Will Lone Star ‘Do A Quintain’ With £630M McCarthy & Stone Deal?

Lone Star’s purchase of Quintain ranks as one of the most successful pivots in recent real estate history. And it could be about to pull off the same trick again.

When the private equity giant paid £1B to take Quintain private in 2015, it was essentially a build-for-sale house builder with a small fund management arm bolted on. The vast majority of the 5,000 homes Quintain had permission to build at Wembley Park were earmarked for sale. 

Within six months, Lone Star had implemented a new strategy, deciding that it would build the majority of the homes at Wembley for rent instead, turning it almost overnight into one of the biggest BTR players in the UK. The decision proved wise. React News reported this week that bidders are lining up to buy Quintain from Lone Star for up to £3B.

A similar manoeuvre, pivoting a company from build for sale to build to rent, could be on the cards at McCarty & Stone, the retirement home builder that announced last Friday that it had accepted an offer from Lone Star to buy the company for £630M. 

The senior living sector is underdeveloped in the UK compared to other countries like the U.S., Australia and New Zealand, and as with Quintain, Lone Star is an early mover among investors looking to tap into potential growth, which in this sector comes from the demographic trend of an ageing population. 

“Only a tiny fraction of the population of over-65s live in age-exclusive accommodation, and the rental offer is very new in this country,” JLL Head of Healthcare Simon Hodson said. “There is a lot of capital looking at that sector.”

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McCarthy & Stone is one of the longest-established names in the senior living sector, having been a builder of retirement apartments for more than 40 years. It has finished-but-unsold stock on its balance sheet valued at £324M, and a landbank with a pipeline of 2,100 units that it estimated it could sell for a value of £300K each, totalling £630M. 

Like many house builders across all types of housing, McCarthy & Stone has been hit hard by the coronavirus pandemic, with far fewer homes being sold. The company’s revenue fell from £280M in the first half of 2019 to just £101M in the first half of 2020, and it moved from a pre-tax profit of £3.6M to a pre-tax loss of £91M.

As a result, its share price more than halved this year until Lone Star’s bid was announced. In that sense, the bid is to a large degree simply Lone Star doing its thing and seeking to buy a company suffering temporary issues. 

But in its statement accompanying the announcement of the deal, McCarthy & Stone said building retirement homes for rent was a major factor in Lone Star’s rationale for the deal.

The company first moved into the rental market in 2019, and it has been steadily building up a rental portfolio that it holds on its balance sheet. 

According to the company’s results, this portfolio totals 192 units, which it values at £59M. The portfolio provides £3.8M of rent a year, meaning it has a 6.5% gross yield, providing McCarthy & Stone with a 7% ungeared return, or a 10% return if gearing of 40% is applied. 

It has two types of rental product, called Retirement Living or Retirement Living Plus. A one-bed Retirement Living apartment rents for an average of £1,069 a month, while a two-bed rents for £1,748 a month. An average one-bed Retirement Living Plus unit rents for £1,792 a month, while a two-bed goes for £2,580 a month. 

McCarthy & Stone has expressly stated that it wants to increase the proportion of its pipeline that it rents out rather than sells. In its half-year results it said it expects that rental portfolio to grow to £300M by 2022.

But in outlining the reasons for selling to Lone Star, it said there are constraints to this growth. It doesn’t have the balance sheet to build and hold a BTR portfolio of this size on its own. It is looking to bring in capital partners to fund its BTR pipeline, but these partners would expect it to co-invest alongside them, which again ties up capital it needs to actually build the units. 

Having a deep-pocketed backer like Lone Star gets round this issue. Either Lone Star provides the funding to build the units itself, or at the very least it can provide the co-investment required to get other investors comfortable with committing capital. 

Rental senior living is clearly going to be a big part of McCarthy & Stone’s future. The only question is, what proportion of the company’s pipeline becomes rental? 

JLL’s Hodson pointed out that McCarthy & Stone is a very different beast to Quintain, which essentially had one huge project of 5,000-plus units. McCarthy & Stone’s schemes tend to be in the range of 100 units, which makes it harder to provide the critical mass required to provide the services and amenities that renters would typically demand. But any larger schemes the company owns, of 400 to 500 units, would be ideally suited for being built to rent. 

“The rental model is all about reducing voids and driving rents, and that comes down to the level of hospitality and service you can provide,” Hodson said. “That is how you are going to persuade people who don’t currently live in age-exclusive communities to move there.” 

As with BTR, amenities are key, and Hodson said Lone Star’s time owning Quintain gives it experience in providing amenities and running rented residential profitably that can to some degree be transferred, albeit the older demographic of senior living has specific needs.

Hodson said the deal has implications beyond McCarthy & Stone.

“It’s hugely positive to see an investor willing to put that much money to work in the sector.”