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McCarthy and Stone (LSE:MCS) built its first owner-occupied retirement development in Milton Keynes in 1977. Five years later it joined the Unlisted Securities Market and two years after that obtained a full listing on the LSE. In 1988 it sold 2,596 apartments, more than it did in 2019.
In 2006 it delisted after being taken over by a consortium led by HBOS. Just before the Great Recession it completed 2,327 apartments (FY 2007). Over the next two years UK house prices declined by 20%, with completion volumes down 50%. It was thus difficult to persuade retirees to sell up and by a MCS apartment. And this was at a time when the company carried £900m of debt.
Despite cash saving measures such as reducing land buying, suspending construction, reducing the workforce from 1200 to 500 and renegotiating terms for land to be acquired it was unable to service the debt.
In 2009 the debtholders swapped some of their loans for all the shares in a new corporate entity which took all of MCS’s assets.
In 2015 MCS re-floated on the stock market with a £200m revolving credit facility in place after raising £76m from selling some shares. Market capitalisation was over £1.5bn (compared with £425m today).
Between 2015 and 2017 the chosen strategy was to go for extraordinary growth in the number of units produced and sold. The directors aimed to double to 3,000 apartments per twelve months and to get to a 25% return on capital employed. They never achieved either target. But they did raise costs while trying.
Return on capital employed was a very impressive 20% in 2015. In 2018 it was a less impressive 10%.
At the time of the 2015 flotation and through to 2017 the company concentrated on building for sale. It did not go in for building to rent, nor did it regard the management of the completed development and care services as a profit centre (there was an arrangement with a non-profit organisation for much of the care).
Today the main part of the business is to build and sell. But MCS is growing other sources of income, as the directors set out in the 2018 Report: “we will…aim to leverage our longer term strategic opportunities within our services and product offering. We will aim to create even deeper and longer relationships with customers to increase our customer appeal, diversify our revenue streams and reduce our exposure to market cyclicality. The long-term aim will be to create retirement communities that enrich the quality of life for our customers and their families and to become the UK’s leading developer, manager and owner of retirement communities.”
Management Services look after over 20,000 customers in 434 developments. MCS has a target of generating more than 5% of revenue from Management Services.
Typical service charges:
- Retirement Living: 1 bed £45pw, 2 bed £68pw
- Retirement Living PLUS: 1 bed £125pw, 2 bed £164pw (includes staffing costs, domestic support package, table service at community restaurant)
Building to rent
The rental side of the business was re-emphasised in July by John Tonkiss, CEO, in the 2020 interim report: “we will continue to focus on our long-term strategy to transition to a service-led organisation, offering a choice of tenures and a range of services – a strategy we know is the right one and which has supported our homeowners during this difficult time. We remain particularly excited about our rental offering in terms of its benefits to customers and increased attractiveness to investors.”
There are already over 200 rented apartments valued at £50m or so, generating a 6.5% yield. There are also 25 rent-to-buy and a score of part-rent-part-buy units.
Ground rents
MCS make a lot of money – up to £30m in a year – by selling the future ground rents paid by apartment holders. These are typically £400 – £500 pa per apartment fixed for 15 years. Increases are at 15-year intervals linked to the RPI, or, if greater, 2% pa. Leases are for 999 years.
The excuse that MCS make (and has been accepted by the government) is that the ground rents pay for the construction costs of unsellable communal areas, which usually account for 30% of the development space. Grounds rents are typically sold for £0.6m per development.
MCS remain the “head landlord” and “head leaseholder” even after the freehold is sold. This makes for continuity for homeowners ensuring they don’t have to deal with the third parties (e.g. pension funds) buying the ground rents.
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