housing solutions for ADF members and their families) and purpose 3 (property sourcing) was affected by our service agreements with Defence, the accuracy of their property forecasting and their policy framework and decisions.

We worked closely with Defence to share information and mitigate provisioning risks wherever possible. In the reporting period we:

• restructured our MWD portfolio and provisioning targets to account for de facto RA and mitigate higher than expected property vacancy levels in some locations
• improved our MCA modelling and worked with Defence to draft revised MCA Agreement terms (particularly the fees and charges structure) to ensure we can meet future provisioning targets without bearing unsuitable financial risk.

These factors negatively impacted our ability to achieve purpose 5 (generate shareholder value) as we received lower than anticipated revenue for housing services.

2. Residential property market conditions and macroeconomic factors

Our ability to meet purposes 1, 3 and 5 was affected by residential property market conditions, including property supply, capital values and yields. These factors negatively impacted our ability to source properties and land that met:

• Defence specifications in terms of location/amenity
• Defence requirements in terms of rent band classifications
• our requirements in terms of financial viability (i.e. capital and rental valuation within budget parameters).

This was particularly the case in Sydney (NSW) which continues to be a challenging market for us in terms of provisioning. In the reporting period we established an internal working group to identify possible mitigation strategies for future provisioning in the Sydney region. We will continue this work in 2017–18 and present our findings to Defence.

Our ability to meet purpose 4 (portfolio management) and purpose 5 was affected by property market conditions and macroeconomic factors. We experienced some challenges in selling properties in Perth (WA), Darwin (NT) and Sydney as part of our property investment and disposals programs, especially where the price exceeded $1 million. We were able to mitigate this by selling more properties in regions that better aligned with investor preferences and demand. This is only a short term solution to our long term funding requirements, which are being considered as part of an independent review of our capital structure. The review, which commenced in June 2017, will consider a number of funding options and inform our Corporate Plan 2018–19.

Unfavourable market conditions also resulted in significantly higher property impairment than budgeted, which contributed to our EBIT being below the Corporate Plan target.

3. Property development and construction processes

Our ability to achieve purposes 1, 3, 4 and 5 was affected by external factors relating to our property development and construction program, including:

• delays in awarding tenders and executing contracts
• delays in receiving development approvals, property titles and approval from third parties (i.e. local councils and energy providers)
• inclement weather.

These factors contributed to us not being able to achieve provisioning targets and not being able to realise revenue from the sale of property and land lots that were surplus to our needs as budgeted. It is important to note this revenue is not lost, but deferred to 2017–18.

Despite not achieving the revenue target, our net margin from development property and land sales was exceeded due to the realisation of better than budgeted margins. We were also able to generate revenue from the sale of excess land we owned in Sydney to an adjoining developer. This helped to ensure that we achieved some of our financial KPIs, including NPAT which is the basis for our annual dividend calculation.

4. Other challenges

Our ability to deliver against our purposes was also affected by the following material operational challenges in 2016–17:

• Maintaining customer service levels against increasing expectations and use of technology, particularly when our customer satisfaction ratings are exceptional by industry standards.
• Attracting and retaining skilled and capable staff, particularly residential property industry and information technology professionals within the APS remuneration framework.
• Maintaining staff wellbeing and our operations following the sudden death of our Chief Financial Officer and Head of Corporate Services, Mr Jon Brocklehurst, on 30 April 2017.

As detailed in the Governance structure section within Part 4 of this report, interim management arrangements were still in place as at 30 June 2017. Revised management arrangements will be formalised in 2017–18.