McCarthy & Stone Half Year Results Presentation Wednesday, 15 th - - PDF document

McCarthy & Stone Half Year Results Presentation

Wednesday, 15th July 2020

Transcript produced by Global Lingo London - 020 7870 7100 www.global-lingo.com

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 2

Overview

John Tonkiss CEO, McCarthy & Stone

Welcome Good morning everybody, I am John Tonkiss. Welcome to our interim results presentation for the period to 30th April. Some brief introductions first of all. As we are all in our offices here in Bournemouth for the first time, socially distanced of course, if I can introduce vocally as it were, firstly our CFO, Rowan Baker. Rowan Baker (CFO, McCarthy & Stone): Good morning, everybody. Secondly, our CFO Designate, Martin Abell. Martin Abell (CFO Designate, McCarthy & Stone): Good morning. Thirdly, our COO, Mike Lloyd. Mike Lloyd (COO, McCarthy & Stone): Good morning. Collectively this morning we are going to cover a few points on our agenda. I will start as you would anticipate with an overview and a strategic update. Mike will then update on our

• perational responses, particularly focusing on our Customers & Services side, before handing
• ver to Rowan who will talk through our financial performance. I will draw things together

with a brief summary and outlook before opening up to the Q&A session. Overview Let me start with the overview. It has been an extraordinary period in which our half year results reside. I will cover some of the more routine achievements and our high level numbers shortly but of course the impact of Covid-19 has been significant on the business. Throughout, our absolute focus has been on the safety and wellbeing of our customers and staff throughout. Due to our unique proposition our customers have experienced a far lower infection rate than older people in wider society. While we have also been acting decisively to protect the financial health of the business and Rowan of course will cover our solid financial and cash position later on. Looking forward, we are gradually remobilising the business recognising the specific nature of our customer base, typically over 75 years of age, at more risk to Covid-19, who are invariably cautious. We are therefore matching our ramp-up actions with a steady return of customer activity. Stepping back and looking more broadly, I believe our response to Covid-19 has been decisive and has illustrated the special nature and benefits of our proposition. Independent retirement living with help and support on hand, a third way of living in your retirement

• years. Not in your own home and isolated, nor in a care home with all the challenges that

that provides. It has also reaffirmed I think that we are pursuing the right long-term strategy where we have made solid progress offering customers choice of tenure with flexible services and more affordable products. Looking beyond Covid-19, for there surely will be an end to this pandemic, we see significant

• pportunities. With our brand proposition and awareness enhanced by our response to the
• utbreak and the land market dislocated by the challenges within retail and commercial

property with a push for more brownfield housebuilding in our towns and cities, which of

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 3 course is where we naturally specialise. With government actually pursuing supportive policies around stamp duty, planning policy reform and ultimately a solution to the adult social care dilemma. Ultimately an emergence of a new and attractive retirement living property asset class. Emerging from extraordinary period – HY2- Review If I look back at H1 in my mind it has been a game of three thirds. You can see in the schematic at the top of page five, we had prior to Christmas the distraction of the General Election, followed by clearly improving trends in the Boris bounce after the new year and then a hard break on activities in March. We have been making good progress with our margin improvement and cash generation plans, notably our build cost reduction programme, with £30 million secured in build, while our rental activity has performed well with attractive yields being delivered. In addition, we are delighted to report that we have achieved our 15th consecutive year of HBF five-star customer satisfaction and five NHBC Pride in the Job

• Awards. This is a real reflection on both the quality and consistency of the schemes that we
• deliver. Our health and safety metrics have improved significantly during the period, well

ahead of industry benchmarks. However, of course, at the bottom of the page H1 financial impact has been significant. Legal completions were down 44% at 471 resulting in a £25 million underlying operating loss in the period. Safety and wellbeing of customers and employees has been our absolute priority Customers As I said at the outset, the safety and wellbeing of our customers and staff has been our absolute priority during the period. For our customers, amongst many things, we have adopted strict hygiene controls, adapted our service activities, provided on-site support and guidance and a range of wellbeing activities. Critically, as you can see in the bar chart on the right of this page, Covid-19 infection rates for our customers have been better than the entire UK population and have been four times lower than the over-85s in the population, which is testimony to the professionalism of our teams. I believe this is an achievement that has enhanced our reputation and underlines the strength of our customer proposition. Employees Throughout the pandemic our staff have been protected with PPE, engaged and proactively volunteered through our Buddying programme and we have supported home-based working through video blogs, cascade communications and online courses. As a result we have seen excellent levels of employee engagement in recent surveys. Bringing these together, I have been both impressed and extremely proud of how we have responded to the crisis. To share this sentiment we recently ran a national ‘thank you’ campaign to show our appreciation of

• ur customers and our employees. You can see on the right some of the wonderful thank you

comments sent to our teams. Acting decisively to protect the financial health of our business On the next slide we have also been acting decisively to protect the financial health of the business with a series of measures. These include cancelling the dividend, stopping discretionary spend, a voluntary 20% salary reduction for Board and Senior Leadership Team members, furloughing some of our build and sales staff at 80% salary, agreeing relaxations to

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 4

• ur RCF covenants with banks and securing access to the £300 million CCFF facility providing

further headroom in the event that we need it. We have also announced internally today a further resource realignment coming primarily as sales, development and leadership strategies. This is aimed at balancing resources with our remobilisation plans and streamlining our development leadership structures. It impacts around 10% of our non-services workforce resulting in around £4 million annualised savings. This change is expected to be completed in August following the consultation process. As part

• f these changes, Nigel Turner, our Build COO and member of the Executive Board is standing

down from the business. Nigel made significant progress with our build cost reduction and safety programmes in particular and I would like to thank Nigel for his contribution over the past 18 months. Following these changes, we now have a simplified and more streamlined forward development vision for the business. We believe we have struck the right balance between preparing the business for tougher market conditions and returning upside in the busines for when markets improve. In overview, we are managing the cost base carefully, we have strong cash controls in place and the business has good liquidity moving forward. Gradual remobilisation reflecting the nature of our customer base Moving on from this we are gradually remobilising the business, recognising our customer base is more at risk from Covid-19. Our services have been restarted and partial lockdown processes established. Testament to the swift action and good practices we have adopted, we had just one confirmed case of Covid-19 amongst over 20,000 customers to-date. We are gradually restarting our construction sites with 17 of 44 live sites now underway and seven first occupations anticipated in the balance of FY20. We have adjusted our build rate and cost assumptions to account for Covid-19-compliant working practices, potentially a 1-2% margin risk although we will naturally be working to mitigate this. Our supply chain and subcontractors have been supportive and are responding positively to our restart programme. Regarding sales and marketing we have changed our sales processes. For example, we are having viewings by appointment only and we have now resumed our lead generation

