As I understand the money that people give pay money in advance for their plot in case of their demise is held in a trust and can't be put on the company books until the plot is used. Hence it is an asset that doesn't appear in the value of the company. Seems strange, but I am not a CPA so don't know if true and what effect.
Is this correct and is there a way to find out about this very hidden asset?
dyk, money paid in advance of need for a plot does not go into trust. Whether the cemetery sells a 'deeded plot' or an 'interment right', the plot or right to it is considered delivered and that money is on the books as a sale. All 50 states have different rules and regulations/laws governing cemeteries and many require an amount equal to 10% of the plot price be placed in the cemetery's endowment or perpetual care fund. Typically those "care" funds allow for an interest only drawdown for maintenance purposes. If a marker/monument/memorial is sold with the plot or right, AND installed, it is ALSO considered delivered and goes on the books as a sale. It may also be possible for the cemetery to sell an outer burial container and structure the sale as delivered. AND, While I wouldn't accuse STON of doing so, some funeral home/cemetery combinations have been known to sell the casket through their cemetery division, THEN claim to warehouse the casket to treat as delivered, in turn booking the sale and bypassing trusting requirements..... It takes all kinds and they are out there....
Something that is of note. I had found a break down of the product blend that was sold. One of the top itemswas pre-need opening and closings. Now, I dont know if they do it throughout the company but where I live, if an opening and closing is 1000.00, it is broken into 2 parts; and "initial" opening and closing and a "final" opening and closing. The company then puts in trust 45% of the final o/c in trust. Now, there is a problem with that. They are taking the future money and putting it into operating capital today (and of course, paying it in the form of distributions) In reality, you cannot service an opening and closing today for the 90 bucks they are placing in trust. So, how can you expect to be able to 5,10, 20 years out? That is going to be a huge cost that will hit and no cash set aside to absorb the cost. One can assume that those costs will be covered by current sales at that time of delivery.
Additionally, on the Sept 2012 financials, they report performing 10,000 burials but only sold 8000 new burial rights. In a cemetery, if you are not selling more than is being used, you are slowly going out of business. That trend has to be turned around soon. It is also worth mentioning that cemetery lots are the most profitable item sold.
The cemeteries in my area are all grossly under-maintained. Below standard upkeep has a direct relationship to how marketable a property will be going forward. If you look at the financials, they are spending approx $5000 PER LOCATION on average for cap ex. Now you can bet that larger cemeteries are getting a greater piece of that dollar meaning that smaller parks in rural areas get nothing.
I expect those that are strong buys on the stock will continue to remain that way due to the 10% DISTRIBUTION. I am just presenting facts on the operation of cemeteries. Do with it as you will.
Traveler - you are partially right, but there are two types of trusts that STON maintains.
You are right about the maintenance type trusts into which the states require a cemetery owner to deposit an amount (percentages differ by state) into what is called a "maintenance" or "perpetual care" type trust - those funds provide security that the grounds will be maintained and not abandoned. STON's maintenance trust appears to be fairly well funded - but Mr Harper's articles question this. This is really a very minor issue.
However, you are not correct that STON doesn't deposit a majority of their "advance of need" proceeds they collect into a second trust. You correctly identified a number of milestones that enable STON to draw down the funds in this trust - and they have quite a bit of control over that timing - enabling them to accelerate those activities if they have a need for cash at high margins. At the time of sale, STON only recognizes a small percentage of revenue from these sales, but has to record all of their costs, including commissions to their sales people. Thus, the more growth booked in advance sales creates a "worse" looking income statement - even though the operational business is growing and thriving.
It is this second type of trust controlled by STON which has more than $250M in it. Most of the critics of STON make one of two mistakes. Either they misunderstand the impact of the MLP structure of the business on the GAAP numbers, or they don't understand the structure and rules related to the operational trusts. Some of the particularly obtuse make both mistakes.
Not exactly true, but very close. You may not be a CPA, but you already understand more than 90% of the posters on this board who are predicting doom for STON. The money for future services is indeed placed in a trust - it is even more complicated than that as most deals are financed - so monthly payments go into the trust. They can withdraw some of that money and make it available to the operations of the business by performing some of the services: digging the grave, preparing the tomb, purchasing materials/casket or urn etc. They can't withdraw all of it until actual burial.
Their trusts currently have over a quarter of a billion dollars in them - that is the piece that most folks trying to value this miss.
Sentiment: Strong Buy
Between baby boomer death demographics and the trust fund this stock is undervalued.
The biggest downside I see is a possible tax change going forward to most MLPS. With
our inept government I don't see this a serious issue. If you look at past conference
calls STON makes a very strong case for the strength of this trust as well as added
value of real estate held. Meanwhile I will continue to collect my 10% distributions.
My shares are held in a IRA so there is no tax consequence until funds are withdrawn.