Trading Statement

Press release, 11 November 2020

McCarthy & Stone plc

FY20 Trading Update

McCarthy & Stone, (the 'Group') the UK's leading developer and manager of retirement communities, is today issuing a trading update for the financial year ended 31 October 2020 ('2020'). All comparatives are for the 14 months financial year ended 31 October 2019 ('2019') unless otherwise stated.

Summary

· Total completions of 832 units (2019: 2,402) including 166 rental units (2019: 101)

· Underlying operating loss in line with Board expectations

· Net debt of c.£63m (2019: net cash £25m) with a continuing focus on cautious cash flow and investment management

· Current trading increasingly affected by rising COVID-19 infection rates and Government lockdown measures

· Rental portfolio now contains 267 units (2019: 101) - discussions with prospective Rental Fund partners progressing constructively

· Landmark partnership established with Anchor Hanover to deliver 'affordable for all' retirement solutions

· Recommended cash offer from Lone Star Real Estate Fund of 115p per share announced 23 October 2020

John Tonkiss, Chief Executive Officer at McCarthy & Stone, commented:

"Protecting our homeowners and employees throughout this challenging period remains our absolute priority. Our retirement communities have proven to be a safe haven for homeowners throughout the pandemic, with infection rates across our developments continuing to trend significantly below that of comparable age groups in the wider UK population. This is a major endorsement of independent retirement living.

"Longer-term, we remain excited by the significant market opportunities open to us as we deliver on our multi-tenure and service-led strategy working in partnerships with others, such as Anchor Hanover. The demand for retirement communities is also underpinned by the need to address the structural undersupply of appropriate housing for older people as well as more supportive government policy.

"However, with national COVID-19 infection rates rising and lockdown measures in place, the retirement housing market is expected to remain difficult. As a result, the Group will continue to cautiously and actively manage cash flow balancing investment in land and development to support future sales with the need to preserve headroom in order to enable the Group to navigate the short-term risks. It is against this backdrop that the Board believes the 115p cash offer from Lone Star Real Estate Fund represents fair value reflecting both the future opportunities and risks facing the business."

Operational performance

The COVID-19 pandemic caused significant disruption to the business during this financial year resulting in nationwide closures of construction sites and sales offices during the first lockdown. During this period the health and wellbeing of the Group's customers and employees has been the first priority while the Group also took decisive measures to protect the financial health of the business. Following the end of the lockdown period in June, the remobilisation of sites and sales activity has been phased through the second half of the financial year. 41 of the Group's 44 construction sites are now remobilised and operating within an appropriate COVID-19 compliant framework. Our sales and marketing activity is now fully deployed with practices adapted to the current COVID-19 environment which takes account of the age profile of our customer base. Within this framework a hub sales operating model has been adopted and all viewings are conducted by appointment only, following extensive customer prequalification online and over the phone.

Against this challenging backdrop, the Group delivered a total of 832[1] legal completions during the year (2019: 2,402) and generated full year revenue of c.£197m (2019: £725m). Underlying operating loss for the year is in line with Board expectations. This loss is before the exceptional costs presented in the first half results and other non-underlying costs primarily relating to COVID-19.

Multi-tenure strategy

The Group completed 265 multi-tenure transactions during the period (166 rental, 41 part-buy part-rent and 58 rent to buy). Although the multi-tenure strategy has been interrupted by COVID-19, the Group continues to make good progress on this strategy and its performance underlines that there is good long-term demand for the multi-tenure offering. In total, there were 267 units in the rental portfolio fund as at 31 October 2020 (2019: 101). Following a suspension of discussions with prospective investors for the Rental Fund during the first wave of COVID-19, discussions resumed in the summer with the same parties and new interested parties. Whilst there can be no certainty about the timing or terms of a deal, discussions have been encouraging.

Cash offer

On the 23 October 2020 the Group announced a recommended cash offer for the acquisition of the entire issued and to be issued share capital of McCarthy & Stone by Bidco, a wholly-owned indirect subsidiary of Lone Star Real Estate Fund VI through a Scheme of Arrangement. Under the terms of the acquisition, each McCarthy & Stone shareholder will be entitled to receive 115p in cash per share held. The acquisition values the entire issued and to be issued share capital of McCarthy & Stone at approximately £630m.