• marketing. If I can point out on the charts on this page covering lead generation and gross

reservation rates, they show the pre-Christmas slowdown that I talked about earlier, with improving trends in the Boris bounce following the General Election and a hard stop in March. More recently, a gradual recovery post-emergence from lockdown as we have restarted again

• n 8th June. We anticipate a gradual recovery over coming months and will match our

business’s resourcing and investment activities accordingly. Mike, of course, will provide more detail during his operational update. Our land buying teams are now fully remobilised and we are seeing opportunities coming forward for change of use of retail and commercial premises in particular. However, the land

• ptionality will remain a key mantra. That said, while we are past the peak of the health

crisis, there will be a weighted financial effect towards the second half. Our half year was after all halfway through the lockdown in the middle of the spring/summer season and delays to our build programmes will result in just ten first occupations in this year, compared to typically somewhere between 40 and 50.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 5 Unique benefits of independent retirement living – the ‘Third Way’ Whilst it has been a challenging period for everyone, there are a number of silver linings in

• ur response to Covid-19. For example, the outbreak has helped us demonstrate the unique

benefits of independent retirement living. Purpose-built retirement communities with support

• n-hand, with your own front door and private apartment. This, combined with our rapid
• perational response, has kept our homeowners generally safe, secure and happy with the

support they receive, as can be seen from the low infection rate and positive survey responses which you can see at the bottom of this page. The pictorial representation captures this I think perfectly, demonstrating a positive alternative to the loneliness of staying at home or the risk of being in a care home, a genuine third way to address the housing needs of older people, which is becoming increasingly understood.

Strategic Update

John Tonkiss CEO, McCarthy & Stone

Short term priorities remain in place Stage 1: Optimising financial performance Naturally, we have been reviewing our strategy in light of Covid-19. To recap, we have two stages to our strategy, optimising our operations and leveraging our strategic opportunities. In the first stage, optimising our operations, going row by row on page 11, we have already right-sized the business with around £10 million cash savings achieved, based on a steady state run rate of 2,100 units. Today we have announced further headcount reductions aligned to our remobilisation plan, with about £4 million of annualised savings. Our sales and marketing practices have been modified with a Covid-19-secure sales journey and a hub-based resourcing model in place. Our build cost reduction programme has made solid progress with £30 million of savings delivered. £9 million has been practically delivered in sites complete with £21 million locked into live sites. Additionally, the design efficiency and specification changes are now embedded in the business and into future projects. Timing of these savings will of course be impacted by the delayed workload while we are also looking to mitigate cost increases related to Covid-19-compliant construction activities. From a workflow realignment perspective there is another silver lining as we look to smooth

• ur production programmes as we remobilise the business, which I will illustrate in more

detail on the next slide. Moving forward we will continue to focus on our margin improvement actions, albeit it will take more time for the benefits to be fully realised. Workflow trajectory As I have said, we have taken the opportunity to review our workflow trajectory with the aim

• f optimising and smoothing delivery over the coming years. To remind everyone on the call,
• ur immediate priority is to sell down our just over 1,350 core stock units. Looking at the

charts at the bottom of this page, we then plan to remobilise sites with our ambition to recover to around 2,000 units being delivered in FY22 with a gradual growth plan thereafter. Understandably, our FY21 output will be tempered by our recent construction hard stop and remobilisation phasing with around 1,250 units scheduled for completion next year.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 6 Looking at the light green and light blue bar charts, the vast majority of our FY22 production has planning with 87% secured, while we are in control of sites, 80% of which for FY23

• production. This is a really good position to be in as we look towards the next 2-3 years.

Right long term strategy in place Stage 2: Strategic Opportunities Looking at the second stage of our strategy, leveraging opportunities around three key things, affordability, flexibility and choice. Looking at flexibility first on page 13, we are building on

• ur Covid-19 learning to develop a new range of softer services, for example, our buddying

voluntary programme, alongside the concrete initiatives covering electric car clubs and enhanced restaurant services and so on. We will also be implementing a phased rollout of alternative charging models in the near-term. Choice, multi-tenure in effect, has gone from strength to strength and we are developing new build to rent, shared ownership and partnership models. Post-Covid-19 our stabilised income- producing rental assets offer an even more attractive investment proposition and ultimately will establish a new property asset class in my opinion, which Rowan will provide more detail

• n later in her update.

From an affordability perspective, while we have paused the rollout of modern methods of construction, MMC, and our affordable product concept for now, we will return to these concepts as the economy recovers. I sincerely believe MMC will play an important role moving forward. Our response to Covid-19 has reaffirmed that we have the right long-term strategy in place, focusing on enhancing our customer offering and their experience. Opportunities beyond Covid-19 Finally from me at this stage, another big silver lining. We see significant opportunities on the horizon once we have a therapeutic response to Covid-19. Our market fundamentals remain, illustrated by the projected UK population growth chart you can see on the top-right

• f this page 14. An ageing population with a chronic undersupply of appropriate housing and

a big shortfall to the potentially 30,000 annual need. This is a huge opportunity to be

• addressed. We have unrivalled capabilities as the UK’s leading developer and manager of

retirement communities. Over 40 years’ experience, outstanding five-star quality with excellent customer satisfaction scores. The increasing political awareness and changing policy landscape will also help us

• significantly. We have enjoyed greater access to government, policymakers and advisors

throughout the pandemic. They have really begun to understand the benefits in the way I think that they did not before the crisis. We definitely now are on their radar. There is a heightened resolve, I think, to address adult social care, both the health and housing elements of this which sit side by side in my opinion. The Prime Minister himself has championed the economic importance of the housing industry. Build, build and build. Potentially, we are likely to see some significant reforms to the planning system which will support our type of brownfield redevelopment, aided by the dislocated retail and commercial land market. These factors, combined with an increased awareness of the benefits of our independent retirement living proposition, our customers are generally happier and healthier. Not loneliness in your own home, nor a risk of being in a care home but a better third way andthe

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 7 renewed emphasis on our brand purpose, building on our well-established ESG credentials. In summary, I think we are very well positioned to navigate the short-term challenges and are uniquely placed to capitalise on the long-term opportunities as we recover from the pandemic and these themes ultimately align.

Operational Update: Customers & Services

Mike Lloyd COO Services & Customers, McCarthy & Stone

Focus on a safe and positive environment for 20,000 homeowners and staff I am going to start by giving you more colour on how we have been managing our developments in recent months. Starting back in March when we saw our first Covid-19 case we put in place instant teams and processes for every confirmed or suspected case that we have been following since. We have been tracking and overseeing those cases on a morning call for four months now and that process has played a major part in avoiding outbreaks. When the Prime Minister announced the original lockdown within 48 hours we developed and briefed out a new way of running our developments. The focus has been on stopping Covid- 19 getting onto our sites in the first place and if it did, minimising the risk of it spreading. As the crisis escalated our Procurement team did a fantastic job in getting hold of PPE early for us and we moved around 50 of our sales consultants onto developments to cover any gaps. It has been an extremely challenging period for our staff. They have done an outstanding

• job. One small indication of that is that we have been running close to just a 2% absence

rate in the last two months and our on-site coverage has been better than normal throughout the crisis. John ultimately talked through the lower infection rate that our homeowners have

• seen. Their average age is over 80.

