The EG Interview: John Tonkiss on finding McCarthy Stone’s third way

A year ago, McCarthy & Stone’s market capitalisation more than halved in just days, as the first Covid-19 lockdown saw more than £300m wiped from the FTSE 250 retirement home developer’s value.

The stock slump underlined a common challenge for leaders of listed companies – balancing long-term plans for the business with the short-term reactions of shareholders.

“I have to say, it’s probably best not to look at the stock market and the prices of your stock at those points in time,” says chief executive John Tonkiss now. “It’s probably best not to be too fixated about it at any point in time.”

He adds: “Clearly, shareholders were undervaluing the business relative to net assets. That was because of the complexity of the business perhaps, and overlaid to that the risk that our customers were most exposed to Covid-19. With that level of uncertainty in a public market, it’s quite hard to then triple-down on a highly ambitious innovative new strategy because people are already unsure.”

While Tonkiss focused on cash preservation, fire-fighting and supporting some 20,000 tenants, larger plans to expand the business with affordable mixed tenures were put on ice. But the pandemic created a clear argument for improvements in retirement living.

“What we have is a third way – you’re independent, but with care, support and community,” Tonkiss says. “[The Covid-19 crisis] really illustrated the benefits for retirement communities in a way that I’ve been arguing about for several years, but with a practical illustration.”

And the fall in stock value opened a new opportunity. A year on, Tonkiss and colleagues are in a very different situation following a near-£650m take-private by Texan private equity giant Lone Star and a subsequent £200m deal with investment giants Macquarie Capital and John Laing to back build-to-rent expansion.

Now Tonkiss wants to use the support of the company’s new investors to drive forward his vision for the business at a time when its offering has never been in greater demand. But he needs government to listen.

Bigger than a housebuilder

Birmingham-born Tonkiss joined McCarthy & Stone in 2015. His background is in construction, with off-site experience before off-site went mainstream, and more than seven years at student accommodation group Unite. In 2018, he moved from chief operating officer to chief executive and set about launching a shift to broaden “affordability, flexibility and choice”.

“The business has been around for 43 years, and for 41 years the only way you could enjoy the benefits of being in a retirement community with McCarthy & Stone was to buy it outright,” says Tonkiss. “I always felt that was a bit limiting.”

When Tonkiss took the helm, the average McCarthy & Stone sale price was just over £300,000. He wanted to cut £50,000 off that price tag. To do this, the company has incorporated modern methods of construction to cut costs with a standardised, affordable product. McCarthy Stone has partnered with off-site builder Sigmat to roll out MMC at a quarter of its sites, with a debut scheme in Hexham (pictured below).

McCarthy & Stone launched its multi-tenure model in 2019 and there are now a third of customers on rental tenures. At the end of 2020, the business registered as a provider of social housing, allowing it to bid for grant finance from Homes England’s affordable housing programme. That same year it mandated Rothschild & Co to secure a capital partner to grow a £300m rental portfolio, seeded by 100 homes.

“When I joined McCarthy & Stone I had many a conversation in those early days about renting,” Tonkiss says. “Most people said, ‘We just don’t do that, we’re a housebuilder.’”

But Tonkiss has changed that, and McCarthy & Stone’s build-to-rent plans were a major factor in attracting Lone Star’s bid. Today the backing of the $85bn private equity company opens the door to working with one of the UK’s largest BTR platforms, including now-sister company Quintain.

We are now part of a really big organisation that has leverage in these areas, well beyond our reach as a FTSE 250 business.

“It’s early days but that certainly is on the radar,” says Tonkiss, adding: “Lone Star has a deep sector knowledge of real estate investment, banking and financing, development and modern methods of construction. We are now part of a really big organisation that has leverage in these areas, well beyond our reach as a FTSE 250 business.”

The BTR strategy has been kick-started with Macquarie and John Laing’s new joint venture, Brigid Investments, the UK’s first specialised retirement housing rental business. “External investors effectively owning rentalised assets is a great investment proposition,” he says. “But fundamentally it’s a really good choice for our customers and will give a good economic outcome for McCarthy Stone.”

That’s another thing that changed. The business dropped the “&” from its name – fit for the digital age, Tonkiss says – and after 40 years its “dated” butterfly logo has fluttered away.

“What we are really doing is looking to much more positively represent older people in society,” Tonkiss says. He wants to champion the wellbeing and happiness of older people, meaning more “optimistic, outward, upward” imagery replacing stereotypical shots of people “sitting in chairs and drinking tea”.

That ampersand keeps sneaking its way back into the conversation, though. Some changes won’t happen overnight.

Call to action

Although demand for all types of retirement housing has never been stronger, the industry is operating in arguably one of the most challenging environments, Tonkiss says. Build costs are rising and house price inflation is muted – margins were already squeezed, and now operators are set to lose income from the ground rent ban through leasehold reform.

“The issue is very simple. If you take one of our retirement communities, about a third of that space that we produce is non-saleable,” says Tonkiss. That space includes care and services that are vital to the elderly, previously subsidised by ground rents. “My point is with the changes to leasehold, the changes to planning, the lack of viability we have on day one – our industry needs specific attention.”

Tonkiss wants support from the government to help create “a viable industry for retirement communities” that can build the homes the country needs. He has proposed a plan for the country to go from around 6,000 homes a year to its 30,000 target. Like many of his strategies it is organised in list form, spanning three areas.

One: planning reform should provide section 106 affordable housing exemptions for retirement communities. Ideally, Tonkiss would like to see a retirement living use class of its own.

“Fundamentally, half of the planning authorities in the country don’t have specific policies for retirement communities in their domain, which is just very hard to deal with,” he says.

Two: a permanent stamp duty holiday for last-movers, which he argues would be net positive to the exchequer by enabling two and a half moves down the chain.

And three: a target for Homes England to deliver 10% of homes for older people.

“That is one thing that Homes England has done well,” Tonkiss says. “There’s commentary about whether it has done other things well, but certainly it has actually facilitated the building of more homes across the country, and we think they should have a particular remit to drive the retirement industry.”

Retirement communities help the government manage the health and social care system more economically – it’s a true economic benefit

‘Brought to life’

Tonkiss is steadfast that enabling the sector has wider benefits, adding that it would release some 2m homes from would-be downsizers and save the NHS £2bn a year.

“Retirement communities help the government manage the health and social care system more economically – it’s a true economic benefit,” says Tonkiss. “By the government helping our industry they are helping the wider housing market; they are facilitating the movement of the right people into the right homes.”

His list of demands has not fallen on deaf ears, and over the past 12 months he has been speaking to the Ministry of Housing, Communities and Local Government and minister Christopher Pincher, trying to set up a task force with private sector leaders and cross-department government officials.

“They understand the unique nature of our business and the unique benefits that we bring. I think they get it,” says Tonkiss. “Maybe you could argue, ‘why didn’t they a year ago?’ That was probably our fault in bringing to life what that unique nature of our retirement living industry is.”

The silver lining of the past year is that it has shown “what the industry does and that we need to do more of it”, Tonkiss says. That’s how you establish a third way – and, if Tonkiss has his own way, maybe a few more as well.