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YIT’s result for the first quarter was published on April 26. While the result represented a clear improvement year-on-year, it showed a loss, as we expected. Particularly the paving business and the recognition of revenue from self-developed residential projects upon completion and in accordance with IFRS reporting create significant quarterly variation. The result improved significantly in Paving, Housing Russia and Business premises segments.
This year, in connection with announcing our results for each quarter, we issue not only guidance for the full year, but also a statement on the adjusted operating profit for the following quarter. Our statement on the current quarter was as follows: “The company estimates that the adjusted operating profit for the second quarter of 2019 will be above the comparison period (pro forma).” The adjusted operating profit for the second quarter of 2018 was EUR 24.4 million.
The questions from investors we have met with after the announcement of the result have revolved around residential construction in Finland, as the consensus among analysts was to expect a higher adjusted operating profit. The most significant reason for the result and profitability being lower than the consensus expectations and the comparison period was a new type of portfolio transaction carried out during the period. In March, we established a fund focused on rental apartments with a group of investors. This also involved us selling a portfolio of completed apartments and apartments that are in the final stage of construction (nearly 600 units in total) to the fund. The total value of the sold apartments is over EUR 100 million. YIT invested approximately EUR 11 million of its own capital in the fund.
In this large bundled sale, YIT recognised 51% of the revenue and result arising from the completed apartments in its result for Q1. For YIT’s own share of ownership (49%), the revenue and result of construction will be recognised only when the apartments are resold. This had a positive impact of approximately EUR 40 million on revenue and the impact on the project margin was close to zero.
Unlike in previous bundled sales to investors, YIT maintains the potential for an increase in the value of the apartments in
the portfolio corresponding to YIT’s share of ownership (49%). The majority of the apartments have already been leased and will be sold when the time is right. The rental apartment portfolio will also provide YIT with steady cash flow until the apartments are sold. The transaction made it possible to release the capital tied up in the completed apartments and reduce the risk level associated with the sale of apartments. The number of unsold completed apartments declined and stood at 216 apartments in Finland at the end of March.
We also noted that activity in the Finnish housing market increased at the end of Q1, and we estimate that as a whole, demand will stay on the level of the second half of last year. YIT has started more apartments aimed at consumers during the early part of the year than during the second half of the year on average. The newly started apartments will mainly be completed in 2020.
The IFRS 16 Leases standard entered into force on January 1, 2019. Under the new standard, all leases are recognised on the balance sheet, with the exception of leases for which the underlying asset is of low value, and short-term leases. Leases other than finance leases were previously only reported in the notes to the financial statements as minimum lease obligations.
The adoption of the standard increased YIT’s capital employed and net debt by approximately EUR 300 million on January 1, 2019. The most significant items increasing the capital employed are leased plots (approx. EUR +170 million), leased properties (approx. EUR +70 million) and machinery and equipment (approx. EUR +30 million). YIT’s leased plots are primarily located in Finland. Financial liabilities were not impacted.
The adoption of the standard does not have an impact on YIT’s financial targets or the guidance for 2019, in which the adoption of IFRS 16 is already taken into account.
The tables below illustrate the impacts of the adoption of IFRS 16 on the income statement for 2019 and the balance sheet on January 1, 2019.