We have also wanted to ensure we are helping our homeowners with the challenges of

• isolation. Many have been shielding. We have created a Buddy scheme where 500 of our

staff and a few of their family have acted as volunteers getting essentials for homeowners. We have run a lot of activity to support people with isolation and fitness regimes to our IT team getting dozens of homeowners online for the first time. They have been truly life- changing for some of our people. I have had a very big mailbag and inbox from our homeowners thanking our staff for doing such an outstanding job. It has really highlighted to me how much our products and services can help people live a better life later in life and what we have delivered through our operation set us in good stead once this crisis has fully abated. Priorities for H2: Sales and Services Services Moving on then to our priorities for H2 and starting with the short-term in service and sales. In our service operation, as John said, we have just one confirmed Covid-19 case as of last

• night. We had actually got to zero over the weekend for the first time since March but

unfortunately one homeowner has since tested positive. We have reopened most of our services but they are adapted in some way, as you would expect. We still have our Buddy scheme and extra cover in place. One thing through this crisis is we learnt that our homeowners see a lot of value in help we provided, ranging from things like doing laundry, having meals delivered to online community activities. We believe a set of these have got

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 8 legs post-Covid-19 and we are investing right now to make them a permanent part of what we offer and what we do. Sales Moving on to sales then, we have been up and running for five weeks now. There are some important context first to our sales model in order to interpret where we are. Our sales model is normally visit and also event-based, especially event-based for off-plan which is usually 50% of our business. Visits and events present challenges with our demographic, not just potential homeowners but existing homeowners. They are much more vulnerable to Covid-19. There has been a natural level of cautiousness in getting out and about but also a concern from existing homeowners having lots of visitors on development. The final piece of context is that our sales model relies a lot on our local direct mail and door-drop marketing which generates our leads. This was turned off in March and the level of new leads we have therefore got during the peak of the crisis has been low and needs building back up. In that context, our plan has been to ramp back up activity step-wise as we see our demographic become more mobile and behaviour evolve. In June we started operating a substantially different sales model with sales consultants working in hubs from home, doing as much as possible online and on the phone. As John said, visits have been by appointment and the initial focus has been on core stock. In June we have seen net reservations on core stock at over half the usual levels. We made a decision to turn back on our lead generation marketing a few weeks ago, the first of which lands this week. That will start to build back up the front of our sales pipeline and drive more core stock sales. We have just got resources back to start selling off plan too. To set all that up from a sales point of view right now, it is still early days for us. We are midway through planned step-wise remobilisation which we are triggering off what we are seeing in our customer group and their behaviour. Priorities for H2: Brand review and repositioning Moving now on to H2 priorities that are about setting us in good stead post the crisis. While there remains some uncertainty about what sales are achievable while we are still living with Covid-19, I am very positive about our potential post-Covid-19. People can get more out of life living in the communities we create. That is true in normal times but the experience under Covid-19 for me it has really vindicated that further. However, we do have work to deliver on that potential. We have been doing a lot of work earlier this year to understand what is holding us back from growing more demand and one of the areas that has come out strongly in that is a lack of familiarity with retirement living in the UK. At a certain stage of life it is not yet a natural thing for most people in the UK to think about the idea of living in a retirement community. Many people expect us to be some form of institutionalised living or a care home and there is a stigma associated with that. That is holding us back. In other countries they are further down the line in creating a national understanding of retirement communities that is quite distinct from care homes and the like. I believe this is one of the key reasons those markets have private retirement housing sectors several multiples larger than in the UK proportionately. I am not just talking about the US. It is true in Australia and New Zealand.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 9 There is a real opportunity to change perceptions in the UK. Care homes are for people who are dependent on others. We are for people who are independent, with people who are not done yet. What we offer is a new way of life to live happier and healthier in older age and I think Covid-19 has really highlighted that very well. To drive this opportunity we started working on relaunching our brand at the beginning of the year. We are well progressed, a few months away from realising that and really excited about it. You will hear more from us

• n this shortly.

Financial Performance

Rowan Baker CFO, McCarthy & Stone

Financial Overview Good morning everyone. I am going to take you through the financials for the period ended 30th April 2020. Now, as John just mentioned, we have had a challenging first half which was impacted by both the General Election for the first couple of months and the uncertainty related to Covid-19. You can see this in the legal completions themselves which stood at 471 units, including 80 rentals, compared to 845 in the prior year. Our ASPs were down at £297,000 and the underlying operating loss for the period stood at £25 million. We delivered a strong performance on land exchanges with 18 delivered in the period and we have controlled our cash well and ended the period with an improved net debt position at £54 million. Our focus continued on optimising our financial performance in line with our strategy. Two highlights particularly to mention here - our rental portfolio has been performing well, delivering attractive yields and we are also very pleased with how our part-exchange book has kept moving during a potentially difficult period. We worked hard to put in place additional cash controls in response to the Covid-19 lockdown and we secured additional liquidity via the CCFF and dealt with any likely covenant pinch points. That puts us in a good position as we continue to navigate through this uncertainty. As John has mentioned, we are remobilising the business now but we are doing that gradually to reflect the cautious and vulnerable customer base that we have. Our guidance therefore remains suspended until the impact of Covid-19 on both the business and the wider economy is better understood but we are flagging that the financial impact is likely to be weighted towards half two. Consolidated Statement of Comprehensive Income Moving on then to the income statement, I have given a bit more line item detail than usual here so that you can see all of the moving parts which I think is important in light of us being in a loss position. Our revenue was impacted by the lower level of legal completions volume as illustrated earlier due to the General Election and Covid-19 and the introduction of rental which goes through the other income line rather than revenue. This lower level of completions was also influenced by our lower level of first occupations which stood at just three for the period compared to 15 in the prior year. That was due to the halt in build activity in March.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 10 In terms of site profit margin that stood at 22.8% compared to the 24.9% during the half year last year. Now, if we adjust that site profit margin for the bulk sale of our Scottish stock then actually you can see that our site profit margin would be consistent with the prior year at around 25-26%. Our gross margin however, was impacted by the fixed costs that we carry within divisional and sales and marketing costs and those are mainly people costs, and the increased empty property costs. That led us to a gross loss of £7.9 million. Another point to draw your attention to is our net operating income. Now, that includes the revaluation of our rental assets which go to the P&L and are recognised at a 21% margin. I have put some further details on rental accounting in the appendix. Moving on then to exceptionals, the main item here was a non-cash impairment of the goodwill and brand that arose in 2009 in the business and that amounted to £60 million. In addition to that we have had a further £3 million of Covid-19 and restructuring costs. Balance sheet Moving on then to the balance sheet, you can see there the write-down of goodwill and intangibles compared to the prior year which stand now at £4.3 million. The investment properties stood at £51.2 million and I will talk you through some more detail on our rental portfolio, which is the main driver of that balance, on a specific slide in a moment. Our total net stock was 15% lower than it was in the prior year. Now, that was partially due to the Covid-19 pause in activity because we obviously stopped investing in land and build in mid- March and you can see that coming through in our balance for sites in the course of

