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McCarthy & Stone CFO on building a solid growth story

A musical background has provided Rowan Baker with some of the essential elements for communicating internally and externally the retirement home developer’s flexible business model.

Rowan Baker has hit the high notes since taking over as CFO of retirement housebuilder McCarthy & Stone in January 2017. Although the group’s share price has almost halved since its peak soon after listing in late 2015- it has had to endure the challenging effect of the Brexit referendum.

For Baker, the group’s careful path forward- producing net income of £74.4m on revenues of £660.9m in 2017 are testament to necessary disciplines put in place- since she took up the top finance job at the group.

Baker’s arrival at McCarthy & Stone was via an early music career- after switching from maths to study law at Cambridge University, she headed to Manchester’s Royal Northern College of Music to pursue a career as a soprano singer.

Fully immersed in music for five years, Baker taught in schools and sang in operas and other concerts at the weekends. She describes singing as “the most momentous experience” that is great for building confidence- “especially when you have to do presentations later in life,” she reflects.

“But then I realised I need the two parts to my life- the practical music part and the academic side, and I’d lost the academic side that I’d kept all the way through school and university. So then I thought I could replace the work element and still keep the weekend singing going,” she says.

The result was a move into taxation with Big Four firm PricewaterhouseCoopers, a role combining the strengths of maths and law and with the added attraction of being paid to train. “They could understand what I’d learnt in my singing side of things in terms of professionalism, presentation, attention to detail.”

From PwC to a smaller accountancy firm Fletcher & Partners to get a more general view, Baker then took the plunge to move into the corporate space alighting at banking giant Barclays the Monday after the collapse of Northern Rock. She didn’t find a calling in finance mainly because of the opaque nature of the industry-“the transparency wasn’t there for me” she says, before spending another three years in practice at Morris Lane.

Three years later and having had three children, Baker started a short term contract as a tax manager at McCarthy & Stone in January 2012, but was soon captivated by the prospects for the company, which is responsible for building and selling nearly three quarters of the UK’s owner-occupied retirement housing each year.

Taking the plunge

“I thought it might be a bit sleepy, that it might not have all the get up and go I need from a career,” says Baker. “But I couldn’t have been more wrong. The business was at a point where it was going places- building itself back up from the financial crisis,” she adds, reflecting on how it became over-leveraged and had to be taken over by Lloyds Banking group.

After 22 years on the stock market McCarthy & Stone was taken private in 2006 by a consortium headed by Sir Tom Hunter and the Reuben Brothers and high street bank HBOS, that was later acquired by rival Lloyds, which took over and restructured the company in 2009. “There were quite a few thorny tax issues which was why I was brought in at this stage,” says Baker. “It quickly moved to conversations about how I could move on in the business,” she says.

A potential listing which would require financial controls and reporting put on a really good footing was the opportunity- involving shortening the financial reporting timeline. Greater transparency of information required by new private equity owners Goldman Sachs and TPG that took over the business in 2013, became a further catalyst for improving reporting. Although she says there was no specific objective at the time, McCarthy & Stone was the subject of an IPO in November 2015, a matter of months before the Brexit referendum.

Baker says the impact of the decision to leave the EU had a big effect on the group in its first year of trading as a listed company. “We’ve noticed a difference definitely in terms of the housing market, and that affects our business. If there is uncertainty out there it can easily affect the secondary market. The critical point for us is customers need to sell their own houses,” she adds.

While other housing developers market to first time buyers and therefore can benefit from the government’s Help to Buy scheme, the fear of a falling secondary market saw “the chains a bit locked up,” in the market, says Baker.

“It took the wind out of our sails a little bit,” Baker admits. “It was actually critical timing for us because it usually takes 2-3 months to complete a sale process, and we had quite a lot of reservations at that point that were to be converted,” she says.

Baker says that effective planning meant the group could react quickly to adverse conditions -getting as much cash flowing in the group and preventing cash leaving – by offering bigger discounts if necessary to push through sales and throttling back on buying land. “That really is how our scenario planning works”, she says.

“We have a land bank of 4.3 years, so why would you spend on any more, when you can go back and renegotiate with the land you’re looking at because the market has changed. You need to work out what you can do to turn it into a positive. The most important thing is to keep cash on your balance sheet so you’ve got options,” Baker advises. “I think we can show we can respond quite quickly because we ended that year with over £50m on the balance sheet, through a tricky period.”

Running the show

In January 2017, Baker stepped up to CFO, having done some intensive training with her predecessor should she be offered the role, and was able to meet some shareholders and key stakeholders whilst he was still in place. “But there are some elements of the CFO job that you just can’t prepare for, until you’re doing it, such as giving of presentations for results and shareholder and analyst engagements,” she reveals.

Help came from non-executive directors, especially Senior Independent Director Frank Nelson, who had been CFO of property group Galliford Try, who counselled her on the fact that the modern CFO’s bigger role requires learning many facets on the job. Baker works closely on strategy with CEO Clive Fenton and the rest of the senior management team.

Business partnering plays a key role for Baker’s finance team. “A critical part of our job is ensuring everyone has the information that they need for decisions that need to be taken, and to be the voice of reason behind them sometimes, to explain them and to flag potential problems and risks,” she says.

Baker says there is plenty of potential risks to the group due to macro-economic uncertainty. “We keep a careful eye on certain indicators that will give us an early warning of potential downturn and general sentiment out there,” she says.

Although the group will look at ways of diversifying toward a younger customer base, she says this is a difficult exercise “because there are so many variables.” In any case, the UK’s ageing population is likely to continue creating demand for its core product.

“This market is structurally undersupplied, so when you look at the demographics-, they’re screaming at you-the number of 85 year olds is going to more than double over the next 20 years or so. Over 65s are going to be 50 per cent again over the same time period. So there is definitely going to be an increasing opportunity out there,” Baker asserts.

Right now the group has 10,000 units at varying levels of development. “It’s at the right level in terms of how much capital one would want to lock up in land at any point. We manage it carefully because when one exchanges on the land, we exchange on it conditionally on getting planning, so actually we’ll agree a price with a customer that is contingent on us getting planning permission,” says Baker.

“We are progressing with quite a bit of land through the planning phase, and if we weren’t to get planning permission we wouldn’t proceed with the land. You’re limiting your risk by doing that because you’re only completing on land you actually have planning for. So what you wouldn’t want is to hold too much land, so that your capital is locked up,” she says.

“We have to run a slightly different model to a standard housebuilder because they will build and sell, build and sell, and they can adjust their build rate in accordance with their sales rate. We have to complete this whole development before we move a single person in. When we get planning consent, we’re then straight on site to build,” says Baker.

One ace card McCarthy & Stone can play is offering an environmentally friendly alternative- with minimum car usage- to what other bidders for the often highly desirable town centre sites may put forward.  “You’ve got that whole social good that’s being done within community. We are also releasing much needed family homes,” she stresses.


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