Full details of the Offer can be found at https://www.mccarthyandstonegroup.co.uk/offer-from-lone-star-disclaimer 

Balance sheet and liquidity

The Group continues to have good liquidity and operates with strict cash controls in place to ensure it is positioned to manage the ongoing uncertainty, the slower sales rate and volatility in the current trading environment. Net debt was c.£63m[2] as at 30 October 2020 (2019: net cash £25m) which provides £137m headroom versus bank facilities in place of £200m. Cash flow benefited from a drive to sell down on-balance sheet part exchange ('OBPX') properties and a measured approach to using the OBPX facility. Net debt is expected to increase during the first half of financial year 2021 as the Group invests cautiously in build activities and expands its rental portfolio on the balance sheet, while sales continue to be affected by COVID-19. A measured approach to cash flow management remains in place, balancing the need to preserve headroom in order to enable the Group to navigate the short-term risks presented by the uncertainty in the market with the need to continue to invest in land and development to support the sales and profitability of future financial periods.

Current trading and outlook

Although the Group saw some benefit from improved liquidity in the secondary housing market during late summer and early autumn driven by pent-up demand and Stamp Duty holiday, our markets remain affected by COVID-19. New sales leads and net reservation rates improved gradually as the Group emerged in June from the first COVID-19 lockdown. However, sales have remained subdued as the behaviour of our customer base, which has an average age at the time of purchase of 79, has been more cautious than the broader population due to the risks associated with COVID-19, and our ability to facilitate marketing events has been constrained. There have also been fewer new sales releases in the year due to the disruption caused by COVID-19. As a result, our average total net reservations level for the quarter ended 31 October has been at 22 per week, which is 40% below the same period last year.

The recently introduced lockdown measures by Government in an effort to contain a second wave of COVID-19 has had an effect on net reservations in recent weeks, initially most pronounced in the Midlands and North where the earlier restrictions were introduced. The Board believes the retirement housing markets will continue to be affected by high infection rates and lockdown measures during the first half of FY21 and this will inform investment decisions and have a bearing on the timeframe for returning the business to profitability. Whilst the Board remains confident about the long-term prospects of the business, it will manage the business cautiously in the near-term in light of the market uncertainty.

- Ends -

For more information, please contact:

Legal Entity Identifier (LEI): 213800CEJ4OQ5YPU8Z37

This announcement contains certain forward-looking statements about the future outlook for the Group. Although the Directors believe that these statements are based upon reasonable assumptions, any such statements should be treated with caution as future outlook may be influenced by factors that could cause actual outcomes and results to be materially different.

Notes to Editors

McCarthy & Stone is the UK's leading developer and manager of retirement communities, with a significant market share. The Group buys land and then builds, sells and manages high-quality retirement developments. It has built and sold more than 58,000 properties across more than 1,300 retirement developments since 1977 and is renowned for its focus on the needs of those in later life.

There is growing demand for retirement communities. There are currently 12.2 million people aged 65 or over, rising to 17.4m by 2043, representing a 43% increase[3]. For those aged 85 or over, the increase will be larger, from 1.6m to 3.0m, representing an 87% increase. Research shows that 33% of those aged 65 or over are interested in moving, equating to c.4 million people[4].

McCarthy & Stone has two main product ranges - Retirement Living and Retirement Living PLUS - which provide mainly one and two-bedroom apartments across the country with varying levels of support and care for older people. Retirement Living developments provide independence in private apartments designed specifically for the over-60s, as well as facilities such as communal lounges and guest suites that support companionship. Retirement Living PLUS developments, which are designed specifically for the over-70s, offer all of this plus more on-site facilities such as restaurants, well-being suites and function rooms. Importantly, they also provide on-site flexible care and support packages to assist those needing additional help.

All developments built since 2010 are managed by the company's in-house management services team, providing peace of mind that it will look after customers and their properties over the long term. This is a key part of how McCarthy & Stone seeks to enrich its customers' lives. This commitment to quality and customer service continues to be recognised by residents. In March 2020, the Group received the full Five Star rating for customer satisfaction from the Home Builders Federation for the fifteenth consecutive year - making it the only UK developer, of any size or type, to achieve this accolade.

For further information, please visit www.mccarthyandstonegroup.co.uk