• construction. However, it was also in line with our strategy of reducing our finished stock

levels which have been progressing towards our 1,100 target and stood at the period end at 1,373, which was good progress since the 1,628 at the year end. It is important to note that our finished stock balance, the £323 million, has been stress- tested and what I mean by that is that prices could fall by 13% before any adjustments to that finished stock balance would be required. That is recognised on the balance sheet at

• cost. All of that taken together gives us a tangible net asset value that is broadly equivalent

to that of the prior year at £691 million. Choice: Rental portfolio performance Let us have a look at the rental portfolio performance in a bit more detail. Now, I have given quite a lot of detail on this slide so let me take you through this. The balances here bring us right up to date as they are shown for the end of June. Now this portfolio has been delivering attractive yields and we have seen a strong and resilient performance with a low level of voids and negligible bad debt. Interestingly, 40% of our reservations were rental or rent to buy during half one. We have now fully rolled out nationally and let me talk you through the numbers across the top. We had 192 assets as at the end of June with a list price of £59 million and a balance sheet value of £53 million. They are delivering annual gross rents of £3.8 million which is equivalent to a gross yield of 6.5%. We have got a really attractive gross to net ratio there of 21% which will deliver some excellent returns and would equate to greater than 10% on a geared basis if we were to take gearing at the 40% level. Now, we are very keen to unlock the potential value in this portfolio and we think that this is really capable of being a strong value proposition once the concept is fully proven and the portfolio reaches scale. We do have a clear path to grow that scale to in excess of £300

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 11 million by the end of FY22 and that also gives us the potential to develop this into a full build to rent strategy. We are keen to unlock best value which means that we would want to be selling this into an orderly market at the right time. In summary then, a strong rental performance delivering attractive yields. Part-exchange performance as at 30th April 2020 Next, let us look at part-exchange. This does continue to be a really valuable and cost effective tool for us and we are really pleased with the performance that this has driven, particularly during the Covid-19 lockdown period. Some of this data brings us right up to date as well, as it does include more recent performance. Now, our average resell period remains strong at 14.2 weeks and indeed only 28 of the 130 properties that we held on the balance sheet at 30th April remain unsold, with the remainder being either sold subject to contract, exchanged or completed. We delivered a strong performance since the Covid-19 lockdown with a total of 85 properties having been sold since the 23rd March. The balance sheet valuation of £44 million reflects the lower cost of net realisable value so it does take into account our current view of the

• marketplace. In light of the current market it is extremely important that we keep those

robust controls in place and are responding to what we see in front of us. We do continue to

• perate robust controls as a priority. Overall we are pleased with that performance over what

was a potentially very difficult period. Cashflow – net cash Moving on next then to cash this shows the moving parts within cash for the first half of the

• year. Now, the main points to draw your attention to here are the land and build spend. We

spent £147 million on land and build and we pulled that back significantly compared to the prior year in response to the lower level of revenue that we could see coming through. We also scaled back our spend on operating costs compared to the prior year and that brought us to a closing net debt balance which is ahead of the prior year at £53.5 million. You are seeing continued careful cash management in response to the Covid-19 lockdown in an effort to maintain as strong a balance sheet as we can. We have recently agreed a relaxation in our covenants with our lenders which takes us right up until October 2021 which sets us up well. We have also agreed some additional liquidity by gaining access to the £300million Covid Corporate Financing Facility which was secured on 2nd June and remains undrawn. Impact of cash preservation measures Finally then I just want to talk you through the impact of some of the cash preservation measures that we put in place in response to the Covid-19 uncertainty. We have really worked hard at this to ensure that we are in the best possible position to take us through this uncertain period that we all find ourselves in. Now, this page walks us through how we have progressed since the February month end close or mid-March through to the current position. In terms of cash, as you know, we have fully drawn our £200 million RCF and we stood with a cash balance of £127 million as reported in mid-March. We drove that up to £146 million as at the end of April and it now sits at around the £122 million mark as we have started to reinvest in land and build as we reopen the business.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 12 We also said in our announcement back in March that we would try to deliver additional cash

• ff the balance sheet and we can see that by looking at our finished stock and our part-

exchange balances. Our finished stock balance moved from £355 million down to £317 million at 30th June and our on balance sheet part-exchange moved from £59 million down to £39 million at the end of June. Our monthly cash burn we have worked very hard to bring down as far as we can. To clarify, this is the overhead monthly cash burn rather than taking into account land and build spend. We have managed to reduce this from £10 million per month to £7 million during the lockdown period through a number of cash actions such as use

• f the job retention scheme, Board and senior salary adjustments and a reduction in

discretionary spend. In terms of covenants then and I will reiterate this because it is important, we could see that

• ur covenants were potentially too restrictive going into this uncertain period. To be clear,

we were fine with satisfying the covenants at our half year end, 30th April 2020, but as we moved through to October 2020 and April 2021 we secured interest cover waivers for those covenant test periods and then a relaxation in covenant for October 2021, which works on a six-month lookback rather than a 12-month lookback. We are well covered by those covenant amendments. We have also increased our potential liquidity from just the £200 million RCF back in March to an additional £300 million of CCFF making a total of £500 million liquidity we have access to. All of those things put us in a good position. We feel that the business is well positioned now to navigate through the continued uncertainty, we have excellent liquidity and strong cash controls in place.

Summary and Outlook

John Tonkiss CEO, McCarthy & Stone

If I can draw things together then with a summary and outlook. Bringing the points together, we have responded early to Covid-19 and our absolute focus has been on the safety and wellbeing of our customers and staff throughout. We have also been acting decisively to protect the financial health of the business and have a solid cash position. We are gradually remobilising the business, recognising the nature of our customer base and the actions that we are matching with customer activity. Of course, while we are past the peak of the health crisis, we flagged that the financial effects will be more weighted towards the second half. That said, our decisive response to Covid-19 has illustrated the special nature and benefits of

• ur independent retirement living proposition, a third way of living in your retirement years.

It has also reaffirmed that we are pursuing the right long-term strategy around the themes of affordability, flexibility and choice, with choice of tenure and rental driving particularly well. Beyond Covid-19, we see significant opportunities with our brand and proposition enhanced, new opportunities in a dislocated land market with the government both aware and actively supporting a review of stamp duty, planning policy and adult social care reform. Also, in my mind, the emergence of a new and attractive retirement living property asset class. The business therefore is in good financial health and is uniquely placed to capitalise on our future

• pportunities.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 13 Before moving on to Q&A, finally from me, I would just like to acknowledge that this is Rowan’s last set of results with the business. Without being too sentimental I wanted to take the opportunity to really thank her for her dedication and support over the last eight or so

• years. Rowan, really, really thank you for everything you have brought and very, very much

best wishes for your career ahead. Well done, thank you. Rowan Baker: Thank you very much.

Q&A

Aynsley Lammin (Canaccord Genuity): Morning everybody, just two from me. On the projected units, 1,200 this year and just over 2,000 in 2022, how much of that would you expect to be rental? Obviously, if you still expect to invest £300 million in rental would that suggest around 1,000 units from here to the end of 2022 would be coming from the rental product? Also, related to that, I think your admin run rate annualised is around £40 million. It was £20 million in the first half. Would that continue to be around £40 million in FY21 and were you able to tweak that with the lower expected volumes? Then secondly, I am interested to hear your view on the stamp duty cut. I would have thought that would be

• helpful. Does it mean you can do more part-exchange? Are you marketing that point

strongly and what is your expectation for the next nine months impact on the business from that change? Thanks. Jon Tonkiss: Aynsley, thanks for the questions. I might farm them out, as it were. For my mind, we are building on from 1,250 to 2,000. What is interesting at the moment is we have been running at about 25% of our completions rental, which is I think where we were anticipating the business getting to in the short-term. However, in reservation terms in the first half we had slightly higher. We actually had a 40% level. So rental is becoming an increasing proportion of the business as we move forward. Mike will have a view on how the market is responding. We are agnostic to some extent to customers, so we are really giving customers the choice to fall in love with the proposition and then find the best way to buy. That is really driving ultimately where this will settle but somewhere between 25% and 40%, maybe that is where we are heading to. Mike Lloyd: I would agree with that. I think the 40% reservations is somewhat affected by the very unusual six months we have been through. That said, we only started our trial of rental in March last year so I feel before we went into lockdown there was still quite a lot more potential in terms of how we were embedding it in our business. I would agree with that, John, 25-40% of our business feels like a sensible range in terms of what it could be. Rowan Baker: The important thing to think about for the first half is that it does include actually a couple of months of shutdown really. You have got slightly less overhead in there as a result of things like the job retention scheme etc. You would expect that to just tick up slightly in the second half of the year. John Tonkiss: Then Aynsley, vis-à-vis stamp duty, something I have talked about a lot for months and years, I am delighted the government has changed their policy on stamp duty. Clearly, there are different opinions on how stamp duty affects the housing market. From my point of view, it is really quite simple. We have a two-speed housing market, new build housing flying ahead with the benefit of Help to Buy at record levels and a secondary housing

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 14 market that is pretty much in the doldrums for the last three years. I think the stamp duty inherently impacts and slows down transactions in the market and I think it is positive to our customers circa £15,000 at the top end of that. However, I think it is also positive for housing chains that form underneath our transactions. I think it is good news. It is really early days yet. One of your follow-up questions will be, ‘What is the impact?’ but we have not really seen that just yet. I think it will have an impact through the second half of the coming year. Rowan Baker: Aynsley, to pick up the point you made about part-exchange and stamp duty, a point to remember there is that PX is actually stamp duty exempt anyway so it does not necessarily have a direct implication. Aynsley Lammin: Thanks very much. Clyde Lewis (Peel Hunt): Good morning all. I think I have got four, if I may. First, probably a quick and easy one, bulk sales as we looking at the second half of the year, would you expect to be looking to do any of those? The second one was on the amount of cash build into the second half and Rowan you very kindly brought us up to date with the numbers to the end of June. Would you expect that to continue increasing until we get to probably the final month of the period and then see a normal inflow in October? The third one I think, John, in your early comments you referred to alternative charging methods. I am just wondering if you can say a little bit about that and what is going on there. The last one was, I think Rowan put up the slide on the different rental income between retirement living and retirement living plus. There is obviously a pretty stark difference between the two. Two related comments to that. One, how much extra build cost is there in retirement living plus

• n an average unit? As we look at your pipeline how much of a shift towards retirement living

plus should we expect to see over the next couple of years? John Tonkiss: Clyde, good points. Bulk sales to start with, we alluded with a few bullet points in the presentation to build to rent and strategic partnerships, as it were. We have been working behind the scenes on that. We have not got anything to announce just yet but I think we will have I hope in the near-term. Updates on that are fully consistent with the strategy and build on some of the great work we have done over the last 12 months or so. Watch this space in that regard around bulk sales. Clearly it is all about driving value for shareholders in that process. Martin Abell: If you think of the cash profile of the business, clearly I think the business did a great job on restricting the cash burn during lockdown where it was broadly £7 million a

• month. Now we are coming out of lockdown we are turning back on the spend on sales and

marketing and rightly we are constructing again. We are continuing to build land to make sure we have got the right pipeline for the medium term. If you put that together, what you will see for a period of time whilst that sales line is more subdued as our customer base take a bit longer to come through into the market, you will see a build up on the net debt. Net debt sits at £78 million at the end of June. It will build through the second half and then, Clyde, you are right, as we go through the course of the next financial year that should unwind depending on the pace at which the sales rate comes back online. Mike Lloyd: We have been looking at service charges for some months pre the lockdown coming in place, looking at alternative ways of charging customers for services. We are really

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 15 trying to tackle two things. One is from a customer point of view, our customers are mainly

• n fixed incomes. One of their concerns is buying into a fantastic property but that service

charge is a pass-through cost. It can go up and a concern really about where those service charges might go in the future. On the other hand, we are acting as a managing agent in charging that way and it is a very low return business. Historically, we have not invested a lot in it because of that. For both of those reasons we have been looking at alternatives. My hope is that we will be trialling at least one, if not two, alternatives by the end of the year. We have not come to a conclusion of exactly what we would like to do there but as an example, in other countries and actually there are some newer operators in this country, using what is called deferred management fees. This is where you have no or a very low fixed service charge and you essentially defer it into the resell of your property later. It might cost you 1% a year for every year you live there capped to a certain amount. That is quite a different way of charging for services. In that example, it provides a good level of certainty for the customer and also a better level of return for us to invest in those services and improve them. Rowan Baker: I think it was clear on the chart on page 23 that there is a difference between the RL and RP yields that we get. Part of that is due to the unique nature of the retirement living plus assets themselves where essentially they are a little bit larger than an RL but we are pricing those in accordance with the alternative that you could get by accessing what a care home has to offer. Essentially, what we do is we review the pricing opposite the current market and then we layer up care costs to give us an equivalent value proposition for the customer. John Tonkiss: Which is of course a lot better than a care home. You have got your independent apartment, front door, one-bed, two-bed. Rowan Baker: Indeed. Yes, there is a huge amount more space and indeed it is your own

• apartment. It is truly independent living. That is the reasons for the difference. I think you

can also see in the mix that in terms of the portfolio in unit terms it has been about 50-50 between RP and RL but what you have to bear in mind there is that the stock that we are choosing from or the stock that we have, is not 50-50 RP/RL. You actually can see a weighting towards RP therefore in what the customer’s preference is. I think we are looking at what the learnings are from this to take into our front end land buying, one-bed/two-bed mix and the distribution across the properties. However, it is still a learning process and it is still early days at the moment. John Tonkiss: I think this agnostic approach we have taken has really helped us understand an unbiased view of customer preferences and Clyde, to your point, I think we will now tailor

• ur learning from this into our development and design criteria moving forward so we develop

a build to rent strategy around the right spec, the right mix, the right profile and ultimately the right locations to really take the BTR strategy forward, which I think will be accretive to the business. I think it will be quite unique and different to our traditional McCarthy & Stone

• ffering.

Clyde Lewis: Thanks for that. In terms of your answer on RL and RP, do you see a point where you would have a whole unit, a whole site which would be just rental as opposed to a mixture.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 16 John Tonkiss: Yes. To be clear, that is exactly what we mean by a BTR, a full build to rent asset level investment proposition like what happened in other forms of housing, for sure. Clyde Lewis: Okay, thank you. Rowan Baker: Yes and we definitely see that as being retirement living plus rather than retirement living. John Tonkiss: Correct. Sorry, can I just clarify that point, yes. That is a really good clarification question, thank you. Clyde Lewis: Okay, thank you. Gregor Kuglitsch (UBS): Hi, good morning, thanks for taking my questions. Maybe one clarification point going back to slide 12, please. It said scheduled first occupations and I think when you were talking to it, it sounded like legal completions. Any difference because

• bviously if I look at what that implies, it implies basically that you sell or that you complete
• n virtually no units in H2, unless I misunderstood something there? That would be helpful.

Then I know you are not guiding specifically but you have given some elements. You have told us the overhead will tick up a bit. The divisional cost that you have helpfully broken out presumably do not change much either. I guess empty property costs neither. Is that the way we should think about it, that you have effectively got something like £50 million on the P&L fixed costs essentially? Obviously, we can triangulate that with the volumes that you provided us with on slide 12. Then, maybe more mid-term, to go back to one of the earlier questions, I think you were implying that maybe a quarter of those 2,000 units, therefore 500-odd, would be essentially rental that you retain. Or at least basically you do not actually sell but you retain them on the balance sheet until you find a third party investor and the accounting is obviously different. Can you maybe circle back to the target initially of returning to, I believe, a 15% operating margin? How do you square the circle to get back there? Perhaps it has changed with the new costs being introduced with Covid-19 etc. but if you could help us in that regard. Then finally, on the rental I think proposition and more around how you think about the capital management side of things. Obviously, £300 million

• f capital tie-up for a company where the balance sheet is probably oversized. Today you

have £700 million of net assets so the question is at what point do you actually need to sell some of these and how do you see that trajectory? How hard do you push on the rental if you do not find a buyer basically? John Tonkiss: Gregor, thanks for the questions. I was not quite clear what you were pointing to on page 12. Gregor Kuglitsch: There is a slide with 400 units first occupations. Circa 400 units in H1 excluding the rental, you did 390 so that implies – John Tonkiss: Let me qualify, slide 12 is the reduction coming from build into first

• ccupations in each of those years. When I talked about this, at the very top there are 1,373

finished good units we are selling from today incremental to these deliverables. That is the clarification point. Hopefully, you understand 400 new, 1,250 new next year and then 2,000 new in FY22. Gregor Kuglitsch: It is not a volume guidance in that sense. John Tonkiss: No, no, it is not.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 17 Rowan Baker: No and to be clear in the first half we delivered three first occupations. We are expecting another seven sites to be complete by the year end. Gregor Kuglitsch: Right. John Tonkiss: Apologies, that was not clear. Martin Abell: In terms of H2 the comments you make on the cost base, I would expect that the fixed cost base will just broadly incrementally increase in the second half versus the first

• half. However, the key point to note when you are thinking about H1/H2 split is what the

sales line does. I would characterise the first half as being four months of trading in a reasonably normal market, followed by two months of lockdown. Whereas the second half you have essentially got two months lockdown again but you have got a slow emergence into a market backdrop that is a lot more uncertain. As a result, we expect our sales trends to be more subdued, certainly in the early period following lockdown. That is why we are making the comments this morning that we think the second half will be tougher than the first half from a financial perspective. Clearly, from our point of view the key priority is coming out of that second half with good momentum going into the next financial year. John Tonkiss: Your third question then, Gregor, was about margins. Having said that we believe we have the right strategy in place, affordability, flexibility, choice, I think we also have the right goals in place around our return on capital employed and operating margin that we articulated in our new strategy. That said, the timing and the delivery of those has and will be affected by the Covid outbreak. We are still aiming for and driving for the margin and ROCE improvement to get us to those 15% numbers and beyond but clearly the timing we need to take stock of in lieu of the outbreak and the response to it. The fourth question that you raised on what to then do with the rental fund is a fundamental part of that. Rowan Baker: As I said when we were covering the rental slide, we are very keen and focused on the strong value proposition that we have got here. We are looking to nurture the portfolio as best we possibly can. We need there to be a fully functioning and orderly market in order to be able to achieve that best value. However, that said, we are stepping back a little bit and considering our options from here because we do think that this is a valuable

• proposition. Whilst we have not concluded on exactly how we are going to treat that we are

acutely aware of the balance sheet lockup that that gives us for the period that we hold it for but we are keeping our strategy under review for that. Suffice to say, we are focused on unlocking the value. John Tonkiss: To emphasise that point, the world of property asset classes has turned upside down over the last four months. What we have, I think, is a really solid income- producing asset base that has a customer base that is pension-backed, that is not at risk of losing their jobs over the next 6-12 months and has long tenure in terms of occupancy terms. Once we get through Covid-19 and we have shown how well we have managed that, to me these are really effective yields and a very, very positive potential asset class. I think we should really be ambitious about how we take that forward with prospective investors over the coming months. Gregor Kuglitsch: Thanks a lot.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 18 Charlie Campbell (Liberum): Hi, morning everyone, a couple from me please, if I can. First of all, you have talked very kindly about the movement between gross and net in terms

• f rent. Clearly, some of that depends on voids, I suppose. What is your experience so far of

how quickly you can fill voids? It probably is very early so perhaps give us some idea of how you have calculated that gross to net. Then secondly, on selling prices you talked I think a bit about trying to reposition to lower price points. I wonder over what time frame that is and what sort of reduction we could see to the average selling price, to gauge that affordability point. John Tonkiss: Charlie, thank you for that. Gross to net we are talking about rental, as it were, and the assumptions there. Rowan Baker: On slide 23 we have got the 21% gross to net. It is very early to look at the pattern on the voids, absolutely, but we have the retail’s experience and we have got our rental team in place now. We have calculated that based on what we feel are sensible and prudent assumptions based on around a four-month time gap from notification of the void. We think that is deliverable and has proved to be so, so far. Charlie Campbell: That is great, thank you. That was exactly what I needed. Thank you. John Tonkiss: Let me talk about selling prices. We obviously have the plans around selling prices for the broad and typical McCarthy & Stone portfolio. What we announced in the strategy back in September 2018 was a drive to a more affordable range of products. There are two aspects to that. We were redesigning our product footprint. You may remember back in January we showed a schematic with five letters A-E, i.e. a new and more efficient

• footprint. And we were using and asked the planner to use modern methods of construction

to deliver that in a more affordable way. I have to say one of the big regrets of the Covid lockdown is we were about to embark upon that and announced quite publicly what we were doing which we have now paused as we come out of the lockdown. Obviously, we are focusing on really the short-term sales conversion of our core stock and so on. However, we will return to that again. We set a strategic objective to drive about a £50,000 reduction in the deliverable costs of our offering and to be able to pass a significant chunk of that on to

• ur customers. I still think that is a viable and sensible planning assumption but there is

clearly a bit of a reset needed post-Covid and we will ultimately turn this back on as we see the economy recover. Charlie Campbell: Great, okay. Thank you very much. Thank you. Gavin Jago (Barclays): Morning all, hope you are all well. Just a few areas of questioning, if I could please. The first one is around the land market and what you have been seeing. I appreciate the activity is slightly limited at the moment but the attractions historically for McCarthy & Stone and living near to town centres, being accessible to local amenities. What is the thinking around the board table at the moment with the change we are seeing to town centres and retail with closures and stuff like that in view of how your land strategy will be moving forward? Then the second one is around the second-hand market. Are there any signs you are seeing there in terms of pricing or weakness and how that is tying into the forward order book? Can you give us a feel for what those 1,370 units you have to for finished stock, the level of interest in terms of strong leads and/or reservations against it? Thank you.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 19 John Tonkiss: From a land market perspective, I see quite a significant opportunity in the dislocation of the land market, particularly around retail and I think in time commercial property where sites are repurposed. We have got several of these now coming into the front-end of our land pipeline. It is early days to ultimately count our chickens on this but I know one particular example which is about three miles from where I live in the Midlands, as it were, where there is not a retail requirement and it is a perfect residential site. We are in the mix to try to redevelop it and it is a really great example of a brownfield redevelopment

• ption that is perfect for us in that regard. Your point then about how high streets are going

to look is really, really important and profound. I would just remind you, the city centres, Birmingham, Manchester and soon are changing significantly but it is places like Nantwich and Middlewich where we are bringing commerce in and actively utilising our high streets more

• progressively. I think we have got a valuable and important role to play in keeping our towns

and cities vibrant. It plays to many policy tunes, health, housing and regeneration. That and the planning changes that were trailed by the Prime Minister two weeks ago all point to redevelopment of brownfield sites particularly where we are clearly strong. Mike Lloyd: I would almost say we face into two markets. We have now a centralised PX team selling mainstream properties into the secondary market. What they would report at the moment is there has actually been a lot of activity since things have released in terms of

• ffers. There are quite a lot of silly offers which we have been turning down but enough

decent offers that have been maintaining our pricing. At the moment our team would say we are not seeing price drops in that market but there is obviously concerns about what happens with job losses further in the year. There is a level of concern looking forward but we will see. I would say then our core market is slightly different in terms of the behaviour. For me in the mainstream and secondary market most people have decided to move when they are looking around and within 12 or 18 months they will have made a decision and moved. That is a slightly different behaviour from our customers. In fact, 95% of customers who look round and do not buy from us are still in their original property 18 months on and we have to do quite a lot to essentially create the leads through our local direct mail and door drop activity. We have only just turned that back on so literally the lead generation for that is picking back

• up. As I said earlier, we are obviously working the leads that we already had going into Covid

and depending on exactly where you count it, on core stock there is new reservations. They are at 40-50%, maybe a bit higher depending on exactly what timeframes you look at. However, I am hopeful once that additional marketing lands and we are ramping up activity that that begins to further step up from there. Gavin Jago: Thanks. On the part-exchange going to slide 24 there is a line in there showing a loss on sales. Can you walk us through the delta between the last financial year and what you have seen because obviously the numbers ticked up 15,500? What has driven that? Rowan Baker: The number has picked up and that is influenced by some of the more recent pricing on that as we have sought to keep selling through the lockdown period. As Mike said, the pricing has held up well in the main but we have seen that loss increase. What we seek to do though is make sure that that is reflected now in the offers that are made to customers so that we do not end up bearing the more substantial part of the loss. It has picked up as a result of the most recent market, yes.

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 20 Gavin Jago: Okay, thank you. Thanks very much. Glynis Johnson (Jefferies): Hello, three if I may. The first one is on the services. I am just really following up on the reticence that you mentioned in there. Is that the same reference for those who bought the products versus renting it and if you were going to alternative methods such as charging one at exit, one would assume that would be some sort

• f annuity that you would take through so clearly some very different accounting there?

Second of all in terms of the build to rent, if you are going to pursue all developments being build to rent would you have to change your land buying from what you have done so far or are some of the sites you have got adaptable? Given that you have actually done a number

• f land sales actually in the first half, have those already been the sites that are more

applicable to build to rent? Then lastly in terms of those costs that are coming gross which are not related to on-site, that is clearly very different to what we get across the volume

• housebuilders. I am wondering, what is the scope to reduce down those costs? Should those

costs go into a viability when you are buying the site and therefore you need to be getting better value on your land deals going forward? A little bit of colour around those. John Tonkiss: Mike, do you want to build on the service model and the way that changes? You are right, Glynis, in the sense that is it an annuity? It is a different way of thinking about the financial returns of the business. It is the appetite to the service model. Mike Lloyd: Glynis, specifically what was your question on that? I obviously got the accounting part. Glynis Johnson: You talked about an increased reticence or customers’ reticence about the variable levels of service costs could be as they go through their time within the McCarthy

• home. I am wondering is that reticence at different levels for those who buy the product

versus those that rent the product. Mike Lloyd: I talked earlier about we have been trying to understand what is holding back

• demand. One of those things is a concern amongst customers about what I would call overall

financial risk. I think what rental is doing is in general lowering that because you are not having to commit £300,000+ of capital upfront. Whether it is specifically getting rid of the uncertainty around the service charge it is certainly taking a level of the financial commitments and risk away of diving into our proposition. I think broadly rental is helping

• ne of the things that is holding some of our demand back in that respect. On the service

charge in particular it is still essentially the same position at the moment for rental versus buyers. John Tonkiss: In terms of BTR, Glynis, and the way we are thinking about that, we have reviewed our portfolio having stepped back and learnt from how we have rented over the last 12 months or so and said, ‘What should be the perfect criteria for a BTR site in terms of the number of chimney pots that are there, the location, principles and parameters and the mix?’ Then we have looked at our portfolio and there is a good overlap of a number of BTR sites where we are moving forward with a notion of effectively, should we be converting them to a full asset BTR solution. That is some of the thinking going on when we talk about BTR strategy moving forward. Then much more longer-term it is designing and buying land specifically for BTR. There are certain aspects of that. For example, we do very little development inside the M25 and the Greater London area where BTR I think has a huge role

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 21 to play. To me there are opportunities for this to be accretive to our traditional McCarthy & Stone land buying activities. Lots of really good things going on there. We will I think move forward with a focused BTR initiative, as we explained earlier, and in the longer-term a much broader BTR land buying strategy. Rowan Baker: The fixed costs you were talking about whether it should go into appraisals and getting better value on the land buying. Well, they absolutely do go into the appraisal, just to clarify that point. However, they go into the appraisal based on expected volumes of the business, which of course at the appraisal stage are nothing like what they were in the first half of the year. We carry those costs which are salary costs of sales consultants etc. on the basis that we are going to achieve certain volumes of sales. It does not factor in a shutdown of the business for a period of time, for example. The land buying criteria includes an element of overhead on the basis of an expected volume of overhead recovery. That is the short answer to your question really, I think. Glynis Johnson: The 25-26% on-site growth is not actually the margin that you anticipated when you bought the site. There were extra costs that you were anticipating putting into that. Rowan Baker: Yes, so we look at it on a fully-loaded P&L basis but your overhead recovery

• bviously increases with the volume. However, we do look at it. We allocate all costs when

we look at the land buying. Glynis Johnson: Okay, thank you. Chris Millington (Numis): Morning everybody, a few quick ones from me. I wondered if you could elaborate on whether or not there is any deferred creditors being carried into the second half. The second one is just on that schematic you showed us about the gross reservation rates as you go back to sites picking up. I did notice that it includes rental and it was based on gross numbers. I wonder if you could tell us what the net number would be ex- rental so we can get a feel as to the cash coming through the business or where it is going to come through in the future. The final one from me is another question on voids within the rental portfolio. I think on one of the slides, and I am struggling to get back there now, it suggested 2% as the assumption on voids in the gross to net. Then Rowan, you mentioned that there is four-month assumption in there. Can you tell me what you are thinking about the average tenure there and how that fits with the two products you roll out? It seems like there is quite a long average tenure assumed. Rowan Baker: Chris, when you are talking about deferred creditors do you mean land creditors? Chris Millington: No, no, just any other, whether it be past creditors, whether there has been any other deferral outside of that, Rowan. Rowan Baker: Nothing major, Chris. The only ones that we carry are a little bit of trade creditors which had come down because of the halt in build activity and land creditors. There will be a little bit of other bits and pieces in there but nothing major. Chris Millington: Understood. Rowan Baker: On the rental and the voids, yes, we do expect a longer tenure time than in mainstream build to rent type of models, absolutely. We find on the ‘for sale’ model, we have

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 22 been managing these developments ourselves since about 2010/11 so we have got some data

• n this as to how the for sale model works. Generally-speaking our customers’ tenure time
• n a for sale basis is between six to eight years. Although on the rental one would inherently

think that there is a slightly more transient nature of a renter but actually for this customer demographic people would expect it to still be their last move or would like it to be their last move that they have to go through in the main. Yes, we expect it to be closer to that normal for sale model type of tenure time. We have modelled in a little bit of a lower level than that but approaching that anyway. Chris Millington: Rowan, really quickly on that point, with it being 50/50 between the two product sets I presume there is a different length of tenure between the two. Would it average out at eight years if you were looking at a 50/50 product model. Rowan Baker: Yes, not massively.The customers are slightly older when they come into a retirement living plus but not massively so. Quite a few times people buy ahead of the real need arising so it is future-proofed that way. Not massively, a little bit and we factored that in, yes. Chris Millington: Okay, got you. John Tonkiss: Chris, on your second question, we showed a gross number really to show the velocity of new activity in the sales market which is slightly purer than a net number that is

• ut of kilter with reservations we might have taken pre-Covid to today. It actually aligns on

the chart really. It is a slightly top line number. Mike Lloyd: I think the question was what proportion of gross reservations since we started back up have been rental. That has been about a third compared to slightly different measure net reservations of about 40% in H1. It is not too dissimilar. John Tonkiss: It is early days, Chris. We have said we have been very, very steady and systematic in turning things back on. We turned on customers that could buy, customers that are on the database. Mike talked about how we are now starting to market again. All of that has been on core stock. We have not really been driving to sell the newer lease[?] yet because we have paused the build on those. We are not fully at anywhere near 100% in terms of sales momentum and we have remobilised sales activity in terms of our hub sales model I talked about. We are continuing to put the resources in as we see customers

• respond. We are trying to balance the books there, trying to get the right activity to the right

demand. It is an important point about the mix between rent and sales. I understood Chris Millington: That was really the point behind it but I do appreciate it is early days and thanks for the answers on those. John Tonkiss: I appreciate everybody’s time on the call. It has been hopefully a useful update to you all. It has been a challenging period for us over the last six months or so but I think we have come out and really shone a positive light on what this business is about, this third way of independent retirement communities. I think we are following the right strategy and I think we have some really exciting opportunities in the medium-to-long term. I have talked about them at length really today so thank you for your attention on the call. We

McCarthy & Stone Half Year Results Presentation Wednesday, 15th July 2020 www.global-lingo.com 23 really appreciate your time. Obviously, we will have chances to catch up with you offline post the call but best wishes. Keep safe and well and catch you all again soon. Thank you. Rowan Baker: Thanks, bye. Mike Lloyd: Thank you. [END OF TRANSCRIPT]